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. Con Racovitis is not a party to this proceeding and no evidence has been adduced as to any negotiations that took place between him and the applicant following service of the s 139ZQ notice. The only evidence about the matter is in the affidavit of Timothy Duff King sworn 28 June 1994 (King's affidavit) filed in support of the application in which the deponent says as paragraph 9: Following his receipt of the said notice pursuant to section 139ZQ, Con Racovitis agreed to transfer to the Official Trustee the interest he had received pursuant to the transfer. Subsequently, by a transfer dated 4 December 1992 (registered no S267336F), Con Racovitis, as sole registered proprietor, transferred all of his estate and interest in the property to himself and the Official Trustee in Bankruptcy as tenants in common in equal shares. This statement is misleading if it is meant to suggest that the interest which Con Racovitis transferred to the applicant was "the interest he had received pursuant to the transfer". The interest he received from the bankrupt was an unencumbered half share in the property but his interest at the time of the transfer in favour of the applicant was subject to the mortgage. He was not able to transfer more than an encumbered interest in the property and on the face of the documents produced, that was the interest he agreed to transfer. King's affidavit establishes that in January 1990 the solicitors acting for the first and second respondents supplied to the applicant's then solicitor details of payments made by their clients totalling $37,345.69 which were made to or on behalf of Con Racovitis and which constituted the debt secured by the mortgage. No evidence has been adduced as to what, if any, communications took place between the parties in the 34 months between January 1990 when these details were supplied to the applicant's solicitor and October 1992 when notice was given pursuant to s 139ZQ. I infer from the absence of any such evidence that nothing of relevance to this application took place. In particular, I draw the inference that neither in the period prior to 26 October 1992, nor after that date prior to the registration of the transfer in favour of the applicant was any claim made by the applicant that the interest of the first and second respondents under the mortgage was susceptible to attack. Nothing appears in the evidence concerning the circumstances in which the duplicate title to the property (which in the ordinary course of events would have been in the possession or control of the first and second respondents as mortgagees) was made available to facilitate the registration of the transfer in favour of the applicant. Clearly, the title must have been made available as the transfer, expressly subject to the mortgage, was registered. When the applicant took a transfer of a half interest in the property from Con Racovitis "... pursuant to s 139ZQ of the Bankruptcy Act" he did so pursuant to s 139ZQ(7). The requirement that Con Racovitis pay the applicant $95,000 was then, by operation of s 139ZQ(7), taken to have been complied with. The subsection leaves no scope for a transfer made pursuant to its provisions to be anything other than a full discharge of the transferee's liability to pay the sum demanded. If there was any doubt as to the validity of the mortgage, the time for raising that matter was before the transfer was taken, not after. In other words, if the applicant's view was that he was entitled to an unencumbered half share in the property he should not have accepted anything less. As it was the applicant accepted the transfer subject to the mortgage. By doing so, the applicant must be regarded as having, at the time of the transfer, accepted that the mortgage was indeed valid. Interesting as some of the questions raised by this application may be, it is unnecessary to pursue them in any detail because I am satisfied that the interest of the first and second respondent under the mortgage is in any event protected by the provisions of s 120(7). I do not propose to canvass the evidence in any detail as there is no fact in dispute. The affidavit evidence of the first and second respondents and of Con Racovitis and his brother George, none of which was tested by cross-examination, establishes that by a series of payments made between members of the Racovitis family between September 1987 and January 1989, Con Racovitis was at 25 January 1989 indebted to the first and second respondents in the sum of $37,345.69. The last transaction in the series of payments occurred on 4 January 1989 when the first and second respondents provided $25,508.82 to enable Con Racovitis to payout the balance owing under the AGC mortgage. I am satisfied that the payments made by the first and second respondents were loans. I reach this conclusion by inference from the fact that over the years amounts advanced by his parents for various purposes were repaid by Con Racovitis and from the uncontested evidence that the moneys were in fact advanced as loans. There is no evidence to support a contrary conclusion. In the absence of any other agreement such a debt would in accordance with normal principles be interest free and be repayable on demand. The applicant seeks to make something of the fact that the mortgage was not executed until 25 January 1989 whereas the last advance was made some 3 weeks earlier. Given the relationship between the parties and the history of their prior dealings, I do not think that there is anything sinister about this apparent delay. There is no evidence as to when the decision was made to secure the debt by way of mortgage nor as to when the solicitors were instructed to prepare the mortgage. There is however no question that at the time the mortgage was executed Con Racovitis was indebted to his parents in the sum actually secured by the mortgage. Nor, in my opinion, does anything turn upon the fact that the mortgage document, which is in common form, refers to the principal sum secured as being "lent or agreed to be lent to the mortgagor". A mortgage may secure an existing debt and the text of the document quite adequately describes the total amount of a series of loans payable on demand. Upon execution of the mortgage the debt became interest bearing. The evidence establishes positively that the mortgage was given in good faith and for valuable consideration. Lack of good faith is not asserted by the applicant. Nothing about the fact of its execution or the circumstances in which was executed suggests that it was not given for valuable consideration. The consideration given, namely security for an otherwise unsecured debt payable on demand and a covenant to pay interest on an otherwise interest free debt cannot be described as either nominal, trivial or colourable. To the extent that s 120 may have any relevance, the mortgage is, by operation of s 120(7), unaffected by the other provisions of that section and accordingly there is no basis upon which to grant any of the relief sought. The application will be dismissed with costs. I certify that this and the preceding 10 pages are a true copy of the Reasons for Judgment of the Honourable Justice Olney Associate: Dated: Heard: 3 May 1995 Place: Melbourne Judgment: 15 May 1995. Appearances: Mr G. Bigmore QC and Mr M. Galvin (instructed by J.M. Smith & Emmerton) appeared for the applicant. Mr J. Peters (instructed by Goulopoulos, Shiels & Mangopoulos) appeared for the first and second respondents. The third respondent did not appear.