FEDERAL COURT OF AUSTRALIA Fodare Pty Limited v Official Trustee in Bankruptcy [2000] FCA 1388 BANKRUPTCY – appeal against decision of primary judge that purchase of property represented a settlement void as against the Official Trustee – whether the acquisition involved a 'settlement of property' pursuant to s 120(2) Bankruptcy Act 1966 (Cth) (Reprint 4) – whether a finding that the bankrupt used the funds as her own, is evidence that the bankrupt was entitledto use the funds as her own - disbelief does not amount to positive evidence of what is disbelieved – whether primary judge proceeded upon basis that evidence relied upon must be corroborated, contrary to s 164(1) Evidence Act 1995 (Cth) – whether prima facie presumption that joint account holders have beneficial ownership of half the funds, is rebutted – whether funds held on trust for family and friends – whether Trustee guilty of long and prejudicial delay in asserting that there was a void settlement - defence of laches and acquiescence – to assert a proportionate beneficial interest in the property, Trustee must elect to pursue this remedy, as opposed to obtaining entry of judgment for the amount of the void settlement WORDS AND PHRASES – 'settlement of property' Bankruptcy Act 1966 (Cth) (Reprint No. 4) ss 120(2), 120(8), 139ZQ, 139ZR Evidence Act 1995 (Cth) s 164(1) Limitation Act 1969 (NSW) In re Mathieson [1927] 1 Ch 283 cited Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 applied Re Ansett; Pattison (as Trustee of the Estate of Ansett) v Crosswell (unreported, 25 March 1998, Northrop J) applied Allcard v Skinner (1887) 36 ChD 145 cited Payne v Evens (1874) LR 18 Eq 356 distinguished Scott v Scott (1962) 109 CLR 649 applied FODARE PTY LIMITED AND DORIS EMILY ELIZABETH MILLER AND KATHLEEN ANNE HIRTZELL AND KEVIN TUBB v OFFICIAL TRUSTEE IN BANKRUPTCY AND OFFICIAL RECEIVER N 400 OF 2000 LEHANE, HELY & CONTI JJ 5 OCTOBER 2000 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 400 OF 2000 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: FODARE PTY LIMITED (ACN 003 722 147) FIRST APPELLANT DORIS EMILY ELIZABETH MILLER SECOND APPELLANT KATHLEEN ANNE HIRTZELL THIRD APPELLANT KEVIN TUBB FOURTH APPELLANT AND: OFFICIAL TRUSTEE IN BANKRUPTCY FIRST RESPONDENT OFFICIAL RECEIVER SECOND RESPONDENT JUDGE: LEHANE, HELY & CONTI JJ DATE OF ORDER: 5 OCTOBER 2000 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeal from the judgment of the primary judge given on 31 March 2000 be upheld. 2. The declaration made by the primary judge that the purchase of the property at 92 Racecourse Avenue, Menangle Park by or for Fodare Pty Limited represented a settlement void against the Official Trustee in Bankruptcy be set aside. 3. It be declared that the disposition on 13 April 1989 of the sum of $87,500 from the flexible deposit account maintained in the joint names of the second and fourth appellants with the State Bank of New South Wales is void as against the Official Trustee in Bankruptcy. 4. There be reserved for further consideration the question of whether any, and if so what, further relief should be granted consequential upon that declaration. 5. The question of costs be reserved for further consideration. 6. The appeal be relisted for further argument on the reserved matters by arrangement with the associate to Lehane J. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 400 OF 2000 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: FODARE PTY LIMITED (ACN 003 722 147) FIRST APPELLANT DORIS EMILY ELIZABETH MILLER SECOND APPELLANT KATHLEEN ANNE HIRTZELL THIRD APPELLANT KEVIN TUBB FOURTH APPELLANT AND: OFFICIAL TRUSTEE IN BANKRUPTCY FIRST RESPONDENT OFFICIAL RECEIVER SECOND RESPONDENT JUDGE: LEHANE, HELY & CONTI JJ DATE: 5 OCTOBER 2000 PLACE: SYDNEY REASONS FOR JUDGMENT THE COURT: 1 Doris Emily Elizabeth Miller ("the bankrupt") was made bankrupt on 23 March 1993. In March and April 1989 the bankrupt had procured a company, Fodare Pty Limited, to acquire a property at 92 Racecourse Avenue, Menangle Park ("the property") for the sum of $195,000. The primary judge justifiably described the circumstances of the purchase of the property as "quite extraordinary", but it is not necessary to embark upon an examination of those circumstances in order to dispose of this appeal. 2 The Trustee's case at first instance, as described by the primary judge, was that the money used to purchase the property, including all incidental costs of the purchase, was the bankrupt's, hence Fodare's acquisition of the property involved a disposition of the bankrupt's property that was void as against the Trustee under s 120(2) of the Bankruptcy Act 1966 (Cth) ("the Act") in the form in which the section then stood. The primary judge declared that the purchase of the property represented a settlement void as against the Official Trustee in Bankruptcy. It is against that decision that this appeal is brought. 3 Notwithstanding the form of the relief granted by the primary judge, it is clear that the subject matter of the alleged settlement(s) consisted of two sums of money, namely: - the sum of $20,000 representing the deposit payable by Fodare Pty Limited under the contract for the purchase of the property; - the sum of $175,000 representing the balance of the purchase price payable by Fodare Pty Limited under that contract. The notice under s 139ZQ of the Act, which was the catalyst for these proceedings, makes it clear that it is the alleged provision by the bankrupt of these sums of money to Fodare which comprises the alleged settlement(s). 4 Kinconne Pty Limited is a company of which the bankrupt was a director and shareholder, and by whom she was employed. At the relevant time the other director was Mr Kevin Tubb, the fourth appellant and a son of the bankrupt. The bankrupt and Mr Tubb were the directors of Kinconne until the provisional winding-up of Kinconne on 17 July 1989. Kinconne maintained two accounts with the State Bank of New South Wales, namely account number 54-0874-00 styled "Kinconne Pty Limited trading as Avoca Nursing Home" ("the trading account"), and account number 54-0874-01 styled "Kinconne Pty Limited trading as Avoca Nursing Home Trust Account" ("the trust account"). 5 The deposit payable in connection with the purchase of the property was paid by means of a cheque dated 2 March 1989 in the sum of $20,000 drawn on the trading account of Kinconne. The immediate source of the balance of the purchase price was a bank cheque for the sum of $175,000 drawn by the State Bank of New South Wales which accounted for part of a debit of $177,737.09 to a flexible deposit account maintained with the State Bank of New South Wales in the joint names of the bankrupt and Mr Tubb. The balance of $2,737.09 debited to the flexible deposit account was credited to the trading account of Kinconne. 6 In addition, a cheque for $5,500 was drawn on 30 March 1989 on the Kinconne trust account in favour of Dennis & Company, solicitors, on account of stamp duty payable on the purchase of the property. In April 1989, a further cheque for $2,000 was drawn on the trading account of Kinconne in favour of Dennis & Company on account of expenses incurred in connection with the purchase of the property. 7 Section 120(2) of the Act, in the form in which it stood at the relevant time, relevantly provided that a settlement of property is void as against the Trustee in Bankruptcy if the settlor becomes a bankrupt and the settlement came into operation within five years before the commencement of the bankruptcy. "Settlement of property" includes any disposition of property: s 120(8). The section is limited to settlements of a settlor's own property, or property in which the settlor has a beneficial interest: In re Mathieson [1927] 1 Ch 283. 8 The primary judge said: "The documentary material, including the bank records, clearly establishes that the monies used were those of the bankrupt, from whatever source they may originally have come." That, we respectfully think, does not state the evidence fully or with complete accuracy. So far as the deposit is concerned, the documentary material, including the bank records, established that the immediate source of the funds was the Kinconne trading account; so far as the balance of the purchase price is concerned, the documentary material, including the bank records, established that the immediate source of the funds was the flexible deposit account maintained jointly by the bankrupt and Mr Tubb with the State Bank of New South Wales. the deposit 9 Two things are clear from the documents, namely: - on 3 March 1989 the cheque for the deposit was debited to the Kinconne trading account; - on 3 March 1989 a cheque for $20,000 was debited to the Kinconne trust account and credited to the Kinconne trading account. The trust account cheque matched the cheque drawn on the trading account for the deposit payable in connection with the purchase of the property. The bankrupt's evidence was that the trust account was maintained to hold monies that she held for people as their carer and for "anybody else that gave me money for some specific person or purpose" (AB 89). 10 It was the bankrupt's evidence that her friend, Mr Noel Miller, was the person for whose benefit the property was being acquired, and that it was he who ultimately provided the monies for the deposit. 11 The primary judge referred to undoubted inconsistencies in the evidence of the bankrupt upon this topic and concluded: "This inconsistency in the bankrupt's evidence and the evasive manner in which she delivered her evidence in all respects leads me to find that the bankrupt's explanation [ie that Noel Miller was the source of the deposit] is more than remarkable – it is entirely lacking in truthfulness." 12 The primary judge was entitled to disbelieve the evidence that Mr Noel Miller was the source of the deposit, and to reject the positive case which was put forward on behalf of the bankrupt in this respect. We do not find it at all surprising that his Honour did so. There was no documentary evidence which would support the contention that funds provided by Mr Noel Miller were either the source of the deposit, or covered it. There was no documentary evidence that Mr Miller's funds were ever credited to the trust account, and on other occasions the bankrupt asserted that contributions from Mr Miller found their way into a joint deposit account in the name of "Miller D E & Tubb K R" to which we will later refer. However, disbelief of the positive case that Mr Noel Miller was the source of the deposit monies does not establish the Trustee's case that the funds were those of the bankrupt. Disbelief of a case does not necessarily require acceptance of the contrary (or some alternative): Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81, 87. 13 The primary judge does make a specific finding that the $20,000 deposit was in fact the bankrupt's money. The reason which his Honour gives for coming to that conclusion is that the bankrupt managed and applied the funds of Kinconne to suit her own purposes. His Honour concludes that the funds of Kinconne "... were in fact, or were treated as, the bankrupt's monies". However, these are different notions, rather than different ways of expressing the same notion. 14 The decision of Northrop J in Re Ansett; Pattison (as Trustee of the Estate of Ansett) v Crosswell (unreported, 25 March 1998) illustrates the difference between the two notions. In that case, Northrop J held that the fact that a director treats company funds as being his, to be used for any purpose he considers appropriate, does not lead to the conclusion that the corporate funds are monies which the director was entitled to use as his own. 15 A liquidator appointed to Kinconne may well complain of the misapplication of its funds in payment of the deposit due by Fodare Pty Limited, a company with which Kinconne had no connection. But it does not follow from the fact that the bankrupt used Kinconne's funds as if they were her own, that a disposition of those funds at the instigation of the bankrupt is a disposition of her property, as distinct from a disposition of Kinconne's property. It becomes even more difficult to reach that conclusion when the trust account cheque covered the cheque drawn on the Kinconne trading account for the deposit. 16 The s 139ZQ notice asserts that Kinconne lent the sum of $20,000 to the bankrupt, and that she drew down on that loan by means of the cheque used to pay the deposit for the purchase of the property. There was no direct evidence of the making of a loan, and the other director of Kinconne, Mr Tubb, claims to have had no involvement in connection with the purchase of the property. 17 The primary judge did not find that there was a loan of $20,000 by Kinconne to the bankrupt. His Honour proceeded upon the basis that it was sufficient for the Trustee to establish that the bankrupt treated Kinconne's funds as her own, in order to prove that the disposition of Kinconne's funds at the instigation of the bankrupt was a disposition of her property. Re Ansett illustrates why we are unable to agree with this approach. We would not ourselves be satisfied on the evidence that Kinconne lent $20,000 to the bankrupt. We agree with the primary judge's assessment that the bankrupt simply managed and applied the funds of Kinconne to suit her own purposes. But, for the reasons which we have given, a finding to that effect is not sufficient to sustain a conclusion that the payment of the deposit involved a settlement of the bankrupt's property. the balance of the purchase price 18 The bankrupt gave evidence that none of her money was used to pay for the purchase of the property. She contended that she had no beneficial interest in the money standing to the credit of the joint account and asserted that those monies were held by herself and Mr Tubb on trust for nominated relatives and friends of the bankrupt. That evidence was supported by evidence from some of the relatives and friends. The primary judge was not satisfied as to the existence of this trust for two reasons. First, his Honour said: "I found each of the witnesses called by the respondents, including Tubb, completely unreliable on the matter. The failure to produce even a single piece of documentary evidence to corroborate the bankrupt's claims of countless deposits into the account from various sources, or to confirm that the alleged contributors had in fact ever owned their supposed contributions or given such money to the bankrupt, did not assist the respondents in establishing their case." The appellants contended that the primary judge made an appellable error in coming to this conclusion, as, contrary to s 164(1) of the Evidence Act 1995 (Cth), his Honour proceeded upon the basis that it was necessary that the evidence on which the bankrupt relied be corroborated. The primary judge did not fall into that error. His Honour simply pointed to the absence of documentary material, where, if the facts were as contended by the bankrupt, documentary material could reasonably be expected to exist, as being one of a number of factors which led to his lack of satisfaction that the facts were as was being contended by and on behalf of the bankrupt. 19 Second, his Honour held that, even if he had accepted that the monies standing to the credit of the joint account reflected monies provided by members of the bankrupt's family and her friends, that would not necessarily establish that the monies were held on trust for the contributors, as the relationship between the account holders and those contributors might simply be that of debtor/creditor. His Honour said: "The evidence disclosed that the bankrupt was allowed by all of the so-called contributors to utilise their money at her leisure and with an unfettered discretion, provided repayment of the principal was available on request." Counsel for the bankrupt, Mr Cameron, accepted that this was a fair statement of the evidence, and that finding is sufficient to negative a conclusion that the monies in the joint account were held on trust for persons other than the bankrupt and Mr Tubb. 20 The primary judge did not accept the bankrupt's contention that she had no beneficial entitlement to the monies standing to the credit of the joint account. Nor did his Honour accept the evidence given by others as to contributions which they made to that account or that, if contributions were made, they were made in circumstances which would give rise to a trust relationship. However, rejection of that evidence simply leaves the prima facie position that the bankrupt and Mr Tubb are each taken to have a beneficial ownership of half of the funds in the account by virtue of their position as a joint account holders. Mr Tubb only made claim in his evidence to $61,700 of the funds in the account, but his Honour found Mr Tubb's evidence on that matter to be completely unreliable. Even if it were accepted, it would not provide a sufficient foundation for a conclusion that the balance of the monies standing to the credit of the account had been contributed by the bankrupt. 21 His Honour does find that the bankrupt exercised total discretion in respect of the management of the account, operating it and utilising it as her own and that all the funds standing to the credit of the account were part of her estate. His Honour does not refer to any particular evidence as the foundation for this conclusion. We invited counsel for the parties to provide us with a schedule of the evidence which was capable of sustaining this conclusion, but the schedules provided by counsel did not substantially rise above evidence which, if accepted, would indicate that any contributions to the account by family and friends gave rise to debtor/creditor relationships only. Our attention has not been directed to any direct evidence of contributions made by the bankrupt herself to the credit of the joint account. In those circumstances the evidence was not capable of sustaining his Honour's conclusion that all of the monies standing to the credit of that account were part of the bankrupt's estate. However, his Honour's non-acceptance of the evidence of the witnesses called by the respondents, including Tubb, leads to the conclusion that the bankrupt had not rebutted the prima facie inference of beneficial ownership of half of the funds in the account by virtue of her being a joint account holder. 22 We conclude that the declaration made by the primary judge should be set aside, but we are satisfied that the Trustee has established a settlement of the bankrupt's property made on or about 13 April 1989 in the sum of $87,500 which is void under s 120(2) of the Act (as it then stood) as against the Trustee. That sum represents one half of the portion of the funds withdrawn from the flexible deposit account which (intermingled with others' money) was applied by Fodare Pty Limited in the acquisition of the property. For the reasons already given, we are not satisfied that the cheques for $5,500 and $2,000 drawn on Kinconne's trust account and trading account respectively constituted dispositions by the bankrupt of her property. DELAY 23 The primary judge attributed to the appellants a submission that the Trustee's claim was barred by the Limitation Act 1969 (NSW), and then rejected that submission on the basis that the proceedings had been instituted within the applicable limitation period of six years from the date on which the bankrupt became a bankrupt. 24 That was not the appellants' submission. The submission was to the effect that the Trustee had been guilty of long and prejudicial delay in asserting that there was a void settlement, which delay evidenced an election on the part of the Trustee to abandon its rights, or was otherwise such as to establish a defence of laches and acquiescence: cf Allcard v Skinner (1887) 36 ChD 145, 186. 25 There are at least two reasons why a defence based upon laches cannot succeed. First, the Trustee seeks to recover the amount of a settlement which is rendered void by statute. Except to the extent that relief is sought on tracing principles, the Trustee's claim involves the assertion of a legal right. Second, the delay between the date of the bankruptcy and the making of the application on 15 December 1997 was about four and a half years. The notice under s 139ZQ of the Act was issued on 22 May 1997. The appellants have been on notice at least since that date that the Trustee challenged this transaction. Delay of that order does not evince an election or waiver on the part of the Trustee not to recover a settlement of property avoided by the Act, even assuming that doctrines of election and waiver have any relevant application in the present circumstances. The responsible officer of the Trustee gave evidence at the hearing but was not cross-examined. Thus the Trustee was not afforded the opportunity of explaining such delay as occurred. The circumstances of the present case are remote from those which were the subject of the decision in Payne v Evens (1874) LR 18 Eq 356. PROPRIETaRY REMEDIES 26 Section 139ZR provides that in certain circumstances, if a notice under s 139ZQ is given to a person in respect of any property, the property is charged with the liability of the person to make payments to the Trustee as required by the notice. Although a notice was given under s 139ZQ in the present case, and although the giving of that notice may have been the catalyst for the institution of these proceedings, it was ultimately accepted, at least by counsel for the Trustee - correctly in our opinion - that the giving of the notice was irrelevant to the outcome of the case. The Trustee's entitlement depends upon the application of s 120(2) of the Act to the facts. Neither in the pleadings as they stood at first instance, nor in the proposed Further Amended Cross Claim which we directed to be filed, does the Trustee assert a charge over the property with respect to the amount of the settlement, nor does s 139ZR provide for such a charge. The s 139ZR charge will arise only where a notice is validly given under s 139ZQ in respect of property other than money. 27 However, during the course of submissions, counsel for the Trustee embraced the proposition that, independently of s 139ZQ or s 139ZR, the Trustee was entitled to trace the settled funds into the property upon the basis that the settled funds had been mingled with other funds made available to Fodare Pty Limited, and applied in the acquisition of the property. 28 Although this proposition was embraced by counsel for the Trustee in argument, it was not developed. If the Trustee were to assert a proportionate beneficial interest in the property, it would need to elect to pursue this remedy as opposed to obtaining the entry of judgment against Fodare Pty Limited for the amount of the void settlement together with interest thereon: see Scott v Scott (1962) 109 CLR 649, 659-660. It may also be necessary to consider how the interest of the mortgagee is to be accommodated – a matter which received no attention in the course of submissions. 29 In the circumstances, we think the proper course is: - to uphold the appeal, and to set aside the declaration made by the primary judge; - to substitute for the decision of the primary judge a declaration that the disposition of the sum of $87,500 on or about 13 April 1989 from the flexible deposit account maintained in the joint names of the second and fourth appellants is void as against the Official Trustee in Bankruptcy; - before directing entry of judgment in favour of the Trustee for the amount of the void settlement and interest, we will afford the Trustee an opportunity of arguing whether it asserts on tracing principles either a proportionate beneficial interest in the property, or a charge upon the property, and if so which. That opportunity will extend to the opportunity of making whatever election is necessary in order to sustain the submissions intended to be put; - the matter is to be relisted for further consideration of the reserved matters on a date to be arranged with the associate to Lehane J. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court. Associate: Dated: 5 October 2000 Counsel for the Applicant: R Cameron Solicitor for the Applicant: Dennis & Company, Solicitors Counsel for the Respondent: A Spencer Solicitor for the Respondent: Sally Nash & Co Date of Hearing: 28 August 2000 Date of Judgment: 5 October 2000