Re Racovitis, D.M. v Ex parte Official Trustee in Bankruptcy & Ors [1995] FCA 308

IN THE FEDERAL COURT OF AUSTRALIA BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA No VB 737 of 1989

Re: DENISE MARGARET RACOVITIS A Bankrupt Ex Parte:OFFICIAL TRUSTEE IN BANKRUPTCY Applicant -and- DIMITRIOS RACOVITIS First Respondent KATINA RACOVITIS Second Respondent DENISE MARGARET RACOVITIS Third Respondent

Coram: Olney J Place: Melbourne Date: 15 May 1995 REASONS FOR JUDGMENT The applicant is the trustee in bankruptcy of the estate of Denise Margaret Racovitis (the bankrupt). A sequestration order founded on an act of bankruptcy committed on 1 March 1989 was made against the bankrupt's estate on 4 July 1989. At the commencement of the bankruptcy the bankrupt's husband Con Racovitis was the sole registered proprietor of the property at 2 Sherwood Drive Thomastown (the property). The title to the property was not then subject to any registered encumbrance although on 25 January 1989 Con Racovitis had executed a mortgage (the mortgage) in favour of the first and

second respondents (his parents) to secure the sum of $37,345.69 repayable on 31 January 1991 with interest at 16% per annum payable quarterly. The mortgage was registered against the title to the property on 9 November 1989 and is numbered P515914S. It remains registered as an encumbrance on the title to the property. There is no evidence that the principal sum has been repaid and I infer from the fact that the present proceeding is opposed by the first and second respondents that it remains outstanding. The property was originally acquired in the joint names of the bankrupt and Con Racovitis by transfer registered on 27 March 1979. In April 1980 it was mortgaged to the State Savings Bank of Victoria. A discharge of that mortgage was registered on 14 December 1987. On 29 March 1988 by transfer N376401T the property was transferred into the name of Con Racovitis. The consideration for the transfer is expressed as "the desire of Con Racovitis and Denise Margaret Racovitis to transfer the property to Con Racovitis". Con Racovitis mortgaged the property to Australian Guarantee Corporation Limited (AGC) on 22 August 1988. The mortgage was discharged on 25 January 1989. The applicant formed the view that the transaction whereby the bankrupt divested herself of her interest in the property in favour of Con Racovitis was void as against the applicant by operation of s 120 of the Bankruptcy Act 1966 and on 26 October 1992 gave notice to Con Racovitis pursuant to s 139ZQ of the Act requiring him to pay the applicant $95,000, being half of the applicant's estimate of the value of the property at the date of the transfer. On 4 December 1992 Con Racovitis executed a transfer of the property "subject to the encumbrances affecting the land including any created by dealings lodged for registration before the lodging of (the) transfer" to himself and the applicant as tenants in common in equal shares. The consideration for the transfer is expressed to be: "... pursuant to section 120 of the Bankruptcy Act 1966 by which the transfer of the Bankrupt's interest in the land to the Transfer registered on 29 March 1988 is void as against the Official Trustee and to a notice given to the Transferor by the Official Trustee on 26 October 1992 pursuant to section 139ZQ of the Bankruptcy Act". The applicant seeks the following declaration and order: 1. A declaration as against the first and secondnamed respondents that transfer registered no N376401T pertaining to the land at 2 Sherwood Drive, Thomastown, being the land more particularly described in Certificate of Title Volume 9269 Folio 580 ("the land"), is void as against the applicant by virtue of the operation of section 120 of the Bankruptcy Act 1966 ("the Act"). 2. An order that the first and secondnamed respondents execute and deliver to the applicant a registrable discharge from mortgage registered no P515914S of the applicant's equal undivided half part or share in the land, and take all steps necessary to effect the registration of such discharge. No relief is sought against the third respondent (the bankrupt) who has taken no part in the proceeding. Subsection 120(1) of the Act provides: 120(1) A settlement of property, whether made before or after the commencement of this Act, not being: (a) a settlement made before and in consideration of marriage, or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration; or (b) a settlement made on or for the spouse or children of the settlor of property that has accrued to the settlor after marriage in right of the spouse of the settlor; is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy. (The period of 2 years before the commencement of the bankruptcy of the bankrupt runs from 1 March 1987). The applicant asserts, and the evidence establishes that transfer N376401T was void as against the applicant by operation of s 120(1), and accordingly (subject to the provisions of the Bankruptcy Act) the estate and interest of the bankrupt in the property at the date of the transfer vested in the applicant upon the making of the sequestration order. That estate and interest was an unencumbered interest in fee simple as joint tenant with Con Racovitis. In the period intervening between the bankrupt disposing of her interest in the property and the commencement of the bankruptcy, the property was mortgaged by Con Racovitis to the first and second respondents. Subsection 120(7) of the Bankruptcy Act provides: 120(7) Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has in good faith and for valuable consideration purchased or acquired from the persons entitled to the benefit of the settlement, covenant or contract or from the trustee of the settlement the money or property the subject of the settlement, covenant or contract or an interest in that money or property. The effect of s 120(7) is to protect any interest that has been acquired in the property by a third party in good faith and for valuable consideration. Thus, if it is established that the interest of the first and second respondents was acquired in good faith and for valuable consideration that interest will not be affected by the operation of s 120(1). Subsection 120(7) does not say that in the absence of good faith and valuable consideration a title or interest acquired from the beneficiary of a settlement caught by s 120(1) will also be void as against the trustee in bankruptcy, but for the applicant to succeed in obtaining the relief sought in paragraph 2 of the application the subsection has to be construed in that way. The Court has not been referred to any authority to support such a proposition. Section 120(1) renders void as against the trustee in bankruptcy a settlement of property if the settlor becomes bankrupt within the relevant period. In this case the settlement sought to be attacked is the transfer (or in the words of s 120(1), the settlement) by the bankrupt of her joint interest in the property. In the context of s 120(1) the bankrupt is the settlor and the settlement came into operation within 2 years before the commencement of the bankruptcy. The relief sought by the applicant insofar as it seeks a declaration "as against the first and second respondents" in relation to the transfer of this property is not something contemplated by s 120(1). What the applicant really wants is a declaration that the mortgage is void as against the applicant but recognises that s 120(1) does not provide an avenue through which to attack the mortgage. The mortgage was not a settlement of which the bankrupt was the settlor. In the circumstances, s 120 can have no application in respect of the mortgage. Insofar as the applicant has sought to rely on s 120(1) the application has been fatally flawed from the outset. It is however appropriate that other aspects of the evidence be adverted to. When issuing the s 139ZQ notice the applicant valued the bankrupt's estate and interest in the property at the time of the void transaction at $95,000 and demanded payment of that sum from Con Racovitis. Section 139ZQ(7) provides: 139ZQ(7) If a person is required by a notice under this section to pay to the trustee the value of any property, the requirement is taken to be complied with if the property is transferred to the trustee.