FEDERAL COURT OF AUSTRALIA Sellers v One Step Plumbing and Concrete Pty Ltd [2002] FCA 478 BANKRUPTCY – applicant trustee in bankruptcy seeks orders that transfers of properties are void as against him – transfers said to be undervalued transactions pursuant to s 120 of the Bankruptcy Act 1966 (Cth) – alternatively transfers said to be intended to defeat creditors under s 121 – whether sale of particular property a "sham" – whether sales of other properties at "market value" WORDS AND PHRASES – "market value" Bankruptcy Act 1966 (Cth) ss 5, 58(1)(a), 115(2), 116(1)(a), 120, 121, 123, Pt X Div 2 and s 188 Jones v Dunkel (1959) 101 CLR 298 referred to Victorian Producers' Co-Op Co Ltd v Kenneth [1999] FCA 1488 at [11] and [18] referred to Sutherland v Brien [1999] NSWSC 155 at [40] referred to Ashton v Prentice (unreported, Federal Court, 23 October 1998, per Hill J) referred to James v Swan Hill Sewerage Authority [1978] VR 519 referred to Spencer v Commonwealth (1907) 5 CLR 418 at 432 and 441 referred to Commonwealth v Arklay (1952) 87 CLR 159 at 169-170 referred to KENNETH STEWART SELLERS (as trustee of William John Hussen, a bankrupt, and as trustee of the property of Kayleen Maree Hussen, a bankrupt) v ONE STEP PLUMBING & CONCRETE PTY LTD (ACN 074 602 396), MANIFOLD NOMINEES PTY LTD (ACN 076 606 221), McKILLOP DEVELOPMENTS PTY LTD (ACN 078 801 368), DRUMCONDRA INVESTMENTS PTY LTD (ACN 074 718 979) and GIUSEPPE'S PROPERTIES PTY LTD (ACN 075 951 852) V7425 of 1999 WEINBERG J 18 APRIL 2002 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V7425 OF 1999 BETWEEN: KENNETH STEWART SELLERS (as trustee of William John Hussen, a bankrupt, and as trustee of the property of Kayleen Maree Hussen, a bankrupt) APPLICANT AND: ONE STEP PLUMBING & CONCRETE PTY LTD (ACN 074 602 396) FIRST RESPONDENT MANIFOLD NOMINEES PTY LTD (ACN 076 606 221) SECOND RESPONDENT McKILLOP DEVELOPMENTS PTY LTD (ACN 078 801 368) THIRD RESPONDENT DRUMCONDRA INVESTMENTS PTY LTD (ACN 074 718 979) FOURTH RESPONDENT GIUSEPPE'S PROPERTIES PTY LTD (ACN 075 951 852) FIFTH RESPONDENT JUDGE: WEINBERG J DATE OF ORDER: 18 APRIL 2002 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The applicant, on or before 2 May 2002, file and serve draft minutes of order to give effect to these reasons. 2. The application be stood over to a date to be fixed to hear argument as to the terms of the proposed orders and to consider the question of costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V7425 OF 1999 BETWEEN: KENNETH STEWART SELLERS (as trustee of William John Hussen, a bankrupt, and as trustee of the property of Kayleen Maree Hussen, a bankrupt) APPLICANT AND: ONE STEP PLUMBING & CONCRETE PTY LTD (ACN 074 602 396) FIRST RESPONDENT MANIFOLD NOMINEES PTY LTD (ACN 076 606 221) SECOND RESPONDENT McKILLOP DEVELOPMENTS PTY LTD (ACN 078 801 368) THIRD RESPONDENT DRUMCONDRA INVESTMENTS PTY LTD (ACN 074 718 979) FOURTH RESPONDENT GIUSEPPE'S PROPERTIES PTY LTD (ACN 075 951 852) FIFTH RESPONDENT JUDGE: WEINBERG J DATE: 18 APRIL 2002 PLACE: MELBOURNE REASONS FOR JUDGMENT background 1 This is an application by Kenneth Stewart Sellers ("the trustee"), suing in his capacity as trustee of the bankrupt estates of William John Hussen and Kayleen Maree Hussen ("the bankrupts"). Mr and Mrs Hussen were property investors in the Geelong area. Prior to July 1996 they were the joint registered proprietors of 13 properties. The present proceeding concerns six of those properties. The trustee seeks declaratory and injunctive relief against the respondents arising out of the sale by the bankrupts to those respondents of those six properties. 2 The six properties in question are as follows: · 58 Western Beach Road, Geelong ("58 Western Beach Road"); · Units 1 to 9, 371 High Street, Geelong ("High Street"); · 162 and 164 Bellarine Street and 89 McKillop Street, Geelong ("Corner Property"); · 224 Pakington Street, Geelong West ("Pakington Street"); · 87 McKillop Street, Geelong ("McKillop Street"); and · Units 40 to 42 Calder Street, Manifold Heights ("Calder Street"). 3 Each of these properties was encumbered by a mortgage in favour of National Australia Bank Limited ("the NAB"). The NAB was first mortgagee in relation to all of the properties except 58 Western Beach Road. That property was encumbered by a first mortgage in favour of the Bendigo Bank Limited ("the Bendigo Bank"), and the NAB was the second mortgagee. 4 The bankrupts were also the registered proprietors of seven other properties in the Geelong and Newtown areas. Those properties were encumbered by mortgages in favour of Australia & New Zealand Banking Group Limited ("the ANZ") and the Commonwealth Bank of Australia Limited ("the CBA"). 5 By late 1995, Mr and Mrs Hussen were in serious financial difficulty. As a result of their predicament, some banks took action. The ANZ entered into possession of, and sold, those properties in relation to which it was first mortgagee. The CBA did the same. On 31 May 1996 the ANZ also took possession of two income producing businesses which Mr and Mrs Hussen conducted. As a result they were soon in default in relation to the NAB and Bendigo Bank mortgages. 6 Each of the six properties the subject of this proceeding was subsequently sold. It is important to note that they were sold not by the NAB or the Bendigo Bank but by the bankrupts themselves. All except 58 Western Beach Road were sold to companies associated with a man with whom Mr and Mrs Hussen had had a long association, Peter George Donald. Mr Donald was a finance broker and had formerly been a bank manager with Westpac. 7 58 Western Beach Road was the bankrupts' principal residence. It was sold to an acquaintance of theirs, Christopher Edward Crawford. Mr Donald facilitated that transaction. 8 The sale prices of the properties were as follows: Property Sale Price 58 Western Beach Road $520,000 High Street $255,000 Corner Property $70,000 Pakington Street $75,000 McKillop Street $56,000 Calder Street $325,000 Total: $1,301,000 9 The sale of 58 Western Beach Road resulted in a shortfall on the first mortgage in favour of the Bendigo Bank. That bank looked to its mortgage insurer for the balance. For reasons which were never entirely clear, the NAB discharged its second mortgage without payment. 10 The NAB suffered a shortfall on the sale of the remaining properties. Nonetheless it proceeded to discharge each of the mortgages which it held thereby enabling those sales to proceed. 11 On 31 January 1997, Mr and Mrs Hussen signed authorities pursuant to s 188 of the Bankruptcy Act 1966 (Cth) ("the Act") in favour of Robert Cole, a registered trustee in bankruptcy. By that action, they sought to enter into Pt X arrangements with their creditors. That constituted an act of bankruptcy on their part, and formed the basis of a creditor's petition filed by the ANZ on 12 May 1997. 12 On 8 August 1997, Mr and Mrs Hussen each presented a debtor's petition. The Official Receiver was appointed trustee in bankruptcy as from that date. In September 1997, Mr Sellers was appointed as trustee of their estates, pursuant to a resolution of the bankrupts' creditors. 13 It should be noted that in their statements of affairs, the bankrupts declared that they had not disposed of any property worth more than $1,000 in the previous two years. the application to this court by the trustee 14 The trustee contends that the circumstances surrounding the acquisition of the properties the subject of this proceeding render each transfer void as against him. His application is brought pursuant to ss 120 and 121 of the Act. 15 These provisions, in their present form, apply to all bankruptcies commencing on or after 16 December 1996. Section 120 relevantly provides: "120 Undervalued transactions Transfers that are void against trustee (1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor's bankruptcy if: (a) the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and (b) the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property." 16 Sub-sections (2) and (3) provide for various exemptions and exceptions to subs (1), none of which are presently relevant. Sub-section (4) provides that the trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee. Sub-section (5) provides that various specified matters are to have no value as consideration. Sub-section (6) provides protection to successors in title who acquire property in good faith and for market value. Sub-section (7) defines the "market value" of property transferred as being "its market value at the time of the transfer." 17 Section 121 relevantly provides: "121. Transfers to defeat creditors Transfers that are void (1) A transfer of property by a person who later becomes a bankrupt (the transferor ) to another person (the transferee ) is void against the trustee in the transferor's bankruptcy if: (a) the property would probably have become part of the transferor's estate or would probably have been available to creditors if the property had been transferred; and (b) the transferor's main purpose in making the transfer was: (i) to prevent the transferred property from becoming divisible among the transferor's creditors; or (ii) to hinder or delay the process of making property available for division among the transferor's creditors. Showing the transferor's main purpose in making a transfer (2) The transferor's main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent. … Transfer not void if transferee acted in good faith (4) Despite subsection (1), a transfer of property is not void against the trustee if: (a) the consideration that the transferee gave for the transfer was at least as valuable as the market value of the property; and (b) the transferee did not know that the transferor's main purpose in making the transfer was the purpose described in paragraph (1)(b); and (c) the transferee could not reasonably have inferred that, at the time of the transfer, the transferor was, or was about to become, insolvent. …" 18 Sub-sections 121 (5), (6) and (9) correspond generally with subss 120 (4), (5) and (7). THE relationship BETWEEN MR DONALD AND THE BANKRUPTS 19 The evidence disclosed that, for many years, Mr Donald had been a bank officer employed by Westpac in the Geelong area. He first met Mr and Mrs Hussen in that capacity in the early 1980's. Thereafter he socialised with them occasionally. After he resigned his position with Westpac, he became a finance broker. Subsequently he had extensive business dealings with Mrs Hussen. He was also involved in some dealings with Mr Crawford. 20 In December 1988, Mr Donald and Mrs Hussen purchased three shops as tenants-in-common at 137 Pakington Street, Geelong West. Mr Donald lent Mrs Hussen the money to finance her share of the purchase price. On 15 June 1996, she mortgaged her half interest in the shops to Mr Donald in order to secure that loan. Mr Donald claimed that he took the mortgage because he felt "uncomfortable" about Mrs Hussen's capacity to repay the money owing. 21 There were further indications of Mr Donald's close business relationship with Mrs Hussen. On 23 July 1997, she entered into a contract to sell her half interest in the shops at 137 Pakington Street to a company known as Cohen Investments Pty Ltd for $150,000. Mrs Hussen and her husband had, at one time, been directors and shareholders of that company. On 20 August 1996, Mr Hussen's brother, Peter Hussen, and Mr Donald were appointed directors, replacing Mr and Mrs Hussen. On 15 May 1997 Mr Donald became sole director and shareholder. He claimed that the bankrupts had assigned their shares to him in order to compensate him in part for the debt owed by Mrs Hussen. 22 Subsequently, Mrs Hussen assigned to Cohen Investments Pty Ltd the benefit of a judgment debt of $26,500 against a particular tenant of the shops. The company acquired that judgment debt for a mere $1,000. It was subsequently able to recover several thousand dollars from the judgment debtor. 23 Mr and Mrs Hussen were also, at one time, directors and shareholders of a company known as William Lenard Pty Ltd. That company had managed the superannuation fund of an elderly couple known to them. On 20 August 1996, they were replaced as directors and shareholders by Mr Donald and Mr Hussen's brother. 24 In November 1996 Mr Donald advised Mr Hussen in connection with a proposed purchase of a property at 197-201 Little Malop Street, Geelong. Mr Donald's position 25 Mr Donald attended a meeting of creditors on 4 March 1997 at which the proposed Pt X arrangement mentioned earlier was rejected. It is clear that he was well aware, by that time, of the fact that Mr and Mrs Hussen were experiencing serious financial difficulties. Indeed, the evidence suggests that he was aware of their difficulties long before that. 26 The applicant's case is that at a time when Mr and Mrs Hussen were plainly insolvent, Mr Donald (through companies that were specifically incorporated for this very purpose) acquired five of the six properties that are the subject of this proceeding. As mentioned, the remaining property, 58 Western Beach Road, was purchased by Mr Crawford, albeit with Mr Donald's assistance. 27 Mr Crawford was an acquaintance of the bankrupts. Their children attended the same school. The evidence established that Mr Donald had provided Mr Crawford with financial advice in the past, and that he played a significant role in assisting his company, One Step Plumbing and Concrete Pty Ltd ("One Step"), the first respondent, in the purchase of this property. 28 Mr Donald acknowledged that he had no funds of his own with which to purchase any of the five properties sold to his companies by the bankrupts. However, he claimed that he had been able to borrow the funds required from various third party lenders. Indeed, the evidence demonstrated that he was able to borrow sums which exceeded the purchase price in respect of all of the properties, except one. 29 Mr Donald explained that he had been able to borrow such sums by relying upon independent valuations which greatly exceeded the purchase price actually paid by his companies. It was no part of the applicant's case that there was anything untoward about these valuations. Indeed, the applicant placed great reliance upon them. It was Mr Donald who claimed that they were significantly inflated. He said: "I can get a valuation done of what they think the market valuation is at the time, which is only a figure off anybody. Anyone can give you a valuation and say "this building's worth $1 million" but someone will only pay half a million and they valued it on the rental return. They give you a valuation. I thought "well I can keep the full finance on that and cover my costs and have a few dollars to help me service things through until I can sell it". I had no money, no cash." 30 In substance, Mr Donald's evidence was that during the years 1996 and 1997, when the properties were purchased, it had been possible to borrow money based solely upon a written valuation, ignoring entirely the contract price. Thus, if a property was valued at $750,000, and a lender was prepared to advance two-thirds of the amount of the valuation, a sum of $500,000 could be procured. The fact that the purchase price may have been $400,000 meant that the purchaser did not need to have any money of his own in order to acquire the property. Indeed, there would be a surplus which could be used to service the loan, and to pay for running costs and maintenance of the property. 31 It should be noted that in relation to each of the five properties purchased by Mr Donald's companies, different agents and solicitors were used. His explanation for that somewhat unusual conduct was that he was concerned to maintain "confidentiality". 58 Western Beach Road 32 By a contract of sale dated 9 September 1996, the bankrupts agreed to sell 58 Western Beach Road to Mr Crawford and/or his nominee for $520,000. The contract provided that $5,000 was to be paid by way of deposit with the balance payable on 6 March 1997. That particular contract was never completed. 33 On 28 November 1996, Mr Hussen approached the Landlink Property Group ("Landlink") to prepare an independent valuation of the property. Michael Webb of that company instructed an employee, Andrew Noseda, to carry out the valuation. On 3 December 1996, Mr Noseda was handed a letter of instruction by Mr Hussen, purportedly written on behalf of a company known as Second Drumcondra Investments Pty Ltd (as distinct from Drumcondra Investments Pty Ltd, the fourth respondent), formally authorising the valuation to be carried out. 34 In early 1997 Mr Crawford acquired One Step and became sole director and secretary of that company. 35 On 3 March 1997, Mr Noseda valued the property at $760,000. He said that he received his instructions to prepare that valuation directly from Mr Hussen, who told him that he was acting on behalf of One Step. 36 In May 1997, One Step sought to borrow $570,000 on the security of the property. A solicitor acting on behalf of third party lenders indicated that his clients were willing to provide a loan of approximately $506,000, (being 65% of valuation), secured by a first mortgage, provided that an independent valuation of $760,000 was obtained. On 2 June 1997, Mr Noseda provided an updated version of his earlier valuation confirming that the market value of the property was $760,000. 37 On 3 June 1997, One Step entered into a contract of sale with the bankrupts. The purchase price was said to be $470,000. However, the Bendigo Bank, as first mortgagee, declined to allow settlement to proceed. The contract price was subsequently adjusted to $515,000, a sum which was acceptable to the bank. Settlement took place on 25 June 1997. 38 The evidence made it clear that Mr Crawford, acting on behalf of One Step, was fully aware throughout his negotiations with the bankrupts that they were insolvent. It was Mr Donald who organised the finance with the third party lenders on behalf of One Step. Those lenders ultimately agreed to lend One Step $494,000, almost the entire purchase price of the property. 39 On 28 August 1997, One Step became the registered proprietor of 58 Western Beach Road. Despite that fact, and for reasons which were never explained, in September 1997, Mr Hussen (who by now ought to have ceased to have any connection with the property) asked Mr Noseda to carry out yet another valuation. 40 One Step subsequently succeeded in obtaining re-financing, once again with the assistance of Mr Donald. In December 1997, BankWest provided a loan of $608,000, that being 80% of Mr Noseda's valuation. 41 In September 1999, One Step put the property on the market for $780,000. However, it did not sell. 42 On 27 March 2001, Mr Hussen requested yet another valuation of the property from Landlink. Mr Noseda carried out that valuation on 2 April 2001. Once again, no explanation was proffered on behalf of the respondents for this extraordinary conduct on the part of Mr Hussen. 43 A former friend and business associate of the bankrupts, Sam Scott, gave evidence that at about 8:00 am on 25 January 2002, he was at the property. The garage roller door at the rear of the premises was open, and Mr Hussen was seen to reverse his black Toyota Tarago out onto the street. Mr Scott said that when Mr Hussen noticed that he was there, he immediately drove back into the garage and the roller door closed. He said that he also saw Mrs Hussen's blue Mazda 626 at the premises on that morning. Importantly, Mr Scott said that Mr and Mrs Hussen had lived at that address for "approximately the last 13-14 years". 44 The applicant alleged that the sale of 58 Western Beach Road to One Step was a sham, and a fraud upon the bankrupts' creditors. He contended that the bankrupts had, at all relevant times, continued to occupy that property, and that One Step had been complicit in the fraud. High Street 45 On 24 October 1996, Mr Hussen approached Landlink requesting an independent valuation of High Street. On 28 November 1996, Mr Webb attended the property, in company with Mr Hussen, for the purpose of carrying out an inspection and valuation. For some reason which was never explained, Mr Hussen handed Mr Webb a formal letter of instruction signed by Mr Donald on behalf of Manifold Nominees Pty Ltd ("Manifold"), the second respondent. In fact, that company was not incorporated until 29 November 1996, the following day. Mr Donald was the sole director, secretary and shareholder of Manifold. 46 On 5 December 1996, Mr Webb provided a written valuation of High Street. He valued the units at $490,000. On 16 December 1996, Mr Donald arranged with Larkins McCarthy & Co, a firm of solicitors, for a loan to Manifold of $320,000 on the security of this property. That sum represented approximately two-thirds of Mr Webb's valuation. 47 On 19 December 1996, the bankrupts entered into a contract to sell High Street to James Synoradski and/or his nominee for $255,000. Mr Synoradski was Mr Donald's insurance agent. He signed the contract as agent for Manifold, purportedly "for confidentiality reasons". In early January 1997, Manifold was nominated as the purchaser. Settlement took place on 24 January 1997. 48 Mr Donald claimed that he had applied the surplus proceeds of the finance (about $65,000) towards various expenses. He said that these monies had now been spent. However, when pressed upon the point, he was unable to provide any bank records or other documentary evidence to substantiate that claim. Corner Property 49 On 19 March 1997, Mr Hussen telephoned Mr Webb requesting a valuation of the Corner Property. However, nothing further was done in that regard until 11 June 1997 when Mr Hussen accompanied Mr Webb to the property for the purpose of an inspection and valuation. Mr Hussen handed Mr Webb a formal letter of instruction from McKillop Developments Pty Ltd ("McKillop"), the third respondent, which had been incorporated the previous week. Mr Donald was its sole director, secretary and shareholder. 50 The following day Mr Webb valued the property at $149,000. 51 On 23 July 1997, the bankrupts entered into a contract to sell the property to Lou Ballinger and/or his nominee for $70,000. Mr Ballinger was a friend of Mr Donald. He signed the contract as agent for McKillop, purportedly because of a concern for "confidentiality". A deposit of $7,000 was required to be paid upon the signing of the contract. However, no deposit was ever paid. 52 On 29 July 1997, Mr Donald was able to obtain a loan of $96,000 for McKillop on the security of the property, based upon Mr Webb's valuation. Settlement took place on 17 September 1997. Both the transfer of the property to McKillop and the mortgage to the lender, were registered on 25 September 1997. 53 Mr Donald claimed that the surplus finance (about $26,000) was subsequently spent on renovations. However, as with High Street, he was unable to produce any bank records or other documents to support that claim. Pakington Street 54 On 29 July 1997, the bankrupts entered into a contract to sell Pakington Street for $75,000. Once again Mr Ballinger signed as agent for McKillop. A deposit of $7,500 was required to be paid on signing. That deposit was never paid. The purchase was funded by a lender who provided $100,000 on the security of the property. 55 Mr Donald claimed that he used the surplus proceeds of finance (about $25,000) "to keep things going". As with the other properties, he was unable to provide any bank records or other documents to support that claim. 56 It is important to note that there was no valuation provided in relation to Pakington Street. However, on 14 January 1999, a mere eighteen months after the property was acquired by McKillop for $75,000, that company entered into a contract of sale for the remarkable sum of $175,000. The sale did not proceed only because the applicant lodged a caveat to protect his interest. McKillop Street 57 Drumcondra Investments Pty Ltd ("Drumcondra"), the fourth respondent, was incorporated on 4 July 1996. Mr Donald was the sole director, secretary and shareholder of that company. 58 It appears that Mr Donald arranged for Landlink to prepare a valuation in relation to the McKillop Street property. He approached Ford Co-Operative Credit Society Ltd ("Ford"), a third party lender, with that valuation. However, on 26 November 1996, Ford obtained an independent valuation in the sum of $84,000. On the basis of that figure, Ford was prepared to lend $63,000. 59 On 12 December 1996, the bankrupts entered into a contract to sell the property to Louise Bellamy and/or her nominee for $56,000. Ms Bellamy was an acquaintance of Mr Donald. She signed the contract as agent for Drumcondra. Settlement took place on 31 January 1997. On 5 February 1997, both the transfer to Drumcondra and the mortgage to Ford were registered. Calder Street 60 On 3 October 1996, Mr Hussen asked Landlink to provide an independent valuation of Calder Street. On 10 October 1996, he met with Mr Webb at the property. He handed Mr Webb a formal letter of instruction purporting to be from Giuseppe's Properties Pty Ltd ("Giuseppe's Properties"), the fifth respondent. That company was not incorporated until the following day. Mr Donald was its sole director, secretary and shareholder. Mr Webb valued the property at $598,000. 61 Mr Webb's valuation was provided to a prospective lender, Central Victorian Investment Pty Ltd. The lender agreed to provide $395,000 (being approximately two-thirds of Mr Webb's valuation) on the security of the property. 62 On 18 November 1996, the bankrupts entered into a contract to sell the property to Chris Katos and/or his nominee for $325,000. Mr Katos was an acquaintance of Mr Donald. He signed the contract as agent for Giuseppe's Properties. 63 Settlement took place on 11 February 1997. According to Mr Donald, the surplus finance of approximately $70,000 was used "to keep things rolling along". However, he was unable to provide any bank records or other documents to show how that money had been spent. 64 It is important to note that Calder Street was re-financed in March 1998. On that occasion, BankWest agreed to lend Giuseppe's Properties $475,000 upon the security of the property. The further surplus proceeds of the BankWest loan were said by Mr Donald to have "gone, servicing commitments". Once again, however, he was unable to provide any bank records or other documents to explain where the money had gone. the trial of the proceeding 65 On the morning of 18 February 2002, the day upon which the trial was to scheduled to commence, the respondents made application for it to be adjourned. That application was refused. I indicated then that I would give my reasons for that refusal upon the publication of final judgment in this matter. 66 The adjournment application was based upon two grounds: · First, the respondents claimed that they were not in a position to proceed with the trial because they had not complied with any of the orders of the Court, including orders for the filing and service of affidavits. They said that that was because they were impecunious and, as a result, had been unable to retain counsel or solicitors to carry out the relevant work. · Second, it was claimed that Mr Crawford was unwell, and would be unable to attend the trial unless it was adjourned. It was claimed that he had suffered chest pains the preceding week and that he had been admitted to hospital on Friday, 15 February 2002. It was claimed that it was "uncertain" whether Mr Crawford would be able to provide instructions to his legal practitioner if the trial were to proceed (a matter which hardly seemed relevant given that Mr Crawford's company, One Step, was unable to afford legal representation for the trial, and was only represented for the limited purpose of making the adjournment application). 67 The respondents' solicitor, Robin Broberg, of the firm Irlicht and Broberg, filed an affidavit in support of the adjournment application. Mr Broberg said that he had spoken that morning by telephone with Frank Vinci, a solicitor in Geelong. Mr Vinci had previously acted as "an intermediary" between Mr Broberg and Mr Crawford. Mr Broberg said that Mr Vinci had become involved because Mr Crawford had found the court process "personally stressful" and wished to have a local solicitor available to him on ready call. He said that Mr Vinci had told him that Mr Crawford had suffered severe chest pains on the preceding Friday, and had been taken to hospital. He said that Mr Vinci had instructed him to make application on behalf of One Step for the trial to be adjourned. 68 Mr Broberg said that Mr Vinci told him that he had not been able to speak to Mr Crawford directly. However, on calling Mr Crawford's mobile number, Mr Vinci had been advised by a person, who identified herself as Mr Crawford's cleaning lady, that he was confined to bed, and "not able to go anywhere". 69 Counsel retained by the respondents for the limited purpose of making the adjournment application produced a copy of a medical certificate that Mr Broberg said had been faxed to him that morning by Mr Vinci. That certificate was a short pro forma dated 17 February 2002. It was issued by a medical centre known as "MedicAid" located in Geelong. It certified that Mr Crawford was suffering from atrial fibrillation with mild cardiac failure and that he would be unfit to follow his daily occupation for three days from 18 February until 20 February inclusive. 70 I reminded counsel for the respondents that this matter had had a long and somewhat unfortunate history. It had been set down for trial for some months, having originally been fixed for hearing in December 2001. It had been adjourned on that occasion at the behest of the respondents because their former legal representatives had belatedly perceived that there might be a conflict of interest between Mr Crawford and Mr Donald. That conflict of interest had been said to arise by reason of the fact that the applicant had discovered that there existed a connection between the bankrupts, and the Landlink valuers, which tended to cast doubt upon Mr Donald's bona fides. The applicant had strongly opposed the adjournment, submitting with some force that with each day that passed, the potential return to creditors if he were successful in this proceeding was significantly diminished. None of the respondents were paying rates on the properties, and it was claimed that they were not being let, or managed, to their best effect. 71 I indicated to counsel for the respondents that, in my opinion, the application for the trial to be adjourned was entirely without merit. Insofar as the respondents' difficulties arose because they had failed to comply with the orders of the Court regarding preparation for the trial, they were the authors of their own misfortune. I pointed out that, at least in relation to their claim that they were not in a position to proceed because they had not filed their material, there had been no intimation that this would be relied upon as a basis for an adjournment until the morning of the trial. I also pointed out that were the trial now to be adjourned, it would not be able to be heard for many months, having regard to the exigencies of my docket commitments. A delay of that magnitude could result in significant and irremediable prejudice to the applicant, and also to the creditors on whose behalf these proceedings were brought. I also noted that there was nothing to suggest that, if an adjournment were granted, the respondents would be in any better position to retain counsel at a later stage. 72 I indicated to counsel for the respondents that, in my opinion, the medical evidence adduced on behalf of Mr Crawford was entirely unsatisfactory. Much of it was vague, and it was largely hearsay. The medical certificate upon which the adjournment was sought was singularly uninformative. 73 The respondents' offer to pay the costs thrown away by reason of any adjournment was, in my view, entirely worthless. The evidence demonstrated that there was little likelihood that any such costs could be recovered. 74 It was for these reasons that I refused the application for an adjournment. the evidence led at trial 75 The applicant relied primarily upon the documents which evidenced the sales of the six properties in question, and the evidence of the independent valuers confirming the accuracy of their valuations. 76 The respondents relied upon an affidavit sworn by Mr Crawford, and the oral testimony of Mr Donald. They also relied upon the oral testimony of David Hadley, a former NAB asset structuring manager who was called on behalf of the second to fifth respondents. Mr Hadley had had responsibility for protecting the NAB's interests in the properties, and had had extensive dealings over the years with the bankrupts. 77 What emerged during the trial was that although Mr Donald claimed that he alone had arranged for Landlink to provide the valuations of the properties purchased by his companies, and that he had paid for those valuations to be carried out, the invoices prepared by that company had been addressed either to Mr Hussen at 58 Western Beach Road, or to a firm of accountants of which Mrs Hussen had once been a principal, and in which she retained an interest. 78 Mr Donald could provide no explanation as to how, or why, Mr Hussen had come to be involved in procuring the valuations of these properties. All that he could say was that he knew nothing of that involvement. However, he accepted that the invoices addressed to the bankrupts were genuine, and that it was apparent that Mr Hussen must have played some role in arranging for the valuations to be carried out. 79 Neither Mr Hussen nor his wife was called to give evidence. The applicant invited me to conclude that they were persons who would normally have been expected to be called by the respondents, and that their failure to call them gave rise to the inference that their evidence would not have assisted the respondents' case: Jones v Dunkel (1959) 101 CLR 298. the relevant legal principles 80 It will be recalled that at the time that the bankrupts filed their debtors' petitions, a creditors' petition filed by the ANZ was already pending. In accordance with s 115(2) of the Act, their bankruptcies must be taken to have relation back to, and to have commenced at, the time of the commission of the act of bankruptcy upon which that creditors' petition was based. 81 The time of the commission of that act of bankruptcy was 31 January 1997, the date upon which the debtors each signed an authority pursuant to s 188 of the Act. That authority purported to authorise Mr Cole, a registered trustee in bankruptcy, to call a meeting of their creditors, and to take control of their property. It follows that, in accordance with s 5 of the Act, that was the date of "the commencement of the bankruptcy". 82 Under s 58(1)(a) the property of a bankrupt vests in his trustee forthwith upon his bankruptcy. Under s 116(1)(a), all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or has devolved on him or her, after the commencement of the bankruptcy and before his or her discharge is property divisible amongst the creditors of the bankrupt. It follows that all property that belonged to Mr and Mrs Hussen as at 31 January 1997 is divisible amongst their creditors. 83 Section 123 of the Act provides for the protection of certain transfers of property against the principle of relation back. That section is subject to ss 118-122 (inclusive). It provides, inter alia, that in any case where a debtor becomes a bankrupt, a conveyance, transfer or assignment by the debtor for market value, or a contract, dealing or other transaction by or with the debtor for market value, is not invalidated, provided that the transaction was in good faith and in the ordinary course of business. The burden of proving that the transaction was of that character lies upon the person who relies on the validity of the transaction. 84 As noted earlier, s 120(1) provides that a transfer of property by a person who later becomes bankrupt ("the transferor") to another person ("the transferee") is void against the trustee in the transferor's bankruptcy if the transfer took place in the period beginning 5 years before the commencement of the bankruptcy, and ending on the date of the bankruptcy and the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property. Section 120(7) provides that the market value of property transferred is its market value at the time of the transfer. 85 Also as previously noted, s 121(1) provides that a transfer of property by a person who later becomes a bankrupt to another person is void against the trustee in the transferor's bankruptcy if the property would probably have become part of the transferor's estate, or would probably have been available to creditors if the property had not been transferred, and the transferor's main purpose in making the transfer was to prevent the transferred property from becoming divisible among the transferor's creditors or to hinder or delay the process of making the property available for division among those creditors. This is taken to be the transferor's main purpose if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent. FACTUAL findings 86 The evidence led on behalf of the applicant demonstrates conclusively, in my view, that Mr and Mrs Hussen were both insolvent as at 31 January 1997. Indeed, it seems clear that they had been insolvent for a long time prior to that date. 87 I am satisfied that each of the six properties sold to the five respondents in this proceeding was sold for an amount that was significantly less than its true market value. I accept the evidence of Mr Webb and Mr Noseda, the independent valuers who provided the detailed written valuations upon which all except one of the properties were financed, to that effect. Neither Mr Webb nor Mr Noseda was required for cross-examination upon their affidavits. Only the most perfunctory challenge was made to the accuracy and reliability of their valuations. 88 Valuation is ordinarily a matter for expertise. The independent valuations relied upon by the applicant were carried out in accordance with generally accepted methods of valuation. These included recent sales of comparable properties, and anticipated rentals capitalised at an appropriate rate. They were in no sense mere kerbside valuations. 89 The difference between the written valuations and the actual price paid by the respondents for each of the properties was substantial. That difference was so great that it is impossible to accept that the purchase price of each property was genuine, or that it bore any real relationship to its true market value. 90 It was submitted by Mr Donald on behalf of the second to fifth respondents that it was important to remember that the bankrupts had attempted, without success, to sell a number of the properties which were ultimately purchased by his companies. He contended that the fact that these properties had not sold at auction suggested that they had a much lower market value than that attributed to them by Mr Webb and Mr Noseda. 91 I am unable to accept that submission. There was a paucity of evidence led regarding the circumstances under which those auctions had been conducted. It is not clear what publicity, if any, had been given to them. There was no evidence as to whether a reserve price had been fixed and, if so, what that price had been. The fact that an auction of a particular property may have been conducted on a given day without eliciting a bid does not mean that the sale of that property shortly thereafter, at what seems to be an absurdly low price, represents its true "market value". 92 Mr Donald seemed to be under the impression that the concept of market value meant whatever he, or any of his companies, was prepared to pay. Under cross-examination he agreed that he had purchased each of the properties cheaply. Indeed, he agreed that each property represented a "bargain". He maintained, nonetheless, that his companies had acquired the properties for market value because the prices paid were all that anyone was prepared to pay for them. He criticised the independent valuations of Mr Webb and Mr Noseda, and also that obtained on behalf of Ford, describing them as being wildly inflated. He suggested that those valuations failed to take into account how depressed the real estate market in Geelong had been throughout 1996 and 1997. 93 Mr Donald also submitted, as was clearly the case, that the NAB had applied pressure to the bankrupts, seeking to coerce them into selling the properties as quickly as possible, failing which it would step in and sell them at mortgagee auctions. He relied upon the evidence of Mr Hadley in support of that contention. Mr Hadley agreed that he personally had approved each of the sales by the bankrupts to Mr Donald's companies. He also agreed that the NAB had discharged its mortgages over those properties to enable those sales to proceed notwithstanding the fact that they had resulted in significant shortfalls in its security. Mr Hadley agreed with Mr Donald that the independent valuations were too high. He maintained that the prices obtained for the properties had been realistic. 94 It should be noted that Mr Hadley retired from the NAB in September 1997, shortly after he had completed his involvement with the affairs of Mr and Mrs Hussen. He frankly conceded that he had been under great stress at the time. He agreed that throughout the months preceding his departure from the NAB, it had expressed dissatisfaction with the manner in which he had carried out his duties. Part of that dissatisfaction stemmed from the losses sustained by the bank arising out of the shortfalls on the bankrupts' mortgages. Mr Hadley seemed to be somewhat defensive about his dealings with the bankrupts. To the extent that his views as to the market value of the properties sold to the respondents differed from those of Mr Webb and Mr Noseda, and of Ford's independent valuer, I am in no doubt that their views are to be preferred. the concept of market value 95 It is necessary to say something briefly about the concept of "market value". That expression appears in s 120 of the Act. It was not to be found in the legislative precursor to that section. The reasons for its introduction were set out in the Explanatory Memorandum dealing with the Bankruptcy Legislation Amendment Bill 1996: "The consideration given by a person for the transfer of property must be an amount which is equal to at least the market value of the property at the time of the transfer (see proposed paragraph 120(7)(c)). This requirement is intended to overcome the decision of the High Court in Barton v Official Receiver (1986) 161 CLR 85 that a person who claims to be a purchaser of the property need not show that he or she had given fully adequate consideration for the transfer, but nevertheless must have given real and substantial consideration, and not consideration which is merely nominal, trivial or colourable. The expression 'market value' is intended to refer to the value of the property concerned if it were disposed of to an unrelated purchaser bidding in a market on an ordinary commercial basis for property of the kind disposed of, without any sort of discount or incentive for purchase being offered. The expression is not intended to include a situation where the property was being disposed of at a 'fire sale', at discounted prices because of some immediate need on the part of the owner to liquidate his or her assets. Of course, there may be differing opinions as to the precise market value of some property, for example house properties, where valuers or real estate agents may give kerbside valuations which spread over a range of monetary values. However, if the property was transferred for an amount less than the lowest amount in the range, the transfer would be a transfer at undervalue, for the purposes of the section." 96 In Victorian Producers' Co-Op Co Ltd v Kenneth [1999] FCA 1488, Merkel J referred to that document and observed: "11. The current form of s 120 is intended to overcome the decision in Barton v Official Receiver (1986) 161 CLR 75, that a transaction is not void under the section if the person who claims to be purchaser of property shows that the consideration given is real and substantial even if it is not fully adequate consideration. Unlike its predecessor, under the current form of s 120 the Court is required to assess the value of the consideration given." 97 In Sutherland v Brien [1999] NSWSC 155, Austin J, said at [40], in relation to the expression "market value": "I must compare the market value of the property with the 'value' - not necessarily, one notes, the market value - of the consideration given by Mr Sutherland. It is plain that the value of the consideration must be assessed on an objective basis not dependent on any special value which the transferor may have subjectively placed on the consideration. This is an important point in the present case because the evidence suggests that Mr Roberts had a totally unrealistic sense of optimism about the future of the company and therefore placed an unrealistically high value on securing a short extension of time. The EM indicates that the present wording of s 120(1) is intended to overcome the decision in Barton v Official Receiver (1986) 161 CLR 75, that a person who claims to be a purchaser of property need not show that he or she has given fully adequate consideration for the transfer as long as the consideration is real and substantial. Under the new s 120 the Court is required to make an assessment of the objective value of the consideration if it can, on the basis of such evidence as is available." 98 It is clear that s 120, in its present form, is intended to cover broadly the same area as the section it replaced. However, it is intended to make it easier for a trustee to succeed than was previously the case. The same has been said of s 121: Ashton v Prentice (unreported, Federal Court, 23 October 1998, per Hill J). 99 In Spencer v Commonwealth (1907) 5 CLR 418, Griffiths CJ said, at 432: "In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, ie. whether there was in fact on that day a willing buyer, but by inquiring 'what would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?" 100 Issacs J said, at 441: "To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration." 101 In James v Swan Hill Sewerage Authority [1978] VR 519, Harris J applied these formulations in determining the meaning to be accorded to the expression "market value" in a different legislative context. He concluded that the "market value" of land under s 11(b) of the Lands Compensation Act 1958 (Vic) was to be determined in accordance with the test laid down in Spencer. 102 Harris J also referred to Commonwealth v Arklay (1952) 87 CLR 159 at 169-170 where it had been held that the term "value" in s 28(1)(a) of the Lands Acquisition Act 1906-1936 (Cth) meant the value of the land to the owner. That in turn involved: "…simply an analysis of what in all the relevant circumstances would be the price that a willing purchaser would have to pay a vendor willing but not anxious to sell in order to obtain the land". 103 Harris J concluded that this formulation, as well as that adopted in Spencer, was applicable to the determination of the "market value" of the land acquired. There is nothing in ss 120 or 121 of the Act to suggest that these formulations are not equally applicable to the determination of "market value" for the purpose of those provisions. were the properties acquired for market value? 104 Despite Mr Donald's insistence that the market value of the properties purchased was whatever price the bankrupts were finally able to obtain for them, I am satisfied that they were purchased at well below their market value. 105 To the extent that the respondents' case depends upon my acceptance of Mr Donald's evidence, I am firmly of the view that that evidence should be rejected. 106 Mr Donald was not an impressive witness. He claimed to have chronic fatigue syndrome. He said that he was unable to recall any of the details of the transactions surrounding the sales of the properties in this case. However, his memory seemed to me to be highly selective. Much of what he had to say was simply not credible. 107 Mr Donald's inability to produce a single document relating to the use which he and his companies had made of the surplus funds obtained as a result of the written valuations was, in all the circumstances, astonishing. No documents relating to the expenditure of monies upon the properties were discovered by the respondents. The likelihood is that no such documents ever existed. 108 Mr Donald's failure to explain how the invoices provided by the independent valuers came to be sent to Mr Hussen, or to his wife's former firm of accountants, speaks volumes. It is obvious that the bankrupts were involved in the sale of these properties in ways that suggest that they were more than mere vendors. That conclusion is fortified by the evidence of Mr Scott concerning their continued occupation of 58 Western Beach Road right up to 25 January 2002, and perhaps beyond. 109 Mr Donald seemed to me to be somewhat evasive when it came to revealing the true extent of his past association with the bankrupts. The same may be said of his association with Mr Crawford. In the absence of any supporting or corroborative evidence, I would not act upon his evidence regarding any contentious issue. 110 In my opinion, the applicant has established that the transfers of each of the six properties by the bankrupts to the respondents took place during the period beginning five years before the commencement of their bankruptcy, and ending on the date of that bankruptcy. The applicant has also established that the respondents gave consideration of less than market value of those properties. Accordingly, each transfer is an undervalued transaction for the purposes of s 120(1) of the Act. It follows that each transfer is void as against the applicant as trustee in bankruptcy. 111 I note that s 120(4) requires the trustee to pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee. In the present case, the applicant does not challenge the validity of any of the mortgages which are currently in place in relation to the subject properties. He accepts that any rights that he may have in relation to those properties must be subordinated to the rights of those mortgagees. 112 It is by no means clear, having regard to the extent of the borrowings by the respondents, that they have given any true consideration to the bankrupts in relation to these properties. Whether they are entitled, in those circumstances, to any payment from the trustee under s 120(4) is doubtful. 113 I should also indicate that even if I were not satisfied that the transfers fell within the scope of s 120(1) of the Act, I would still find that they were transfers intended to defeat creditors. Under s 121 of the Act, they would therefore be void against the trustee. 114 If it were necessary to do so, I would find that the sale of 58 Western Beach Road to One Step was, in every sense, a sham. In my view, that sale was a fraudulent transaction, designed to enable the bankrupts to retain and continue to occupy their home. 115 My findings require it to be accepted that the bankrupts, and those complicit with them, either anticipated or hoped that the Bendigo Bank and the NAB would allow their mortgages to be discharged at a shortfall to those institutions without proper scrutiny. That was precisely what occurred, at least with regard to the NAB. It was concerned to have the properties sold as quickly as possible, irrespective of whether the price realised was the best that could be achieved. It recognised that mortgagee sales would be unlikely to produce any better results, and simply wanted to rid itself of the bankrupts and to get their properties off its books. 116 Mr Hadley was prepared to go to great lengths to accommodate the bankrupts by enabling them to sell the properties themselves, rather than insisting upon mortgagee sales. The NAB was prepared to accept the shortfall on its mortgages. That was a matter for the bank, but its willingness to accept that loss should not deprive unsecured creditors of the opportunity to reap the benefits which sales at genuine market value might deliver. 117 The applicant is entitled to have each of the sales of the properties in question treated as void as against him. I propose to order that he file and serve draft minutes of order to give effect to these reasons. I will hear argument as to the terms of the proposed orders, and deal with the question of costs, on a date to be fixed. I certify that the preceding one hundred and seventeen (117) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Weinberg. Associate: Dated: 18 April 2002 Counsel for the Applicant: Mr M. Galvin Solicitors for the Applicant: Deacons Counsel for the Respondents on the adjournment application: Mr S.E. Marantelli Solicitors for the Respondents Irlicht and Broberg on the adjournment application: Counsel for the First Respondent on the trial: No appearance Counsel for the Second to Fifth Respondents on the trial: Mr P.G. Donald was given leave to appear on behalf of the Second to Fifth Respondents Dates of Hearing: 18, 19 and 20 February 2002 Date of Judgment: 18 April 2002