FEDERAL COURT OF AUSTRALIA Anderson v Peldan [2005] FCA 1179 BANKRUPTCY – void transfers – where husband and wife owned property as joint tenants – where joint tenancy severed by mutual agreement to tenancy-in-common and subsequently wife died and husband declared bankrupt – whether severance of joint tenancy into tenancy-in-common is a 'transfer of property' for the purposes of s 121(1) of the Bankruptcy Act 1966 (Cth) – whether the defence of good faith is established under s 121(4) of the Act Statutes Bankruptcy Act 1966 (Cth) ss 121(1), 5, 121(2), 121(4), 121(9), 121(5) Cases Cannane v J Cannane Pty Ltd (1998) 192 CLR 557 Cited Corin v Patton (1990) 169 CLR 540 Cons Hardie v Hanson (1960) 105 CLR 415 Cited Lyons v Lyons (1967) VR 169 Cited Prentice v Cummins (No 5) [2002] FCA 1503 Cons Williams v Hensman (1861) 1 John & H 546 Cited Williams v Lloyd; In Re Williams (1934) 50 CLR 341 Cited Wright v Gibbons (1949) 78 CLR 313 Cited BERNADETTE ANDERSON AND ROBYN MOLLEE AS EXECUTORS OF THE ESTATE OF THE LATE DOROTHY RUTH PINNA v MICHAEL PELDAN AND MORGAN LANE AS TRUSTEES OF THE BANKRUPT ESTATE OF RAYMOND KENNETH PINNA QUD 73 OF 2005 KIEFEL J BRISBANE 25 AUGUST 2005 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QUD 73 OF 2005 ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA BETWEEN: BERNADETTE ANDERSON AND ROBYN MOLLEE AS EXECUTORS OF THE ESTATE OF THE LATE DOROTHY RUTH PINNA APPELLANTS AND: MICHAEL PELDAN AND MORGAN LANE AS TRUSTEES OF THE BANKRUPT ESTATE OF RAYMOND KENNETH PINNA RESPONDENTS JUDGE: KIEFEL J DATE OF ORDER: 25 AUGUST 2005 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The orders of Jarrett FM made on 21 February 2005 be set aside. 3. The respondents pay the appellants costs of the appeal and of the proceedings below. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QUD 73 OF 2005 ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA BETWEEN: BERNADETTE ANDERSON AND ROBYN MOLLEE AS EXECUTORS OF THE ESTATE OF THE LATE DOROTHY RUTH PINNA APPELLANTS AND: MICHAEL PELDAN AND MORGAN LANE AS TRUSTEES OF THE BANKRUPT ESTATE OF RAYMOND KENNETH PINNA RESPONDENTS JUDGE: KIEFEL J DATE: 25 AUGUST 2005 PLACE: BRISBANE REASONS FOR JUDGMENT 1 The bankrupt Mr Pinna and his wife purchased a property at Carindale in Brisbane in 1995 and were registered as joint tenants. It was their matrimonial home for many years. On 11 September 2003 they executed a form of transfer ('Form 1'). Beside the printed words 'Interest being transferred' were inserted the words 'One-Half Interest In Fee Simple'. Mr Pinna was said to be both the transferor and transferee. Beside the word 'Consideration' the words 'The Unilateral Severance Of A Tenancy Pursuant To Section 59(2) Of The Land Title Act 1994' were inserted. The transfer was registered on 5 November 2003. Mrs Pinna died on 12 January 2004. On 21 April 2004 Mr Pinna was declared bankrupt. On 28 April 2004 the property was sold to a third party for $600 000. One half of the proceeds is held in trust pending the conclusion of these proceedings. The trustees of Mr Pinna's estate claimed that there had been a transfer of property that was void against the trustees pursuant to s 121 of the Bankruptcy Act 1966 (Cth) ('the Act'). On 22 February 2005 a Federal Magistrate made a declaration to that effect and ordered that the appellants, who are the daughters of Mr and Mrs Pinna and entitled to the property by transmission upon her death, pay the trustees the sum of $288 777.29. The Statutory Provision 2 Section 121 provides, in relevant part: '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 not 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. Other ways of showing the transferor's main purpose in making a transfer (3) Subsection (2) does not limit the ways of establishing the transferor's main purpose in making a transfer. 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. Refund of consideration (5) 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. What is not consideration (6) For the purposes of subsections (4) and (5), the following have no value as consideration: (a) the fact that the transferee is related to the transferor; (b) if the transferee is the spouse or de facto spouse of the transferor - the transferee making a deed in favour of the transferor; (c) the transferee's promise to marry, or to become the de facto spouse of, the transferor; (d) the transferee's love or affection for the transferor. … Meaning of transfer of property and market value (9) For the purposes of this section: (a) transfer or propertyincludes a payment of money; and (b) a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person; and (c) the market value of property transferred is its market value at the time of the transfer.' 3 The definition of 'property' in s 5 of the Act includes any estate or interest, present or future, vested or contingent, arising out of or incident to any real or personal property. The Reasons for Judgment 4 His Honour found that there had been an equitable disposition of Mr Pinna's interest as a joint tenant on 11 September 2003 when he and his wife mutually agreed to sever the joint tenancy. This was to be inferred from the execution of the transfer. Severance at law came about on registration on 5 November 2003. His Honour held that all that was transferred at the point of registration was the bare legal title. By reason of the agreement, Mrs Pinna became the beneficial owner of the property as a tenant-in-common in equal shares on 11 September 2003. 5 His Honour considered that the change in the nature of Mr Pinna's interest carried with it a change in the bundle of rights attached to his interest in the property. Given the mutual promises to accept the change in the status of the ownership, there was valuable consideration. It is to be inferred from these matters, his Honour held, that property interests were disposed of. It followed that there was a transfer 'of that part of his [Mr Pinna's] interest in the property in the nature of the bundle of rights that came with being a joint tenant'. Section 121(9) provided guidance. The severance of the joint tenancy created in Mrs Pinna a new interest, an interest as a tenant-in-common that carried with it a different bundle of rights. There was, his Honour concluded, a transfer of property for the purposes of s 121(1) of the Act. Further, had there not been the transfer, Mrs Pinna's interest in the property would have become available to Mr Pinna's creditors upon her death. Mr Pinna's main purpose was the purpose referred to in s 121(2). There is no issue taken with that finding on the appeal. 6 As to the defence of good faith, his Honour held that in accordance with his earlier reasons, Mrs Pinna had given consideration for the property as valuable as that which had been transferred. His Honour was also satisfied that Mrs Pinna did not know her husband's purpose in effecting the transfer. At an earlier point in his reasons, his Honour had observed that the trustees would no doubt have him infer that Mrs Pinna knew of Mr Pinna's financial affairs because they were married. His Honour however considered that that was insufficient for an inference to be drawn relating to her knowledge and there was no other evidence touching upon it. These findings are put in contention by the trustees. However, his Honour held that there was no doubt that Mr Pinna was insolvent as at September 2003. No issue is taken with that finding. His Honour then went on to say that 'there was certainly sufficient evidence to suggest his insolvency at that point of time, and so I do not think that I can be satisfied … [that section 121(4)(c) is made out]' The defence of good faith therefore failed. The Evidence 7 In May or June 2003 the first appellant, Mrs Anderson, had a discussion with her mother and father. The father's conversation was ruled inadmissible by his Honour as he was not called as a witness in the proceeding. Her mother said that the bank 'had done something so that she was no longer on the title to their home anymore'. She said it was the bank's fault that 'they had taken her name off the title and that therefore Pinnacle Engineering Pty Ltd would get the house'. Pinnacle Engineering is a company in which Mr and Mrs Pinna were shareholders. Mrs Pinna was also the company secretary and director. She ceased being a director on 17 February 2003. 8 After some further discussion Mrs Anderson told her mother that there were two ways in which the property could be owned in both of their names, either as joint tenants or tenants-in-common. She explained that in the first case, if one owner died the other would then own the entire property, but in the other case if one owner died, the share would pass under their will. Mrs Pinna then asked if that meant that if the house was held by her as a tenant-in-common her share would pass to her children and was advised that it would. She asked that if she signed at the solicitor's office to this effect whether her share would pass. There was some discussion about arrangements to see the solicitor. Mr and Mrs Pinna saw the solicitor on 11 September 2003. He said that he had given them advice concerning the joint tenancy and what it entailed, including survivorship rights, some months before. On 11 September 2003 instructions were taken from Mr Pinna 'and others' in relation to the document Form 1 and their Wills. Mr Pinna wanted to leave his estate to his wife. When it was put to the solicitor, during the course of Mr Pinna's public examination, that that did not require the severing of the joint tenancy he explained that this was done 'because of other factors which I was aware of from other clients'. The solicitor later explained in his evidence that the matter developed in this way. Mr Pinna advised that, as a result of the solicitor's prior advice, he had discussed the matter with his wife and she wanted to be in a position to leave an interest to her children. Mrs Pinna was at this time outside the room and the solicitor went out and spoke to her. He returned and advised Mr Pinna that if he did not want to agree to sever the joint tenancy his wife would do so in any event. The decision was then made by Mr Pinna to mutually sever. The transfer was prepared on that basis. It was requisitioned by the Land Titles Office for some reason and as a result it was amended to a unilateral transfer or severance. the appeal 9 The following contentions are raised on the appeal. 1. The severance of the joint tenancy was not a 'transfer of property' within the meaning of s 121(1) of the Act. 2. If there was a transfer of property, the good faith defence was made out. In particular there was no basis for concluding that Mrs Pinna could have inferred that her husband was insolvent. 3. His Honour should have ordered a refund of consideration pursuant to s 121(5) of the Act. whether a transfer of property 10 The interests of each joint tenant in land are always the same with respect to possession, interest, title and time. If one joint tenant dies, their interest is extinguished and the interest of the other surviving joint tenant is correspondingly enlarged: Wright v Gibbons (1949) 78 CLR 313 at 323 ('Wright v Gibbons'). The appellants' essential submission is that the giving up of a right to the whole of the land by survivorship is not a transfer of property. Mr and Mrs Pinna changed the character of what they held. It is submitted that the problem with the decision appealed from is that it does not identify what property or interest has been transferred. It cannot be said, as the respondent contends, that Mr Pinna forfeited his right and transferred to Mrs Pinna the right to alienate her share by Will. This was the consequence of what they did, but it cannot be characterised as a transfer. Further, if one assumes that there has been a transfer one cannot say the whole of the land would 'probably' have been available to creditors. 11 The respondent refers to the judgment of Deane J in Corin v Patton (1990) 169 CLR 540 at 575 ('Corin v Patton'), as did his Honour below. After referring to the decision in Wright v Gibbons concerning the nature of a joint tenancy, his Honour referred to the ability of a joint tenant to alienate their legal interest in the property. His Honour considered that there were two steps in that process which occurred simultaneously: the creation of a distinct proportionate share of the whole; and the detachment of that share from the property which is subject to the joint tenancy, with the consequence that the transferee received the share of a tenant-in-common. In the case of two joint tenants, the transferee and the non-transferring joint tenant thereafter hold as tenants-in-common in equal shares. 12 As his Honour below observed, the agreement reached between Mr and Mrs Pinna had the effect of severance of the joint tenancy at least in equity: Williams v Hensman (1861) 1 John & H 546 at 557; (1861) 70 ER 862 at 867; Lyons v Lyons (1967) VR 169 at 170. It is apparent from Corin v Patton that the transfer which takes place in the detachment of the new shares in the property is from one former joint tenant to themself. The transfer document here records such a transfer. But this is not a transfer 'to another person',as the words of s 121(1) would require. It has been said that provisions such as this are directed to the divesting of beneficial ownership from the bankrupt and the investing of some other person with it: Williams v Lloyd; In Re Williams (1934) 50 CLR 341 at 373. 13 The meaning of 'transfer of property' in s 121(9)(b) however puts a different complexion on the notion of the transfer of property. Here it could be said that Mr Pinna has done something that results in Mrs Pinna, and himself, becoming the owners of an interest in property that did not previously exist. Their rights as tenants-in-common in equal shares came into existence upon Mr Pinna's alienation of his rights as a joint tenant. 14 There is a difficulty in applying s 121(1)(a) to s 121(9)(b). The problem arises if the property identified for the purposes of the s 121(1)(a) enquiry is the interest which is created. The question posed by s 121(1)(a) cannot sensibly be answered if, in the context of s 129(9)(b), it is taken to be : would the property interest created likely have been available to creditors if it had not been created? Such an approach could not have been intended. 15 Section 121(9)(b) is intended to widen the application of 'transfer of property' to transactions or actions which may not involve a transfer as such. Its focus is what is done by the person who later becomes bankrupt to alter their property interests. It is obviously meant to work with s 121(1)(a). That provision poses the question: 'but for' the transfer, would the property formerly held by the bankrupt and the subject of the transfer have been available to creditors? This approach appears to have been taken by Sackville J in Prentice v Cummins (No 5) [2002] FCA 1503. Further, in Cannane v J Cannane Pty Ltd (1998) 192 CLR 557 at 566, Brennan CJ and McHugh J, dealing with the predecessor to s 121, observed that a subtraction of assets which, but for the impugned disposition, would be available to meet the claims of present and future creditors, is material from which an inference of intention may be drawn. Applied to the circumstances dealt with by s 121(9)(b), the enquiry would be: 'but for the acts undertaken by the bankrupt, would the property held by the bankrupt before the acts were undertaken probably have remained available to creditors?' 16 The question arising in the present case is then, but for the severance of the joint tenancy, would Mr Pinna's interest as a joint tenant likely have been available to creditors. The answer is clearly yes. But the enquiry arising under s 121(1)(a) does not extend to Mrs Pinna's interest. And it does not, in my view, extend to what would likely have occurred to Mr Pinna's interest in the event of Mrs Pinna's death. The purpose of the section is to prevent fraudulent dispositions of property. The question it poses focuses upon the effect of the disposition on the property the subject of it. It is intended to protect creditors from such a dealing. It could not be intended to enlarge their interests because of some unforeseen event. 17 The phrase 'an intention to defraud creditors' implies that the intention is put into effect: Hardie v Hanson (1960) 105 CLR 415 at 456. There is a connexion in s 121 between the bankrupt's purpose and the property the subject of it. It may be possible in some cases, in connexion with determining the property the subject of s 121(1)(a), to have regard to other than that of the bankrupt by reference to the intention of the parties to a transaction. In this case that possibility may have arisen if it were shown that Mr and Mrs Pinna undertook the severance of the joint tenancy with knowledge of her impending death and with the intention of depriving creditors of access to Mr Pinna's enlarged interest as survivor. A conclusion to this question is not necessary. The evidence does not permit a view to be reached about their knowledge or their actual intention. 18 In my view it cannot be said that the severance of the joint tenancy is caught by s 121(1) of the Act. It is therefore not necessary for me to deal with the remaining issue, but I shall say something about good faith. 19 His Honour was not satisfied that the defence in s 121(4)(c) of the Act arose. His Honour referred to the fact that Mr Pinna was insolvent at the time, although he was not prepared to infer that Mrs Pinna knew of this simply because she was married to him. The appellants say that it was therefore illogical for his Honour not to apply the defence. The trustee contends that his Honour should have ruled it out on account of the knowledge Mrs Pinna should have had because she was a company secretary and shareholder in the family company. It is not apparent to me how the company is connected with Mr Pinna's financial position. In any event the defence is concerned with her actual, not her deemed knowledge. What the appellants overlook in their argument is that on the proper construction of s 121(4) the burden of proof was on them. They did not have the necessary evidence. 20 The appeal will be allowed with costs, and his Honour's orders will be set aside and in lieu it will be ordered that the trustee's application be dismissed with costs. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kiefel. Associate: Dated: 25 August 2005 Counsel for the Appellant: Mr P Freeburn SC and Mr L Jurth Solicitor for the Appellant: Klar & Klar Counsel for the Respondent: Mr D Coper SC and Mr M Martin Solicitor for the Respondent: Quinn & Scattini Date of Hearing: 13 July 2005 Date of Judgment: 25 August 2005