FEDERAL COURT OF AUSTRALIA Sweeney v Cape [1999] FCA 1140 BANKRUPTCY – proceeds of three blocks of land sold by the bankrupt in 1992-3 largely distributed to his children, the first three respondents – trustee seeking to have proceeds of sale paid to him – notices issued by trustee under s 139ZQ of the Bankruptcy Act – application by bankrupt to set aside the s 139ZQ notices, review the trustee's conduct under s 178 of the Bankruptcy Act and reverse some of the trustee's actions – application by trustee for summary dismissal of bankrupt's applications – when trust in three blocks of land in favour of the bankrupt's children established – prior intention to gift land to children – whether moral obligation established – the existence of a constructive trust – proof of solvency at one time does not establish solvency at an earlier time – no evidence to establish state of bankrupt's solvency at the relevant time – absence of relevant fraudulent intent on the part of the bankrupt Bankruptcy Act 1966 (Cth) ss 120(1), 120(2), 121, 139ZQ, 178 Re Brown [1950] 15 ABC 74 Re Saebar [1971] 18 FLR 317 Re Hyams [1970] 19 FLR 232 Last v Rosenfeld [1972] 2 NSWLR 923 Organ v Sandwell [1921] VLR 622 Re Chemical Plastics Ltd (In Liq) [1959] VR 570 Re Doughty Bros [1895] 2 Ch D 54 (CA) PAUL DESMOND SWEENEY v LISA JANE CAPE & ORS NG 7051 OF 1996 THE HON JUSTICE MARCUS EINFELD AO SYDNEY 24 AUGUST 1999 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NB 2488 OF 1994 BETWEEN: PAUL DESMOND SWEENEY Applicant AND: LISA JANE CAPE First Respondent RICHARD WILLIAM TIMOTHY CAPE Second Respondent JULIE ANN O'CONNOR Third Respondent WILLIAM TIMOTHY CAPE Fourth Respondent JUDGE: THE HON JUSTICE MARCUS EINFELD AO DATE OF ORDER: 24 AUGUST 1999 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. the declaration of trust of 19 May 1992 in favour of the first, second and third respondents be set aside and the settlement by the bankrupt upon them of the 3 blocks of land therein referred to be declared void as against the applicant trustee in bankruptcy 2. the first, second and third respondents pay the proceeds of the sales of the blocks to the trustee with interest, including the amount directed by the second respondent to be paid to the bankrupt 3. there be liberty to apply until final orders are made THE COURT DIRECTS THAT: 4. the parties bring in draft or agreed final orders to give specific effect to these and the other conclusions reached in the reasons for judgment within 14 days Note: Settlement and entry of orders are dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NB 2488 OF 1994 BETWEEN: PAUL DESMOND SWEENEY Applicant AND: LISA JANE CAPE First Respondent RICHARD WILLIAM TIMOTHY CAPE Second Respondent JULIE ANN O'CONNOR Third Respondent WILLIAM TIMOTHY CAPE Fourth Respondent JUDGE: THE HON JUSTICE MARCUS EINFELD AO DATE: 24 AUGUST 1999 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction 1 On 27 October 1994 a sequestration order was made against the fourth respondent and the applicant was appointed trustee. The act of bankruptcy relied on was alleged to have been committed on 5 May 1994 as a result of the non-payment of costs ordered against the fourth respondent by the A.C.T. Supreme Court following extended and unsuccessful litigation. 2 This case concerns 3 blocks of land near Queanbeyan sold by the bankrupt in 1992-3 the proceeds of which largely went to his adult children, the first 3 respondents. The applicant issued notices under section 139ZQ of the Bankruptcy Act (the Act) against each of these respondents seeking payment of these proceeds to him, and has alternatively or cumulatively moved to have the sales of the blocks and disposition of the proceeds declared void and the proceeds paid to him. The bankrupt has applied to set aside the s. 139ZQ notices and sought a review of the trustee's conduct under section 178 of the Act and the reversal of some of his actions. In turn the trustee has sought the summary dismissal of these applications. To determine this litigation which was all heard, and may be determined, together, it is not necessary to determine whether someone other than a recipient can challenge a s. 139ZQ notice. I shall assume that it is permitted. 3 The facts appear to be as follows. The bankrupt was a Canberra bookmaker. In 1990 or 1991 Redarb Pty Ltd as trustee of his family trust transferred these 3 blocks and one other to the bankrupt as a beneficiary under the trust. The transfers were registered on 24 September 1991. In 1992 and 1993 the 3 blocks were sold to different purchasers with the proceeds of each sale given respectively to his children. By what was called a "Declaration of Trust" made by the bankrupt on 19 May 1992, the bankrupt stated as follows: 1. Serendipity Investments Pty Limited and I are the beneficiaries of the Redarb Unit Trust the assets of which inter alia included certain land situated at Queanbeyan in the State of New South Wales and known as the Fernleigh Park Estate. 2. It was agreed by Serendipity Investments Pty Limited and myself that each of the unit holders would be entitled to give four of the blocks of land in the said Fernleigh Park Estate to such persons as the unit holder may nominate and I believe that the Receiver/Manager, Robert John Yeomans, transferred four of such blocks to Serendipity Investments Pty Limited. Annexed hereto and marked with the letter "A" is a letter dated 29 January 1991 from Messrs Malleson Stephen Jaques to my solicitors Messrs Crossin Power Haslem. 3. I gave one of the following blocks to each of my four children as follows:- (i) Lot 4 Deposited Plan No. 747879 to my daughter Julie-Anne O'Connor of Granite View, Murrumburrah in the State of New South Wales being the whole of the land in Folio Identifier 4/747879. (ii) Lot 25 Deposited Plan No. 747879 to my son Richard William Timothy Cape of 8 Freshwater Close, Woodbine in the State of New South Wales being the whole of the land in Certificate of Title Folio Identifier 25/747879. (iii) Lot 42 Deposited Plan No. 775098 to my daughter Lisa Jane Cape of 27 Fox Street, Lane Cove in the State of New South Wales being the whole of the land in Certificate of Title Folio Identifier 42/775098. (iv) Lot 43 Deposited Plan No. 775098 to my son Peter John Cape of 49 Woolner Circuit, Hawker in the Australian Capital Territory being the whole of the land in Folio Identifier 43/775098. 4. The value ascribed to the said Lots are respectively as follows:- Lot 4 - $70,000.00 Lot 25 - $70,000.00 Lot 42 - $72,000.00 Lot 43 - $75,000.00 5. My capital account in the Redarb Unit Trust was debited with the values of the said blocks as indicated above and the title to each of the said blocks was transferred into my name by the Receiver Manager of the said Unit Trust on the 18th day of June 1991. The appropriate New South Wales stamp duty was paid on the said transfer calculated in accordance with the above valuations of the land. Annexed hereto and marked with the letters "B", "C", "D" and "E" respectively are Statutory Declarations of the said Robert John Yeomans dated 18th June 1991 relative to such transfers. 6. The said titles were transferred into my name and held by me as Trustee for each of my children. I have no beneficial interest in the land and if and when the said lands are sold the net proceeds of such sale will be paid by me to the appropriate beneficial owner of the said land. The term "Declaration of Trust" seems to me to be something of a misnomer but as the parties adopted it for the purposes of the case, I shall do the same. It is not disputed that the blocks were identified by the bankrupt and his children in 1987-8 and that there was no consideration given for the dispositions. The disposition of Lot 43 to Peter John Cape is not in issue in these proceedings. Moreover, as the other 3 blocks were sold to people apparently at arm's length from the parties to this litigation and they took for valuable consideration without notice of any dispute about their ownership, the sales cannot now be reversed so as to vest the land itself in the applicant as trustee in bankruptcy. 4 The trustee based his claim in relation to the 3 blocks on 3 grounds founded respectively in sections 120(1), 120(2) and 121 of the Act. Section 120(1) Claim 5 Subsection (1) of section 120 relevantly provides as follows: A settlement of property, whether made before or after the commencement of this Act, not being – (a) a settlement made before or 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. By subsection (8), "settlement of property" includes any disposition of property. 6 The trustee alleged that the declaration of trust constituted a settlement, or a series of settlements, of property not for valuable consideration and made within 2 years before the commencement of the bankruptcy. If so, the relevant date for fixing the settlements in relation to the bankruptcy is 3 May 1992. The respondents asserted that in fact the bankrupt held the blocks on trust for his children from 1987/8. The evidence relied on was paragraph 4 of his affidavit of 14 September 1998: I recall having a conversation with each of my children either before or at the time of attending the subdivision with each child [during the summer months of 1987/8] to the following effect: I said: "Bob Maidment and I have been discussing the possibility of the Cape Family Trust selling its interest in the Hawker shops. It is Bob's suggestion that you should each be entitled to select a block of land at the Fernleigh Park development to the value of about $70,000.00. His family will also select blocks to the equivalent value." The figure of $70,000.00 was my estimate of the approximate entitlement of each child from the proceeds of sale of the Hawker shops if that sale proceeded. 7 In my view this statement and others of similar ilk in the same affidavit could not and did not amount to a declaration of trust in the land in favour of the children. In 1987/8 this land was an asset of Redarb of which the bankrupt was a beneficiary. While as such he no doubt had an actual or potential entitlement to a share of the trust property, it could not be said to be an interest in any defined trust asset such as one or more specific blocks of land. He could not have declared himself, in 1987-8, a trustee of such land. 8 Nor do I accept that there was a transfer to him of this land on 31 October 1990 as alleged to flow from an annexure to the same affidavit under the heading "Distribution in Specie". Whatever that annexure means, it is most unlikely to have done vaguely or indirectly then what was done explicitly in the declaration of 19 May 1992. I do not accept that that declaration therefore merely confirmed a pre-existing arrangement. It stated that the transfers to the bankrupt occurred on 18 June 1991 and it was separately established that he only became the registered proprietor three months later. It would make a nonsense of this considered lawyer-prepared document to hold that in fact the transfer to him was in or before the summer of 1987/8 or on 31 October 1990. 9 The respondents argued that the trust existed despite the absence of writing. They said first that the Statute of Frauds cannot be used as "an engine of fraud": Re Chemical Plastics Ltd (In Liq) [1959] VR 570; Last v Rosenfeld [1972] 2 NSWLR 923. See also Organ v Sandwell [1921] VLR 622. The problem with this argument is that the evidence simply failed to establish a trust prior to May 1992 at all, not that the trust failed because of a lack of writing. 10 They argued, second, that some form of constructive trust should be found. In my view, this contention must be rejected because of the absence of credible evidence that something occurred to bind the bankrupt's conscience. As the children were volunteers, and at its highest, the bankrupt claimed a moral obligation, by which he meant an idea or personal intention of his own or personal commitment to himself and them, this requirement was not met. 11 The evidence established that at all relevant times up to the sale of the blocks, the bankrupt treated the land as his own – he paid the rates and other overheads, he referred to them in his tax returns and claimed the outgoings as deductions, he sought out a solicitor to prepare the declaration of trust, and in other ways. It is difficult to avoid the conclusion, especially as his evidence on this subject was in many respects unsatisfactory, that he saw financial ruin coming on him and tried to honour his personal commitment in relation to the land by the declaration of trust. Until then I believe that the bankrupt held the legal and equitable title in the 3 blocks of land in his own right. Section 120(2) Claim 12 According to this subsection: A settlement of property, whether made before or after the commencement of this Act, not being a settlement referred to in paragraph (1)(a) or (b) or a settlement that is void as against the trustee by reason of the operation of that sub-section, is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 5 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy, unless the parties claiming under the settlement prove – (a) that the settlor was, at the time of making the settlement, able to pay all his debts without the aid of the property comprised in the settlement; and (b) that the settlor's interest in the property passed to the trustee of the settlement or to the donee under the settlement on its execution. 13 This provision is activated in the circumstances of this case if, as the respondents allege, the bankrupt held the relevant land on trust for the children earlier than 3 May 1992, say from 1987/8, from 31 October 1990 or from 18 June or 24 September 1991. In this event, the subsection imposes on the respondents the onus of proving that as at the date of the settlement upon the children, whichever it was, the bankrupt could pay his debts as and when they fell due. It was argued that I should accept the evidence of the bankrupt that as at 19 May 1992, he could pay his debts as they fell due and that it should therefore be implied that he could have done so, say, in September 1991 or, semble, on whichever of the other proffered dates is chosen as the settlement date. 14 This onus of proof must be strictly addressed : Re Doughty Bros [1895] 2 Ch D 54 (CA); Re Brown [1950] 15 ABC 74. It is true that the bankrupt said that he did not anticipate, as at 19 May 1992, that the debt concerned would descend on him as quickly as it did, but I was unable to accept that evidence. As the facts set out in the section 121 claim (which follows) show, his financial position was at best precarious on that date. Indeed, on the evidence, it is quite unlikely that he would have been able to meet his liabilities and obligations then. The test is objective and contingent liabilities are always relevant to solvency as long as they are, as here, known and are not fanciful or remote : Re Saebar [1971] 18 FLR 317; Re Hyams [1970] 19 FLR 232. In fact, a liability of nearly $700,000 appeared only a month later. Moreover, as is mentioned more specifically under the section 121 claim, not all the bankrupt's debts were disclosed in his affidavit evidence, as his oral evidence and documents showed. I do not believe that his evidence in this regard was frank and credible. 15 Furthermore, it does not follow that because a person is solvent at one time, he must have been solvent 7 months earlier. There was simply no evidence to establish what was the state of the bankrupt's solvency at 24 September 1991, and the inference is the harder to draw the further away is the date when solvency has to be proved from when it is or can be proved. If the disposition of the 3 blocks was earlier than the declaration of trust, and therefore before the two year relation back period fixed by section 120(1), the respondents have not discharged their responsibility to prove that the bankrupt could pay his debts as and when they fell due at that time. Section 121 Claim 16 This section 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, void 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, in 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 or property on or in respect of property. 17 The evidence established that in the year to June 1992, the bankrupt's total income from all sources – most, presumably, from his occupation as a bookmaker – was just over $500,000 but that he incurred a net loss of more than $350,000. His profit from bookmaking was only $32,000 and he had minimal assets. He declared legal fees, presumably to his own lawyers, in excess of $400,000. 18 Furthermore, by the time of the declaration of trust, the bankrupt had been involved in the litigation against the Receiver and Manager of Redarb which led to his bankruptcy, for a considerable period. A hearing of some 18 days had been completed and judgment was awaited. When his case was dismissed on 22 June 1992, he was ordered to pay to Redarb the Receiver's costs on an indemnity basis after they were in fact recovered in the receivership. Thus by May 1992, the trustee argued, the bankrupt must have known that he was in a perilous financial state and that if he lost the case, he would be bankrupted and the creditors would more than likely take the land in question. The declaration of trust was, it was said, the product of that reasoning and circumstances. 19 In the light of my earlier findings, it is strictly not necessary to decide this question but as it was pressed and for more abundant caution, I should do so, albeit briefly. The respondents suggested that the claim fails because as the disponees of the land, they were not part of or involved in the alleged fraud. But that may not be a categorical answer to the claim. In my view, the claim fails because the evidence falls well short of establishing the relevant fraudulent intent. It is true that the bankruptcy concept of fraud does not necessarily embrace the criminal concept of deceit and dishonesty, and that it is sufficient to show that the bankrupt was acting hazardously and taking undue risks with his assets adversely to the interests of creditors. However, I do not think that the evidence satisfactorily establishes even this level of motivation. It is likely that the bankrupt was concerned for his children's futures and that he was acting to protect their interests. The "moral" obligation of which he spoke may have earlier been of a limited kind, in the sense that he may well have had the idea of transferring the land to the children when, for one reason or another, he had no further use for it himself. When disaster loomed, I think that he probably realised that the only way he could save his children from being caught up in his financial failures was, as had always been his general intention, to try to establish immediately and unequivocally their ownership of these blocks of land by a positive declaration. The arrangement, whatever it was, by which the second respondent actually paid over to the bankrupt part of the proceeds from the sale of his particular block, may have been an attempt by the bankrupt to rescue a little of the money for himself. Although his earlier intentions did not establish his trusteeship of the lands in question for them, this operation to codify these intentions in May 1992 is not, in my opinion, the stuff of fraud. Conclusion 20 The declaration of trust of 19 May 1992 in favour of the first, second and third respondents will be set aside and the settlement by the bankrupt upon them of the 3 blocks will be declared void as against the applicant trustee in bankruptcy. The first, second and third respondents will be ordered to pay the proceeds of the sales of the blocks to the trustee with interest, including the amount directed by the second respondent to be paid to the bankrupt. 21 The parties will bring in draft orders to give effect to these conclusions within 14 days. It should only be necessary to make orders in one set of proceedings. If made under section 120(1) or (2), the section 139ZQ notices will presumably be dismissed. Subject to that possible outcome, all applications of the fourth respondent will be dismissed. As the multiplicity of proceedings did not materially increase their complexity or length, the respondents will pay the applicant's costs. There will be liberty to apply until final orders are made. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Marcus Einfeld AO. Associate: Dated: 24 August 1999 Counsel for the Applicant: Mr C. P. Comans Solicitor for the Applicant: Gadens Lawyers Counsel for the first to third Respondents: Mr B. J. Skinner Solicitor for the first to third Respondents: Messrs Hunt & Hunt The fourth respondent appeared in person. Date of Hearing: 16 September 1998 Date of Judgment: 24 August 1999