JUDGMENT No. ou! und oot tn hl CATCHWORDS BANKRUPTCY - income tax evasion - discretionary family trust established by debtors - properties purchased by trust - loans for purchase by debtor and by bank - annual tax returns disclosing properties - whether disposition of property by debtors - whether intent to defraud creditors - whether benefit retained by debtors - whether concealment - issue of shares in trustee - whether disposition of property by debtors - sham - resulting trust = estoppel Bankruptcy Act 1966 (Cth) ss.6, 121 Statute of Fraudulent Conveyances 1571 (Imp) Alliance Acceptance Co Ltd v Oakley (1988) 48 SASR 337 Alton v Harrison (1869) 4 Ch App 622 Re Barnes; ex parte Stapleton (1961) 19 ABC 126 Barton v Federal Commissioner of Taxation (1974) 131 CLR 370 Clegg v Bromely [1912] 3 KB 474 Freeman v Pope (1870) 5 Ch App 538 Re Expo World Park Pty Ltd (1994) 12 ACSR 759 Re Hermann (1916) 16 SR (NSW) 264 Re Kelly; ex parte Young (1932) 4 ABC 258 Re La Rosa; ex parte Norgard (7 February 1990, unreported, French J) Re Lloyds Furniture Palace Ltd; Evans v The Company [1925] Ch Re Marchiori (1983) 69 FLR 290 Mogridge v Clapp [1892] 3 Ch 382 Noakes v Harvy Holmes & Son (1979) 37 FLR 5 ~A NOV 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY Ex parte Mercer (1886) 17 QBD 290 Middleton v Pollock [1876] 2 Ch D 104 Paintin & Nottingham Ltd v Miller, Gale & Winter [1971] NZLR 164 P f Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 Sharrment Pty Ltd v Official Trustee (1988) 18 FCR 449 Stapleton v The Queen (1952) 86 CLR 358 Trautwein v Richardson [1946] Arg LR 129 Williams v Lloyd (1934) 50 CLR 341 -~ re: Paul Alvaro & Rosina Alvaro ex parte: The Official Trustee in Bankruptcy (No.SB 240 and 241 of 1991) Judge: Heerey J Date: 31 October 1994 Place: Melbourne (heard in Adelaide) IN THE FEDERAL COURT OF AUSTRALIA AUSTRALIA DISTRICT REGI ENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE Fr AUSTRALIA JUDGE = Heerey J DATE: 31 October 1994 RY No. SB 240 of 1991 No. SB 241 of 1991 ed RE: THE BANKRUPT ESTATE OF PAUL ALVARO and THE BANKRUPT ESTATE OF ROSTNA ALVARO Ex Parte: THE OFFICIAL TRUSTEE IN = RUPTCY Applicant and PAUL ALVARO, ROSINA ALVARO, P & R_ALVARO ENTERPRISES PTY LTD, PAUL ALVARO JNR, ELENA GALIMI and MARIA CONCETTA ALVARO Respondents PLACE: Melbourne (heard in Adelaide) MINUTE OF ORDER The Court orders that the applications be dismissed with costs including reserved costs. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA JUDGE: Heerey J DATE: 31 October 1994 PLACE: Melbourne (heard in Ad No. SB 240 of 1991 No. SB 241 of 1991 RE: THE BANKRUPT ESTATE OF PAUL ALVARO and BANKRUPT ESTATE OF Ri NA ALVARO Ex Parte: FFICIAL TRUSTEE IN BANK- RUPTCY Applicant and PAUL ALVARO, ROSINA ALVARO, P_& R_ALVARO ENTERPRISES PTY LTD, PAUL ALVARO _JNR, ELENA _GALIMI and MARIA CONCETTA ALVARO Respondents elaide) REASONS FOR _ JUDGMENT The applicant is the trustee of the bankrupt estates of Paul Alvaro and his wife Rosina Alvaro (Mr and Mrs Alvaro). The applicant seeks declarations that certain lands, the registered proprietor of which is P & R Alvaro Enterprises Pty Ltd (the Company), are vested in the applicant as property of Mr and Mrs Alvaro. issued by the Company. As to the lands, the claim is p The same claim is made in respect of certain shares ut on three alternative bases. 2. First, the company acquired the lands by dispositions of Mr and Mrs Alvaro made with intent to defraud creditors. Such dispositions are void as against the applicant by virtue of s.121 of the Bankruptcy Act 1966 (Cth) (the Act). Secondly, the arrangement whereby the Company holds the lands on a discretionary trust is a sham and Mr and Mrs Alvaro are the true owners. Thirdly, the lands are held on a resulting trust for Mr and Mrs Alvaro, having been acquired out of monies provided by them. The shares are claimed under s.121 only. Tax Fraud For the 1978 to 1984 financial years Mr and Mrs Alvaro lodged with the Australian Tax Office (ATO) income tax returns which understated their true incomes by at least $200,000. They adopted various means to conceal income, including bank accounts in false names as follows: Opened False Name Deposited Interest Closed 16.7.79 Romano $100,000.00 $15,019.28 4.6.84 12.3.84 Tiani $500.00 $2,531.95 18.3.85 15.3.84 Crea $25,000.00 $2,272.72 29.3.85 In 1978 Mr Alvaro also arranged for a bookmaker to record false bets so as to give rise to false winnings of $16,160.00. Similar false winnings were established in May 1981 for $30,030. On other occasions assessable income was falsely claimed to be gifts or loans and motor vehicles were acquired in the names of other persons. The Company and the Trust The Company was incorporated on 22 May 1981. Ten shares were issued and allotted, nine to Mr Alvaro and one to Mrs Alvaro. The directors were Mr and Mrs Alvaro. The first meeting of the directors was held on 29 May 1991. According to the minutes, Mr Alvaro reported that "the proposed business of the Company would be to act as the trustee of a proposed trust to be known as the P & R Alvaro Family Trust" (the Trust). It was resolved that the Company would accept the nomination as trustee. It was also resolved that the business of the Trust would be "to carry on the business of ladies and mens hairdressing, investor and any other such things as are allowed by the deed". By a trust deed dated 12 June 1981 the Trust was established with the Company as trustee. The settlor of the Trust was Mr Alvaro's brother Mr Giuseppe Alvaro who contributed $100. The trust deed specified that the "Specified Beneficiaries" of the trust were as follows: I PAUL ALVARO of 22 Prinse Street, West Beach S.A. 5024 II The spouse of the said PAUL ALVARO IIl The Child of the said PAUL ALVARO Iv Any other child or children and the remoter issue of the gaid PAUL ALVARO before the vesting day. v Any company incorporated in any country throughout the world any of the shares in which are beneficially owned by any one or more of the persons described in paras. (1), (II), (III) and (IV) of this item or by a trustee upon trust under which any one or more of such persons 18 a beneficiary either presently or contingently entitled. 4. VI The trustees of any other trust howsoever created in existence at the Vesting Day the capital or income of which 18 or may be held in whole or in part whether presently or contingently upon trust for any one of the aforesaid person PROVIDED THAT no part thereof is held for the Settlor or the Trustees and provided further that all interest created under such Trust shall vest on or before the Vesting Day. VII Any charitable institution person or persons body corporate or incorporate or howsoever constituted whom the Trustee in the Trustee's absolute discretion considers worthy of purposes or for the relief of poverty or for religious scientific or public hospital or any hospital which 1s carried on by a society or association otherwise than for the purposes of profit or gain to the individual members.of the society or association. The trust deed recited that the settlor was desirous of making provision for "Eligible Beneficiaries", which term was defined to mean the Specified Beneficiaries and, amongst others, the "children grandchildren brothers sisters spouses widows and widowers" of the Specified Beneficiaries and "any of the following entities ... which the Trustee may ... nominate in writing as an Eligible Beneficiary, namely ... A. the trustee (in their capacity as such) of any Trust or Settlement ... under which any Eligible Beneficiary is a beneficiary". At this time Mr and Mrs Alvaro had two children, Maria Concetta born in 1978 and Mariella born in 1980. Subsequently Francesca was born in 1983 and Carmine in 1985. The incorporation of the Company and the establishment of the Trust was arranged by Mr and Mrs Alvaro's accountant, Mr Natale Rugari. On 14 June 1981 Mr and Mrs Alvaro sold their hairdressing business to the Company. They had been carrying on this business in partnership in North Adelaide under the name "Headlines". The 5. price of $809, being the net asset value of the business, was left owing by way of unsecured loan repayable on demand. Acquisition of Properties The evidence as to the acquisition of the three properties claimed by the applicant was as follows. Claim I - 14-16 Lombard Street On 17 November 1981 the Company entered into a contract for the purchase of a property consisting of three flats at 14-16 Lombard Street, North Adelaide for $40,000. The purchase was completed on 30 November 1981. Of the total cost of $40,910 (including stamp duty and settlement costs) $35,750 was contributed by Mr Alvaro and credited to his loan account with the Trust. The balance ($5,352) came from the Trust's current account at the North Adelaide branch of the Commonwealth Bank. In an affidavit sworn on 16 September 1992 in proceedings in the Supreme Court of South Australia concerning a caveat on the property Mr Alvaro deposed: "In relation to paragraph 6 of the said affidavit [of Dean Richard Govan] I state that the sum of $35,750 was a sum of money gifted by me to [the Company]." The affidavit of Mr Govan was not in evidence before me, nor was there any other evidence as to the nature of the Supreme Court proceedings. The applicant relied on Mr Alvaro's statement in the affidavit, and also similar statements in his public examination, as an admission that the money was not advanced as 6. a loan. As a consequence, it was said, his loan account was correspondingly reduced and his subsequent drawings would have overdrawn his entitlement. Mr Alvaro did not give evidence. It is reasonable to infer, if only from his massive tax evasion, that he is someone who is prepared to make false statements if he believes they are to his advantage at the time. But Mr Alvaro also made contemporaneous statements, in the form of the Trust tax returns, to the effect that the sum in question was a loan. The documentation at the time was consistent only with the sum being a loan. There was evidence that as a matter of ordinary commercial practice it was more common for funds provided by directors of a discretionary family trust for acquisitions to be by loan rather than gift. Objectively considered, the transaction was in my opinion a loan. In any event, whether loan or gift, it is difficult to see how the applicant's case of fraud and concealment at the time is much advanced since Mr Alvaro's contribution (to use a neutral term) was disclosed in the Trust's tax return. There was no acceptable evidence as to the ultimate source of Mr Alvaro's $35,750. The applicant sought to rely on an earlier draft of Mr Alvaro's admissions at the time of the committal proceedings in 1990 (as to which see infra) on which his counsel Mr J Mansfield QC noted that $30,000 of the amount was "undeclared assessable income". However, that part of the draft had a line drawn through it. Counsel for the applicant did not put specifically to Mr Mansfield when he gave evidence before me (legal professional privilege having been waived) the inference now sought to be raised. If the admission was in fact true, it is surprising that counsel for the prosecution at the time did not insist in its conclusion in the final form of the admissions. To the extent that the Trust bank account provided the balance of the funds for the purchase, that account was in debit and security for the overdrawn account was provided by properties owned by Mr and Mrs Alvaro. Claim II - 188-190 Tynte Street On 22 February 1983 Mr Alvaro submitted a tender to the City of Adelaide for the purchase of a property at 188-190 Tynte Street, North Adelaide. He proposed that the property be let as four professional offices. On 10 May the City of Adelaide accepted the tender and Mr Alvaro paid a deposit of $7,750. By a deed dated 22 June 1983 Mr Alvaro assigned his rights in respect of the property to the Company which on 27 June 1983 became registered as proprietor. The price was $77,500. Stamp duty and settlement costs were $2,880. The purchase was funded by a term loan from the Commonwealth Bank to the Company of $70,000. The loan was guaranteed by Mr and Mrs Alvaro and security provided over properties owned by them, although not over the Lombard Street property. In 1984 and 1985 the property was renovated at a total cost of $30,534. (Unless otherwise indicated, reference to a year means a financial year.) Of the cost of renovations, $1,050 came from Mr Alvaro and was debited to his loan account. Circumstantial evidence, the details of which were contained in the applicant's final submissions, leads me to conclude that the remainder ($15,887 in 1984 and $13,647 in 1985) came from the Romano account. Monthly payments of $1,300 in reduction of the term loan came from the Trust bank account and thus the loan was serviced from rental income. The initial deposit of $7,750 and the stamp duty and settlement costs of $2,880 were not included in the Trust records. The former amount had been paid by Mr Alvaro prior to the assignment and should have been credited to his loan account. This may have been an oversight. There is no direct evidence as to who paid the $2,880, but it seems reasonable to assume it was Mr Alvaro. I am not satisfied that these two amounts came out of the Romano account or otherwise from undisclosed available income. Claim III - 630 Seaview Road On 14 December 1983 the Company entered into a contract for the purchase of a house property at 630 Seaview Road, Grange for $93,890. The purchase was settled on 31 January 1984 with the Company becoming registered proprietor. Subsequently units were constructed on the land. Total expenditure on the property was: Contract price - 93,890 Stamp duty and settlement costs 3,282 Unit construction 86/87 148,274 Unit construction 87/88 5,756 Stamp duty (sic) 89/90 — 1.528 252,730 The sources of funds were: Deposit, credited to Mr Alvaro's loan account 9,389 Bank fully drawn loan 80,000 Trust current account 4,646 Stamp duty and settlement costs 3,282 (Probably Mr Alvaro) 97,317 Bank bill 5.5.87 176,849 Less FDL payout 33,589 143,260 240,577 The difference of $12,153 is not identified but may have come from the Trust's operating cash flow. Shortly before the purchase, $35,500 became available from the sale of the hairdressing business in October 1983. As with Tynte Street, the stamp duty and settlement costs were not included in the Trust records. Here again the money was probably paid by Mr Alvaro. The security for the loan was the property itself and two other properties owned by Mr and Mrs Alvaro. The Lombard Street property, which was of course owned by the Company, was not used as security and is not referred to in the Bank reports. The Tynte Street property was referred to, but was nevertheless not used as security. Repayments of the fully drawn loan at $1,510 per month were made from the Trust bank account until the balance ($33,589) was discharged out of the proceeds of the bill facility in May 1987. Thereafter a debt of approximately the amount of the facility remained owing to the Bank and appeared in the accounts of the Trust at least up to 30 June 1992. 10. Accounting Records and Tax Returns The Company and Trust lodged tax returns for the years 1982 to 1993. For all those years rental income was returned and, in the years 1982 to 1984, income from the hairdressing business as follows: Gross Net 1982 93,214 22,065 1983 -- 109,195 20,920 1984 36,684 12,890 The returns identified Mr and Mrs Alvaro as directors and shareholders of the company. The returns included annual financial statements consisting of a balance sheet and profit and loss account. Assets of the Trust and the amounts of the various loan accounts appeared in the Trust balance sheet. In the 1982 and 1983 returns there appeared under Fixed Assets an item "Property" with a value which corresponded to the cost of the premises acquired by the Trust. In the 1984 balance sheet the item appeared as "Land and Buildings". Under "Current Liabilities" the balance sheets included Mr and Mrs Alvaro as holders of unsecured loans. Files for the Company and Trust, along with files for Mr and Mrs Alvaro's personal tax and accounting affairs, were kept in filing cabinets in Mr Rugari's office in the central business district of Adelaide. Mr Rugari compiled the accounts and tax returns of the Trust and 11. Company once for each year, usually early in the following calendar year. He did not have a separate ledger as such but kept working papers which included a form of journal and also what was referred to in the evidence as a "columnar document" with columns in which payments and receipts were dissected. There is an indication in the documents in evidence that there was probably also a cash book, at least for some years. The records that were kept by Mr Rugari show rent received and expenses paid by Mr Alvaro on behalf of the Trust. From the records it has been possible, with no great difficulty, to reconstruct a ledger. The balances of Mr Alvaro's loan account after the making of these debits and credits correspond with the amounts appearing in the balance sheets included with the Trust tax returns. Mr Rugari's records (other than the tax returns and annual financial statements) were in pencil and were rather untidy. However I accept the evidence of Mr Brian Harmer, an accountant called on behalf of the beneficiaries, to the effect that the standard displayed was "not uncommon" among suburban accountants and reflected, if anything, a desire to do the work quickly and cheaply by cutting some corners. (Mr Rugari was not literally a "suburban" accountant but appears to have run a practice ona relatively small scale.) I do not find the way in which the Company and Trust records were kept -as supporting an inference of an intent to defraud or conceal; indeed they indicate the contrary. 12. It will be convenient to note at this stage something of Mr Harmer's background. He has been in private practice as an accountant specialising in the taxation area since 1971 and before that worked with the ATO as an assessor and investigator for seven years. He has given expert evidence in other court proceedings and published papers in professional journals. His competence and objectivity were not attacked by the applicant. Generally, I found his evidence valuable as a guide to the practices commonly followed in relation to family discretionary trusts. The extent to which the Company and the Trust followed or departed from such practices provided a useful test of the allegations of fraud and concealment made by the applicant. Trust Distributions Distributions to beneficiaries were made each year. The beneficiaries were Mr and Mrs Alvaro, their children, some nephews and nieces and some other relatives resident in Italy. All distributions were by way of credit to the respective beneficiary's loan account. Cash drawings were made in some years, but only by Mr and Mrs Alvaro. The usual pattern was that distributions for beneficiaries other than Mr and Mrs Alvaro would be amounts at or just under the applicable tax free threshold. In 1990 and 1991 debits were made to the loan accounts of Mr Alvaro (1990, $33,000) and Mrs Alvaro (1991, $47,753) effectively reducing both to virtually nil. Corresponding credits were made 13. to the accounts of other beneficiaries. Other Family Transactions Mr and Mrs Alvaro purchased a number of properties and took title in their own names: Property Purchased Cost Sold Family home 22 Prinse Street, -~ 1976 54,262 1984 West Beach Extensions 1983 30,000 1984 Shops 588 Seaview Road 1981 76,017 1983 Grange Family home 11 North East Road 1984 234,032 After Collinswood sequestration Outwardly the Alvaro family presented a picture of prosperity. They were looked on benignly by their bank. On 4 May 1983, in reporting on the application for finance for Tynte Street, the manager of the North Adelaide branch of the Commonwealth Bank Cormnen tid "reported to his superiors: "Past support of the Bank has been demonstrated and future potential is sound ... In view of the overall connection, the strong financial position of applicants and our personal knowledge of their previous loyalty and servicing ability approval as submitted is strongly recommended." Tax Investigation and Litigation But in the meantime the ATO had been conducting an investigation of the tax affairs of Mr and Mrs Alvaro. In February 1985 the ATO issued amended tax assessments against Mr Alvaro for the years 1978 to 1984 and against Mrs Alvaro for the same period, except for 1979. The amended assessments were made under s.167 14. of the Income Tax Assessment Act 1936 (Cth) and were based on the acquisition of assets inconsistent with declared assessable income. Prior to the issue of these amended assessments there was nothing to indicate to Mr and Mrs Alvaro that their evasion of tax was suspected. The ATO supported the amended assessments by a betterment statement. In its final version dated 14 March 1989 the betterment statement extended over the years 1977 to 1987. In April 1985 Mr and Mrs Alvaro lodged objections which were only determined in March 1989 following upon mandamus proceedings issued by them in February of that year. Mr and Mrs Alvaro then appealed to the Federal Court against the determination of their objections. In April 1989 fresh assessments were issued by the ATO against Mr Alvaro for the years 1978 to 1987 and Mrs Alvaro for the same period except for 1979. In May objections were lodged against the 1989 assessments. In December 1989 the ATO issued writs for the recovery of outstanding tax and penalties against Mr and Mrs Alvaro in the Supreme Court of South Australia. Later those proceedings were cross-vested to the Federal Court. In February 1990 the objections to the 1989 assessments were determined and in May Mr and Mrs Alvaro appealed to the Federal Court against that determination. In the same month, Mr and Mrs Alvaro made an application to the Federal Court seeking to have the ATO recovery proceedings dismissed as an abuse of process. That application was heard by O'Loughlin J and dismissed on 17 August 1990 when judgment was given in favour of 15. the ATO against Mr Alvaro in the sum of $402,282 and against Mrs Alvaro in the sum of $395,835. Criminal Proceedings In December 1987 the National Crime Authority (NCA) raided the home of Mr and Mrs Alvaro and other premises, including the office of their accountant Mr Rugari. In 1988 a Task Force was set up constituted by officers of the NCA and the ATO to investigate the affairs of Mr and Mrs Alvaro and other members of the extended Alvaro family. On 25 September 1989 Mr and Mrs Alvaro, along with other relatives, were charged under the Crimes Act 1914 (Cth) with conspiracy to defraud the Commonwealth. Committal proceedings before Mr Harris SM commenced on 14 May 1990. The prosecutions were conducted by the Commonwealth Director of Public Prosecutions (DPP). The hearing continued until 8 June and resumed on 17 September. Negotiations took place which resulted in pleas of guilty being entered by Mr and Mrs Alvaro and the other defendants on 27 September. The negotiations were carried out between counsel Mr Brian Martin QC and Ms Robyn Layton on behalf of the DPP, and Mr J Mansfield QC and Mr I Sampson on behalf of Mr and Mrs Alvaro. Other defendants were represented by counsel and in two instances also by senior counsel. On 27 September Mr and Mrs Alvaro signed statements of admissions. In his admissions Mr Alvaro admitted that he was guilty of 16. conspiracy to defraud the Commissioner of Taxation "over the period 1978 to 1984 inclusive as charged in the information and thereafter until 1990". He stated that he agreed "to the following facts for the purposes of sentencing". Mr Alvaro's admissions stated that over the period 1978 to 1987 he and his wife declared assessable income of $77,243 and $62,899 respectively, his income being "derived partly from my hairdressing business", that over the same period he received "certain additional assessable income other than that declared in the taxation returns", that the DPP alleged that a total of $472,264 was omitted, and that he acknowledged that he and his wife "omitted at least $200,000 assessable income". He accepted that for the purpose of sentencing it was unnecessary for the sentencing judge to resolve the dispute as to the total omitted. He stated that over the period his wife and he "have purchased and/or sold the following assets". There then follows a list referring to six properties including the Lombard Street, Tynte Street and Seaview Road properties. Tynte Street was said to have been "purchased by me and later transferred into P & R Alvaro Enterprises Pty Ltd". The other two properties were each said to have been "purchased in the name of the Family Trust P & R Alvaro Enterprises Pty Ltd". A property at 588-594 Seaview Road was also said to have been "purchased in our names and later transferred to the Family Trust P & R Alvaro Enterprises Pty Ltd". This was in fact wrong; title to the property always remained in the name of Mr and Mrs Alvaro. 17. The statement then admitted various frauds in relation to concealment of income including gifts disguised as loans, the purchase of motor vehicles in the names of other persons, the purchase of silver in false names, false betting wins arranged through bookmakers, and the establishment of the false name Romano, Tiani and Crea bank accounts. In her statement of admissions Mrs Alvaro admitted that in conjunction with her husband she used and operated the false name bank accounts for the purpose of disguising certain assessable income. She admitted to failing to declare certain assessable income contained in those bank accounts. Counsel for the prosecution and defendants agreed on a document headed "Agreed Statement of Facts". This document was as follows: "INTRODUCTION 1. The essence of the Crown case is that three brothers Giuseppe, Cosimo and Paul Alvaro conspired together to defraud the Commissioner for Taxation by concealing taxable income, Thomas Tigani and the wives of Cosimo and Paul Alvaro, namely, Francesca and Rosina Alvaro, joined the conspiracy and participated in a limited way. 2. The conspiracy was hatched in approximately 1978/79 and continued until about 1990 during which tame tax returns were submitted to the Commissioner understating the taxable income of the three Alvaro families in each year and, following betterment assessments and other enquiries by the Commissioner of Taxation, the conspirators gave false information to the Commissioner through their accountant, Mr Rugari and took extensive steps to cover up the failure to disclose income. 3. Australian Tax Office investigations commenced in 1983 and are continuing. Assessments raised for each of the financial years, have been met by the lodging of objections which contained false information as to ownership of assets, sources of income and expenses together with voluminous correspondence containing false information. i8. 4. The primary methods of disguising or concealing assessable income were centred upon the purchase of real estate, the operation of undisclosed bank accounts, the use of bookmakers and a travel agent in order to falsely represent assessable income as being non-assessable, the purchase of cars and the creation of numerous false loans evidenced by false statutory declarations and/or false acknowledgments of debt to support such loans. Over the period 1978-1989 there have been 19 properties owned or purchased by or through the 3 Alvaro families. Details of those dealings and current holdings are set out in the respective signed statements of fact signed by each defendant. These properties have variously and in part been purchased with undeclared assessable income. Over ten years, the three Alvaro families have operated between them in excess of 100 bank accounts. Some of these bank accounts were opened and closed after being in operation for only a week, some were in false names and others were in the names of relatives but were operated for their own benefit. Other accounts were opened by Cosimo Alvaro and Giuseppe Alvaro as trustee accounts for children but were used for their own purposes and not for their stated beneficiary. 5. The Australian Taxation Office estimates investigations costs in the vicinity of $1,000,000 and those of the National Crime Authority are estimated to be in excess of $2,500,000.00. 6. The main particulars of the involvement of each defendant are set out in separate memoranda." There was also a document referred to in evidence in the present case (although not on the face of the document itself) as "heads of agreement". This document recorded an agreement between counsel that the defendants would plead guilty before the Magistrate to a charge of conspiracy to defraud on the basis set forth in the agreed statement of facts and the memorandum signed by each defendant. The document recorded amongst other things that an acknowledgment of guilt and agreed statements of fact concerning each defendant would be tendered to the magistrate for use by the sentencing judge, that no additional Federal charges would be laid against the defendants or any of them in relation to the subject matter of the prosecution, that for the purpose 19. of sentencing no allegations would be made by the DPP or by the defendants as to the source of the undisclosed income, that the DPP would not apply in the proceedings for confiscation of alleged profits under the Proceeds of Crime Act 1987, that the defendants would make no complaint or claim in respect of the investigation or prosecution, that the DPP was at liberty to present such submissions as he saw fit with respect to penalty and was not restricted by the agreed statements of facts but was not entitled to make allegations of fact inconsistent with the statements of fact of the heads of agreement, that the DPP would not oppose bail subject to appropriate conditions, and that in the case of Mrs Alvaro and another wife of a relative the DPP would not oppose the imposition of a bond. Clause 11 of the heads of agreement was the subject of debate in the present proceedings. It was as follows: "The pleas, statement re facts, submissions and all other matters associated with the pleas are without prejudice to the rights of the DPP and any person named herein in any existing or future civil/tax proceedings and on the part of defendants and each of them are made for the purpose of this matter being dealt with by Mr Harris or the court on sentence but not otherwise." In a ruling during the course of the trial I held that the admissions, the statement of agreed facts and the heads of agreement were admissible in the present proceedings. On 5 November 1990 Mr and Mrs Alvaro pleaded guilty before Millhouse J in the Supreme Court of South Australia to an ex officio indictment laid by the DPP.- On 14 November his Honour sentenced Mr Alvaro to three years imprisonment, subject to release on recognisance after a period of 18 months, and ordered 20. him to pay the sum of $333,000 in reparation. Mrs Alvaro was sentenced to two years imprisonment subject to immediate release upon entering into a bond to be of good behaviour. Changes in Company and Trust September 1990 On 21 September 1990 Mr and Mrs Alvaro executed a document excluding themselves from the class of eligible beneficiaries under the Trust. On the same day Paul Alvaro Junior (aged 20) and Elena and Marla Alvaro (aged 18), who were respectively a nephew and nieces of Mr and Mrs Alvaro, were appointed directors of the Company. The new directors were each allotted four shares of one dollar each. These are the shares claimed by the applicant in the present proceedings. It may immediately be noted however that if the Company validly holds the three properties under the Trust the Company holds no relevant asset beneficially and as a consequence the shares would be worth no more than par value. At the time of the committal proceedings Mr Mansfield QC advised Mr and Mrs Alvaro that "... their position might be different from that of the children in the event of a committal or a conviction, and that they should give control of the family trust through the trustee to some other entity or persons". Mr Mansfield subsequently gave written advice to the effect that there were "potential conflicts of interest" and that Mr and Mrs Alvaro should seek the appointment of "additional independent directors". 21. Bankruptcy Proceedings In December 1990 the ATO procured the issue of bankruptcy notices against Mr and Mrs Alvaro based on its judgment debts. The noticse were not complied with and after the issuing and serving of creditor's petitions sequestration orders were made on 18 February 1991. Section 121 Section 121 provides: "(1) Subject to this section, a disposition of property, whether made before or after the commencement of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, vord as against the trustee in the bankruptcy. (2) Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has, 1n good faith and for valuable consideration, purchased or acquired the property the subject of the disposition or any interest in that property. (3) In this section, 'disposition of property' includes a mortgage of property or a charge on or in respect of property." Also relevant is s.6: "A reference in this Act to an intent to defraud the creditors of a person or to defeat or delay the creditors of a person shall be read as including an intent to defraud, or to defeat or delay, any one or more of those creditors." (Emphasis added) Disposition The applicant correctly submitted that if a debtor purchases property with his or her own money and procures the title to be taken in the name of a third party, there can be a "disposition of property" by the debtor to the third party even though title passes directly from vendor to third party: fTrautwein v Richardson (1946) Arg LR 129 per Latham CJ at 130, per Starke J 22. at 132 and per Dixon J at 133, Re Hermann (1916) 16 SR (NSW) 264 per Street J at 269. Hermann was concerned with the question of "settlement" under s.55 of the Bankruptcy Act 1898 (NSW). In Tfrautwein the court had to consider s.37A of the Conveyancing Act 1919 (NSW) which makes "any alienation of property with intent to defraud creditors voidable at the instance of any person thereby prejudiced". Dixon J pointed out (at 133) that the statute was "an attempt to re-express the text" of the Statute of Fraudulent Conveyances 1571 (13 Eliz., c.5)} in modern form. The New South Wales statute was not, Dixon J said, "intended to disturb the traditional and well settled operation of this branch of law". Likewise, in my respectful opinion, the concepts of "disposition" and "the person making the disposition" should be construed consistently with the way in which the statutory law has been applied since the days of Elizabeth I (cf Re La Rosa; ex parte Norgard, 7 February 1990, unreported, French J). Thus the term "disposition" in s.121 must be taken to bear a somewhat extended meaning. In its ordinary meaning "disposition" is not apt to apply to a dealing with property which the alleged disponor never owned; nemo dat quod non habet. However the statements in frautwein and Hermann all express the principle in terms of the debtor providing the money for the purchase. The reason is not hard to see. Whether the debtor pays $100,000 to X, or transfers Blackacre to X, or pays $100,000 to Y to transfer Blackacre to X, the net result is the same; the 23. estate of the debtor has been depleted by the disposition of money or money's worth. But if X pays the vendor of Blackacre by borrowing the purchase price, the analysis must be different - and this is so even if the borrowing is from the debtor himself or from another lender and secured over property of the debtor. X's borrowing from the debtor creates an equivalent asset in the debtor's estate in the form of the loan. In neither case is there the depletion of the estate with which s.121 is concerned. In the present case, Lombard Street was purchased with funds borrowed by the Company from Mr Alvaro. For the reasons already stated, his contribution is not to be characterised as a gift. Even if the source of the funds was illicit, in the sense of being undisclosed assessable income, the contribution was none the less a loan. Seaview Road was purchased with the aid of ordinary bank finance on arm's length commercial terms. I conclude therefore that the acquisitions of Lombard Street and Seaview Road were not dispositions of property by Mr and Mrs Alvaro within the meaning of s.121. The application, insofar as it is based on s.121, therefore fails at the outset in respect of those properties. - Tynte Street stands on a different footing since Mr Alvaro became 24. the owner in equity and formally assigned his rights to the Company. That would be a "disposition" within the ordinary meaning of the word without recourse to the historical doctrine mentioned. As to the shares, no authority was cited to support the proposition that the issue and allotment of shares in a company is a disposition of the shares by persons controlling the company. In the absence of specific legislative provision, such as used to exist in probate duty legislation, such a contention is in my opinion contrary to fundamental concepts of company law. Intent to Defraud Creditors - Actual Intent If however the element of disposition were established in relation to all three properties and the shares, the applicant would still have to show that such dispositions were made with intent to defraud creditors. In Williams v Lloyd; Re Williams (1934) 50 CLR 341, a case dealing with s.37A of the Conveyancing Act 1919 (NSW), Starke J said (at 361): "Fraud, however, is not to be presumed: the burden of proof is upon those who impeach the disposition." Dixon J (with the concurrence of Rich J) said (at 372): "A real intent to defeat or delay creditors must exist, and the question always is whether, upon all the circumstances of the transaction, the transfer or other disposition was in fact made with that intention. The burden of proof is upon those alleging that it was so made." 25. His Honour cited a number of authorities, the first of which was Ex parte Mercer (1886) 27 QBD 290 where the English Court of Appeal emphatically rejected the argument that the effect of a disposition raised a conclusive presumption as to the intent with which it was made. Lord Esher M R said (at 298): "The argument was first put in this way - it is necessary to prove that the bankrupt, at the date of the voluntary settlement, intended to defeat and delay a creditor or his creditors generally; the™necessary consequence of what he did was to defeat and delay his creditors; and, therefore, as a proposition of law, the tribunal which had to consider whether he did intend to defeat and delay his creditors was bound to find that he did. In support of that proposition dicta of great and eminent judges were cited. I will venture to say as strongly as I can that to my mind that proposition is monstrous. It is said that it is a necessary inference that a man intends the natural and necessary result of his acts. If you want to find out the intention ina man's mind, of course you cannot look into his mind, but, if circumstances are proved from which you believe that he had a particular intention, you infer as a matter of fact that he had that intention. No doubt, in coming to a particular conclusion as to the intention in a man's mind, you should take into account the necessary result of the acts which he has done. I do not use the words 'necessary result' metaphysically, but in their ordinary business sense, and of course, 1f there was nothing to the contrary, you would come to the conclusion that the man did intend the necessary result of his acts. But, if other circumstances make you believe that the man did not intend to do that which you are asked to find that he did intend, to say that, because that was the necessary result of what he did, you must find, contrary to the other evidence, that he did actually intend to do it, is to ask one to find that to be a fact which one really believes to be untrue in fact." Later his Lordship said (at 301): "It 1s true that voluntary settlements have been set aside under the statute, as it has been construed for a great number of years, in cases in which there was no actual intention to defraud. It has been held to be sufficient if, when the settlement 18 executed, the circumstances are such that it must have that effect. But the language which has been used in a great many cases, that a man must in point of law be held to have intended the necessary consequences of his own acts, is apt to mislead, by confusing the boundary between law and fact, and by consequences which can be foreseen with those which cannot." The passages from Mercer bring to mind the observation in another context of Dixon CJ, Webb and Kitto JJ in Stapleton v The Queen (1952) 86 CLR 358 at 365: 26. "The antroduction of the maxim or statement that a man is presumed to intend the reasonable consequences of his act is seldom helpful and always dangerous. For 1t either does no more than state a self evident proposition of fact or it produces an illegitimate transfer of the burden of proof of a real issue of intent to the person denying the allegation." Later Gibbs J, when a judge of the Federal Court of Bankruptcy, said in Re Barnes; Ex parte Stapleton (1961) 19 ABC 126 at 131: "Actual fraud, that is an actual intention to defeat or defraud creditors must_be established, and whether the existence of such an intention should be inferred from the circumstances 1s a question of fact." His Honour was applying s.46 of The Mercantile Acts 1867 to 1896 (Qld), the Queensland descendant of the Statute of Fraudulent Conveyances. The mode of proof of the requisite intent was discussed by Brennan J (with whom Deane and Fisher JJ agreed) in Noakes v Harvey Holmes & Son (1979) 37 FLR 5 at 19, a case under the Statute of Fraudulent Conveyances itself which still applied in Norfolk Island. His Honour said: "We were pressed with some observations in Williams v Lloyd; Re Williams where the court affirmed that the burden of proof that a transfer was made with a real intent to defeat or delay creditors 1s upon the party who so alleges. But that was a case where, at the time of the challenged disposition of property by a husband to his wife, he was in a sound financial position, and it was held that subsequent conduct and events were insufficient to show that the husband had at that time an intent to defraud creditors: see the judgment of Dixon J (at 372). In the present case, the inevitable result of the transfer of shares on 13 December 1976 was to defeat or delay any attempt to execute the judgment in Norfolk Island. The case falls squarely within the line of authorities of which Freeman v Pope 1s the leading example, where Lord Hatherley LC said (at 541): 'But it as established by the authorities that in the absence of any such direct proof of intention, if a person owing debts makes a settlement which subtracts from the property which is the proper fund for the payment of those debts, an amount without which the debts cannot be paid, then, since it is the necessary consequence of the settlement (supposing it effectual) that some creditors 27. must remain unpaid, it would be the duty of the judge to direct the jury that they must infer the intent of the settlor to have been to defeat or delay his creditors, and that the case is within the Statute.' That proposition does not trespass upon the rule as to onus of proof, it is a particular illustration of the discharge of the onus by inference from the known facts cf Re Holland; Gregg v Holland [1902] 2 Ch 360 at 381. In this case, the inference is strengthened by the proximity in time of the failure to have the judgment set aside and the execution of the transfer of the shares. The challenge to his Honour's finding that the transfer fell within the State of Elizabeth therefore fails." (Emphasis added) The passage was treated by a later Full Court as applicable to 8.121: P T Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 at 526; see also Re Expo World Park Pty Ltd (1994) 12 ACSR 759 at 767. The Court in Garuda was dealing with a submission on behalf of the disponee (at 523) that "fraudulent intent on the part of the bankrupt must be expressly proved" (emphasis in original). Such an argument seems to be flatly contrary to what was said as to proof by inference in Williams, Mercer, Barnes and Noakes. The circumstancal evidence of actual intent to defraud by the disponor in Garuda was very strong - and indeed the point had been conceded at first instance. I do not read Garuda as detracting from the proposition that s.121 is referring to the actual intent of the disponor, whether proved directly or by inference. That proposition appears to be part of the ratio of Williams. Defraud The intent to defraud referred to in s.121 involves not so much dishonesty as an "intention to deprive creditors of recourse 28. against all or any of [the disponor's] assets": Lewis' Australian Bankruptcy Law (4th ed, 1955) cited in Garuda at 523. Retained Benefit Under the Statute of Fraudulent Conveyances it was often held to be an indicator of the requisite intent that the disponor retained a benefit for himself. In the words of Giffard LJ in Alton v Harrison (1869) 4 Ch App 622 at 626: "If the deed 1s bona fide - that is, if it is not a mere cloak for retaining a benefit to the grantor ~ it 1s a good deed under the statute of Elizabeth." See also Middleton v Pollock [1876] 2 Ch D 104 at 108-9, Clegg v Bromely [1912] 3 KB 474 at 479, 492, Re Lloyds Furniture Palace Ltd; Evans v The Company [1925] Ch 853 at 862, Re Kelly; ex parte Young (1932) 4 ABC 258. In Re Marchiori (1983) 69 FLR 290 at 296 Fisher J applied this principle to an application under s.121. Consistently with this principle, the statute did not apply to a disposition which merely preferred one creditor over others. In Middleton v Pollock (1876) 2 Ch D 104 at 108 Jessel MR said: "It has been decided, if decision were wanted, that a payment is bond fide within the meaning of the statute of Elizabeth, although the man who made the payment was insolvent at the time to his own knowledge, and even although the creditors who accepted the money knew it. Therefore, the mere fact of the deliberate intention, of preferring, in case of insolvency, this selected list of clients to the others, would not be sufficient to avoid this claim. Assuming, therefore, that it had been proved not only that he was insolvent, but also that he was insolvent to his own knowledge, I think that, looking at the words of the statute and the authorities, the payment was bond fide if it was intended to be a payment, and the security was boné fide if 1t was intended to be a security. The meaning of the statute 1s that the debtor must not retain a benefit for himself. It has no regard whatever to the question of preference 29. or priority amongst the creditors of the debtor. That, I think, disposes of the first argument." In Re Johnson (1881) 20 Ch D 389 at 392 Fry J said: "It is obvious that the intent of the statute [of Elizabeth) 18 not to provide equal distribution of the estates of debtors among their creditors - there are other statutes which have that object." Under the Act a disposition preferring one or more creditors against others will be caught by s.122 if it occurs within six months prior to presentation of petition, but without more will not be a disposition with intent to defraud creditors. If there is a settlement (which includes a disposition, and thus a gift: see s.129(8)), even though no retention of benefit by the debtor the transaction can be set aside under s.120, but only if sequestration occurs within two years. The basic objectives of the Act include the recovery of all the bankrupt's property and the rateable distribution of its value amongst creditors. Since the likelihood, or at least the risk, of sequestration will usually be apparent to the debtor some time before that event, so also will be the temptation to deal with property in a way which would defeat those objectives. By imposing arbitrary pre~sequestration periods to catch preferences and settlements the Act avoids the practical difficulties attaching to the proof of intent on the part of the debtor. While the Statute of Fraudulent Conveyances was not part of a bankruptcy system, its descendant s.121 fits into the structure of the Act by providing a remedy whose reach into the past is unlimited in time, but one which demands the price of proof of 30. intent of a kind developed in the jurisprudence of the Statute of Fraudulent Conveyances; albeit an intent which may be proved "by inference from the known facts" (Noakes, supra). In Garuda the Full Court said (at 525): ",.. 8.6 of the Act, in its application to s.121, has the effect that a disposition of property will be void as against the trustee in bankruptcy if made with an intent to defraud or to defeat or delay any one or more of the creditors of the disponor; there is no need for an intent to defraud creditors as a class." The Statute of Fraudulent Conveyances itself spoke of an intent to "delay, hinder or defraud" whereas s.121 uses the expression "intent to defraud". Elsewhere in the Act, in s.40(1)(c) and s.272 (a) and (b), the formulation is "intent to defeat or delay". The existence of these differing formulations is expressly adverted to in s.6, but was not discussed by the Full Court in Garuda. It seems a reasonable supposition that s.6 was introduced to overcome the rule that the Statute of Fraudulent Conveyances did not apply to dispositions which merely preferred one or more creditors over others (Middleton, Johnson supra). (Section 6 appears as cl.311 of the draft Bill appended to the Report of the Clyne Committee (1962) but is not discussed in the body of the Report.) However in other respects the "traditional and well settled operation of this branch of law" should be applied (per Dixon J in frautwein supra). Consistently with this approach, the well established concept of 31. retained benefit may still be a relevant criterion in determining the existence of an intent to defraud. While s.6 has the application stated by the Full Court in Garuda in a context where the impugned disposition prefers one creditor over another - as was the case in Garuda itself - there will also be cases where no question of competition between creditors arises. The present case is such a one. Relevantly there was only one actual or potential creditor - the ATO. In Marchiori also there were several creditors but the impugned disposition did not prefer one or more over others. In such a context, arranging for a retained benefit is obviously one way a debtor could defraud creditors. The approach is illustrated by Marchiori (at 296) where Fisher J said: "In this matter the bankrupt was patently insolvent at the time he made the disposition and unable to meet his recurrent commitments. He gave evidence of a number of other grounds which he said justified the transfer to his daughter, but none of these were convincing or even necessitated the change in ownership of the vehicle. The transaction, with all of its exceptional features, 1s only capable of explanation on the basis that he wished to retain the benefits of ownership whilst at the same time placing the asset beyond the reach of his creditors. Paragraphs (c) and (d) of the agreement are very significant in this regard. The services of his daughter eventually as an alternative or substitute driver for himself and his wife did not require a sale to her of the vehicle. Nor did his desire to obtain her financial assistance to meet his periodic commitments, for, as she said, he had received such assistance whilst in Queensland and there was no evidence to suggest it would not again be available when she obtained employment. If the latter ground was of great significance, a sale on the open market would have produced substantial funds, but of course denied him the benefits which accompany ownership. The fact that he continued notwithstanding transfer of ownership, to pay all running expenses and outgoings and the terms of the agreement itself satisfy me that the transaction was a cloak for retaining the benefits of the vehicle for himself whilst placing the asset beyond the grasp of his creditors. There is no doubt that as far a the bankrupt was concerned the disposition was manifestly an arrangement to defeat his creditors." (Emphasis added) In the circumstances of the present case, where the impugned dispositions (other than the issue of shares) were made many 32. years ago and well before there was any apparent need to stave off creditors, any intent to defraud creditors seems to necessarily involve some provision for retained benefit. The presentation of the applicant's case accepted this need by urging that Mr and Mrs Alvaro treated the properties in question "as their own". On this issue tehre was a substantial degree of overlap between the case under s.121 and the case of sham. The form a retained benefit takes will depend on the circumstances. Sometimes it may be the physical use of the property, like the engagingly explicit promise to lend a motor car to the debtor "whenever requested or required, at any time or place" (Marchiori at 292). Or it may take the form of rent or dividends made available to the debtor. Section 121 can have no application unless the disponee has acquired legal title - otherwise there will be nothing to set aside. Nor is the section relevant where the disponee holds the property on trust for the debtor by reason of some doctrine of equity. In such a case the debtor's beneficial interest is part of the debtor's estate and vests in the trustee in bankruptcy under s.59. Thus s.121 posits legal and beneficial title in the disponee. Therefore the concept of retained benefit must require at the time of the disposition some promise by the disponee, or some arrangement or understanding between disponee and debtor, that the latter will receive the benefit and that the disponee will 33. make the benefit available - notwithstanding the disponee's legal and beneficial title - and, if need be, inconsistently with the disponee's own rights and interests. The promise, arrangement or understanding may be express (as in Marchiori) or it may be implied, but it must have existed at the time of disposition. Mere expectation on the debtor's part, or some familial or social relationship between debtor and disponee, May not in themselves be enough. A good indication of the existence of such a promise, arrangement or understanding will be evidence of the subsequent enjoyment by the debtor of the benefit. Conversely, if there is no such evidence it will be harder to infer the existence of the promise, arrangement or understanding at the time of disposition - and the more so if a long time has passed since the disposition and there have been circumstances in which the debtor might have been expected to call in the benefit had there been one promised. The approach of Gibbs J in Barnes implicitly accepts that participation on the part of the disponee is required; see also In re Johnson (1881) 20 Ch D 389 at 394 where Fry J said: "It has not been contended, and it could not be intended, that the mere fraudulent intent of the vendor could avoid the deed if the purchaser was free from fraud." The promise, express or implied, of the disponee to make the benefit available to the debtor, being a promise known to the debtor, is an element of the intent to defraud creditors and also 34. something which negatives good faith on the part of the disponee: Clegg [1912] 3 KB at 492 per Parker J. Concealment The times at which the applicant has to establish the relevant intent are: Lombard Street 30 November 1981 Tynte Street ~ 27 June 1983 Seaview Road 31 January 1984 Shares 21 September 1990 Thus the Court is asked to set aside transactions which occurred up to thirteen years ago, nine years before sequestration and three years before the emergence of the ATO as a creditor posing a serious threat to Mr and Mrs Alvaro, a marked contrast to the proximity in time of insolvency and pressing creditors' claims that existed in Noakes, Marchiori and Garuda. In opening the applicant's case counsel said that *(b)yetween 1978 and 1987 (Mr and Mrs Alvaro) conspired to defraud the (ATO) by concealing assessable income. This was done, amongst other ways, by the purchase and transfer of property into the names of a company purportedly as trustee, it having been established 1n order to conceal the accumulation of wealth from the concealed income", In final submissions counsel expanded this notion by asserting that there was intent to defraud if there were +... dispositions designed to defeat creditors by evasion. Evasion does take place if the disposition is designed to prevent the creditor gaining knowledge of the existence of the interest in the property ... it was sufficient to establish that the properties were acquired in the name of the Trust to prevent, hinder or delay the assessment of tax by concealing the true 35. assessable income of the bankrupts. Concealment is enhanced if assets are in the name of others for that frustrates the effective use of the betterment statement to assess the amount concealed". The problem with this analysis is that the applicant's case assumes a knowledge in 1981 by Mr and Mrs Alvaro of the betterment assessment system and a conscious plan to defeat that system or make its application as difficult as possible. There is no evidence -to suggest that Mr and Mrs Alvaro had such knowledge and the circumstances point to the conclusion that they did not. If there was an intent to defraud creditors or, more specifically, the ATO, in the circumstances of this case it could only be an intent, in the words of the applicant's opening submissions, " to conceal the accumulation of wealth from the concealed income". (That submission may from another point of view be said to beg the question whether the "wealth" was accumulated by Mr and Mrs Alvaro or by the Company as trustee of the Trust.) On the issue of intent to conceal, the evidence is as follows. In 1981 Mr and Mrs Alvaro were carrying on a hairdressing business in North Adelaide. They banked at the North Adelaide branch of the Commonwealth Bank. They caused the Company to be incorporated with the stated purpose of acquiring their business. They made themselves the only directors and shareholders of the Company and named it after themselves, all of which information would be available for public search at the appropriate registry. They retained their accountant Mr Rugari for the purposes of incorporating the Company and establishing the Trust, which also 36. bore their names. Mr Rugari kept files for themselves and the Company and Trust under their respective names in his office in Adelaide. In the bookkeeping and records of the Trust there was no concealment of wealth or assets. In the same year Mr and Mrs Alvaro caused the Company to acquire a property, the title to which was registered in the name of the Company in the Titles Office. Mr Alvaro signed a tax return which told the ATO that the Company had "property" and that he, Mr Alvaro, was indebted to the Trust. When the other two properties were acquired subsequently they too were registered in the name of the Company as registered proprietor and their existence indicated in the balance sheets lodged with the tax returns. Mr Alvaro collected the rent. Since he was not an estate agent the tenants would doubtless conclude that he had some kind of personal connection with the properties. From 1981 onwards the ATO, or anyone else curious about assets Mr and Mrs Alvaro might own or control or have some involvement with, needed only to search the index at the Titles Office to find holdings in the name of a company bearing their own name. What Mr and Mrs Alvaro did in relation to their connection with or involvement in the three properties seems quite inconsistent with the existence of any intent to defraud by concealment. 37. The ATO was for present purposes Mr and Mrs Alvaro's only creditor. (Only two proofs of debt were lodged against their estates, one by the ATO and the other by the DPP in respect of the reparation orders.) Section 6 makes an intent to defraud one creditor sufficient for the purposes of s.121. But the evidence shows not merely an absence of concealment of Mr and Mrs Alvaro's connection with the three properties, but a positive communication of the fact of that connection to the ATO itself by means of the Trust tax returns. It was not something kept secret, to be sprung upon the creditor only in case of some unexpected claim (Mercer at 294). I do not doubt that some of the money which was not included in Mr and Mrs Alvaro's tax returns went towards the improvement of at least some of the properties concerned. In particular, I find that this happened with the renovations of Tynte Street. However, that does not of itself establish that the relevant dispositions at the time the properties were acquired were made with intent to defraud creditors. The conclusion to be drawn is that Mr and Mrs Alvaro, although undoubtedly dishonest, were also naive. The circumstances strongly suggest that they thought they would never be caught, that once they had concealed income by false betting wins, false name bank accounts and the like, they could do what they liked with it. Likewise, I do not regard the admissions made in the course of the criminal proceedings as concluding this issue. Clause 11 of the heads of agreement acknowledges that the admissions etc were 38. made "for the purpose of this matter being dealt with by Mr Harris or the Court on sentence but not otherwise". In the course of the trial I ruled that this provision could not prevent the applicant tendering the admissions. However, when evaluating the admissions for the purpose of the present case, cl.1l is a reminder that they have to be considered in context. The question whether the three properties were "disposed of", with the intention of defrauding creditors, was simply never an issue in the criminal proceedings. What was then raised was the concealment of assessable income and what was done with that income towards the acquisition of assets. The applicant argued that Mr and Mrs Alvaro treated the properties "as their own" by, in particular, collecting rents of the properties and paying personal expenses from such funds. Such an argument bears on the issue of retention of benefit by the debtors, as well as on the issue of sham. But their transactions were consistent with, in the words of Mr Harmer, a "reasonably normal" degree of usage with a family discretionary trust of this kind. The regular practice of Mr Rugari was to make the appropriate adjustments to the loan account when the accounts of the Trust were compiled each year. The evidence did not establish that any significant amount of rent escaped accounting in this way. Counsel for the applicant urged the fact that such accounting "only" took place some months later when the tax returns were prepared as something showing that Mr and Mrs Alvaro treated the assets as their own. But the accounting was not "rectifying" an irregular transaction. The Company traded 39. as trustee of the Trust but did not have salaried employees or retain an estate agent. Somebody had to collect the rent of properties owned by the Trust, and I see nothing sinister in the fact that Mr Alvaro assumed that task. As long as he accounted to the Trust on a regular and consistent basis for the rents there was nothing inherently improper in his dealing with the money for his own purposes in the meantime. The evidence indicates that such delay as occurred was not abnormal with business entities of this kind. There was a transaction in 1987 in which Tynte Street was made available as security for an advance to the family Trust of Mrs Alvaro's brother, Mr Thomas Tigani, for a farming venture. That security was ultimately realised. However imprudent the transaction may appear, Mr Tigani and the trustee of his family trust were each an "Eligible Beneficiary" of the Trust. I do not regard the transaction as having any great bearing on the question of the intent of Mr and Mrs Alvaro at the time of the impugned transactions. Availability of Other Assets The applicant's case on intent to defraud creditors fails for another reason. If a disposition by a debtor is attacked as being made with the intent of putting the debtor's assets beyond the reach of creditors, such a purpose would be pointless if the debtor retained assets in his own name which would be sufficient to meet claims of creditors. There would not be a dealing which "subtracts from the property which 1s the proper fund for the 40. payment of those debts, an amount without which the debts cannot be paid": Freeman v Pope (1870) 5 Ch App 538 at 541 per Lord Hatherley LC, Noakes at 303. Counsel for the beneficiaries of the Trust argued that the evidence showed that at the time of relevant dispositions there were assets in the name of Mr and Mrs Alvaro themselves which were sufficient to~ meet their liabilities to the ATO, and not just their liabilities based on their disclosed incomes at the time but their true liabilities as established by the subsequent betterment statement. The evidence supports her contention. Taking the asset position of Mr and Mrs Alvaro in 1983 immediately before the acquisition of Tynte Street their position can be deduced from information provided to their bank at the time and also the betterment statement: Assets 22 Prinse Street $120,000 Furniture 30,000 Cash 15,000 Romano account 55,475 588 Seaview Road 100,000 Loan accounts (Trust) 31,912 Loan Sorgini 18,000 370,657 Liabilities Mr Alvaro overdraft 494 Surplus 370,163 The prices for which 22 Prinse Street and 588 Seaview Road were subsequently sold shows that the figures given for those 41. properties were quite conservative. On the basis of the betterment statement the true tax liability of Mr and Mrs Alvaro which had accumulated by 1983 was $156,125. Even applying penalties which were subsequently assessed, including an interest factor up to 1989, the total tax liability amounted to $367,146. Moreover, the fact that, well after the conspiracy to conceal was allegedly established, substantial properties (the shops at 588 Seaview Road and later the new family home at 11 North East Road, Collinswood) were acquired in Mr and Mrs Alvaro's own names suggests that arranging for the acquisition of other properties by the Company as trustee of the Trust was for reasons other than concealment. An intention to defeat future creditors may be sufficient in the particular circumstances (Garuda at 526). But here the circumstances did not, as I find, include a belief on the part of Mr and Mrs Alvaro that the ATO would be a creditor for tax and penalties on undisclosed income. The movements in the loan accounts in 1990 and 1991 were in effect redistributions of the loan accounts; they operated as if one beneficiary made a payment to the Trust, thereby going into credit, with the funds being used to repay another beneficiary where credit is correspondingly reduced. They are of no assistance in characterising the intent of Mr and Mrs Alvaro in connection with transactions up to a decade earlier, cf Williams v Lloyd (1934) 50 CLR 341, per Dixon J at 372, per Evatt J at 42. 377. Legitimate Purpose There is a positive side as well. Mr and Mrs Alvaro's tax evasion was reprehensible, and thoroughly deserving of the sanctions of the criminal law. But it does not follow that their every act and deed was motivated by similar criminal and dishonest designs. WS Gilbert reminds us that the felon's ""... Capacity for innocent enjoyment Is just as great as any honest man's." The discretionary family trust with children (and parents) as beneficiaries has been a familiar business entity in this country for twenty years or more. For small and medium sized businesses the impression one gets is that a discretionary trust is generally preferred as a legal vehicle as against a partnership or a company as beneficial owner. The taxation benefits such trusts confer are recognised by the tax laws - subject of course to detailed prescription, but accepted nonetheless. Such tax benefits are allowed because discretionary.trusts can fulfil a socially desirable purpose of making provision for dependants. There was a legitimate reason for the use by Mr and Mrs Alvaro of the Company and the Trust. At the time the Trust was established Mr and Mrs Alvaro had two small children and were presumably contemplating more. fTheir circumstances were in this respect no different from thousands of Australians who have established discretionary family trusts. 43. The first transaction of the Company was to acquire, for the purposes of the Trust, Mr and Mrs Alvaro's hairdressing business. It is not suggested, nor could it be, that this transaction had any tax evading or concealment objectives. It was a typical and unremarkable transaction for a family discretionary trust. Thus the genesis of the Company and the Trust was not stamped with any kind of fraud or illegality, whether by concealment or otherwise, directed towards the ATO or anyone else. The subsequent acquisitions by the Company of the three properties, viewed through the prism of the Company's unexceptionable foundation, become all the more understandable as everyday transactions explicable by ordinary domestic and commercial considerations. The intent proscribed by s.121 need not be the only operative intent: Barton v Federal Commissioner of Taxation (1974) 131 CLR 370 at 375. However I am not persuaded that there was not a "single innocent intent" (Barton loc cit) at the time of the impugned transactions. Put more exactly, I am satisfied that there was in fact the innocent intent of providing for the beneficiaries of the Trust in the same way as family discretionary trusts usually make provision and I am not satisfied that this intent was accompanied by an intent to defraud creditors by concealment. I conclude therefore that none of the "dispositions" of the three properties were made with intent to defraud creditors within the meaning of s.121. Viewed generally, the dispositions are notable for the lack of the "several hallmarks" of fraudulent intent 44. described in Underhill's Law of Trusts and Trustees (13th Edition) at 217: "All the debtor's assets may have been settled, the settlement may have been carried out secretly or in great haste, false statements may be contained in the recitals, the debtor may continue to remain in possession of the settled property or retain some advantage under the terms of settlement." As to the share issue, there is likewise no basis for a finding of intent to defraud creditors. What was done was consistent with the substance of Mr Mansfield's advice. Once Mr and Mrs Alvaro relinquished control by appointing three more directors, it was logical to have the Company issue more shares so that Mr and Mrs Alvaro's control as shareholders would also cease. Mr and Mrs Alvaro had ten shares between them. If the three new directors were to receive shares sufficient to outvote Mr and Mrs Alvaro, the obvious number was something more than ten which was divisible by three. Hence the issue of twelve shares, with four going to each of the new directors. Valuable Consideration and Good Faith The burden of proof on these issues is*™on the applicant: Marchiori at 297, Garuda at 527-8. I find there was valuable consideration in the form of the loans. As to good faith, the relevant persons must be Mr and Mrs Alvaro in their capacity as directors of the Company. In the circumstances of this case, negating an intent to defraud creditors must lead to a finding of good faith. The question is whether the disponee is "privy to or party to the fraud of the debtor": Garuda at 528. 45. Sham . The legal concept of sham has been authoritatively expounded in a recent decision of a Full Court of this Court. Before xeferring to that authority, the following passage from the judgment of Turner J in Paintin & Nottingham Ltd v Miller, Gale & Winter [1971] NZLR 164 at 175 bears repeating: "The word 'sham' is well on the way to becoming a legal shibboleth; on its mere utterance it seems to be expected that contracts will wither like one who encounters the gaze of a basilisk. But by a 'sham' 18 meant, 1n my opinion, no more or no less than an appearance lent by documents or other evidentiary materials, concealing the true nature of a transaction and making it seem something other than what it really is. The word 'sham' has no applicability to transactions which are untended to take effect, and do take effect, between the parties thereto according to their tenor, even though those transactions may have the effect of fraudulently preferring one creditor to others, and notwithstanding that they are deliberately planned with this in view. If such is their effect, there are statutes and rules of law designed to thwart the intentions of those who enter into them; but the fact that the law discountenances such transactions as these does not render them 'shams'." In Sharrment Pty Ltd v Official Trustee (1988) 18 FCR 449 Lockhart J, after discussing a number of authorities, said (at 453): "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 18 a spurious imitation, a counterfeit, a disguise or a false front. It 18 not genuine or true, but something made in imitation of something else or made to appear to be something which it 1s not. It is something which is false or deceptive." His Honour went on to consider a number of the features of the case then before the Court. The following comment is apt for present purposes (at 455): ""Fifthly, 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 Sankruptcy Act, characterise them as a sham. The transactions may in themselves be legally effective although intended to achieve an inacceptable purpose. In Miles v Bull 46. (supra) Megarry J said_ (at 264): 'A transaction is no sham merely because 1t 1s carried out with a particular purpose or object. If what is done is genuinely done, it does not remain undone merely because there was an ulterior purpose in doing it.' Megarry J went on to observe (at 264) 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'. The characterisation of a sham adopted by Megarry J in Miles v Bull is consistent with that adopted by Windeyer J in Scott's case 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 thezr 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 See also Beaumont J at 467 and Alliance Acceptance Co Ltd v Oakley (1988) 48 SASR 337 at 341 per King CJ. In the circumstances of the present case, once an intent to defraud creditors is negated, a conclusion of sham is impossible to draw. The acquisitions in question were, I find, intended to take effect and be governed in accordance With the rights and duties created by the establishment of the Company and the Trust. There were no underlying "real" transactions which the Company and the Trust were designed to conceal or disguise. Resulting Trust This doctrine has no application because, first, the purchase price of the properties was provided by way of loan and in any event there was an intention on the part of Mr and Mrs Alvaro 47. that the Company should hold the three properties subject to the express terms of the Trust: see Sharrment at 471-473 per Beaumont J. Estoppel Counsel for the beneficiaries pointed out that the applicant accepted the ATO's proof of debt, which was based on the betterment statement. The conclusion was said to be that since the latter document treated the loans to the Trust as assets of Mr and Mrs Alvaro, the applicant is estopped from contending that they are invalid. This argument fails for a number of reasons. The ATO's proof of debt was founded as a matter of law on the judgment, not the betterment statement. In any case, there is no evidence that Mr and Mrs Alvaro acted to their detriment or otherwise altered their position in reliance on the conduct of the applicant in accepting the ATO's proof of debt. Conclusion The applications will be dismissed with costs including reserved costs. 48. Appearances Counsel for the applicant: Solicitor for the applicant: Counsel for the first and second respondents: Solicitor for the first and second respondents: Counsel for the beneficiaries of P & R Alvaro Family Trust: Solicitor for the beneficiaries of P & R Alvaro Family Trust: Dates of hearing: I certify that this and the preceding forty seven (47) pages are a true copy of the reasons for judgment of his Honour Mr Justice Heerey. Assoc vate Mr D Meagher QC with Ms §S Maharaj Australian Government Solicitor Mr M Abbott QC with Mr H Patsouris Patsouris & Associates Ms L Powell Condello & Co 5,6,7,8,9,13,14,15,16,19 and 20 September, 1994