CONCLUSIONS AND ORDERS
90 Accordingly, I find that the transfer of Mr Poumako's half interest in the Crittenden Road property to Jacqueline Poumako and his interest in the Crafter Street property to Mrs Cassidy, were undervalued under section 120 of the Bankruptcy Act 1966 (Cth). The transfers took place in 2005, which is less than five years previous to the date of bankruptcy and the consideration paid was less than the market value of the property: s 120(1) and (b).
91 The exemptions in s 120(2) do not apply. The respondents have not made out any defence of solvency under sub 120(3). At the time of the transfers, by his own statement of affairs, and the proofs of debt, Mr Poumako owed substantial amounts to various creditors. Just prior to 2005, Mr Poumako's liabilities exceeded $16.4 million. The net equity in his three residential properties, being the Crittenden Road property, the Crafter Street property and the residential home was just over $100,000. His interest in property in New Zealand, by his own evidence, was minimal. Another property previously owned by Mr Poumako in Elizabeth Vale was sold in July 2005, although the sale price was not disclosed. In Mr Poumako's statement of affairs, he estimated the value of 'Fernilee Lodge', the Burnside property which Mr Poumako intended to develop, to be $9.5 million. However, he was not the registered proprietor of that property from September 2004, when it was transferred to Fernilee Estate Pty Ltd. Even if his shareholding in Fernilee Estate Pty Ltd had some value, the deficiency in his assets at that time was still over $6 million. The respondents bear the burden of proving solvency under s 120(3) and they have not done so: see Ashton v Prentice; in the matter of Jury (1999) 92 FCR 68 per Ryan, Heerey and Katz JJ at [67].
92 Section 120(4) provides that the trustee must pay to the transferee the amount equal to any consideration paid for a transfer that is void against the trustee. Mr Ambrose does not challenge the registered mortgages over each of the two properties and accepts that if the transfers are voided as against him, the mortgagees will have to be repaid and the mortgages discharged to enable him to deal with them.
93 The Crittenden Road property was transferred by Mr Poumako and Janice Poumako to Jacqueline Poumako but $48,168 less than the market value was paid (that is the claimed sum of $55,168 unpaid at settlement plus the $7000 her home owners grant) so the available funds from the mortgage and the $7000 actually paid total $97,832.
94 In my view, s 120(4) therefore requires Mr Ambrose to repay to Jacqueline Poumako that sum, or one half of that sum, as a refund for the consideration given. As I have found, Mr Poumako and Janice Poumako were joint holders of the Crittenden Road property. It appears to have been accepted by the parties that such a finding has the consequence that, from or as a result of his bankruptcy, s 120(1) would operate to avoid the transfer only to the extent of one half of the property. The precise form of the order, in that circumstance, was not addressed. If that is the case, Mr Ambrose would then be required to repay Jacqueline Poumako $48,916 under s 120(4), being one half of the consideration paid by her.
95 In addition, as noted, Mr Ambrose acknowledges that he will take that half interest subject to the existing mortgage, and will have to discharge it (or half of it) before he can deal with that property (unless he does so subject to the mortgage). There would seem to be some element of double benefit to Jacqueline Poumako, as she got the loan and its benefit secured by the mortgage and would also get the benefit of the loan being repaid by Mr Ambrose, because she paid the funds procured in part payment of the consideration. The submissions did not address that apparent double benefit to her. How those two matters intersect should be the subject of further submissions.
96 Mr Ambrose accepted that, because I have made that finding as to the shared holding of the property by Mr Poumako and Janice Poumako immediately prior to the transfer, the avoiding of the transfer can only benefit the bankrupt estate of Mr Poumako to the extent of one half of the undervalue, namely $24,084. But how the matters referred to above are to be reflected in this Court's orders to produce that outcome (if it is the correct outcome) is unclear.
97 Before making an order in terms of s 120(1) that the transfer of the half interest in the Crittenden Road property is void as against Mr Ambrose, I propose to invite further written submissions from the parties as to the orders I should make.
98 The above general comments reflect the approach of Lindgren J in Anscor Pty Ltd v Clout (Trustee) (2004) 135 FCR 469 (Anscor) at [43]. In accordance with that explanation, my findings would appear to lead to the following in relation to the Crittenden Road property. Upon the bankruptcy, the half interest of Mr Poumako which he transferred to Jacqueline Poumako became void, as she paid less than the market value of that property, but
(a) Mr Ambrose must pay to Jacqueline Poumako an amount equal to the consideration given, namely one half of the net mortgage fund and the first home owners grant, namely $48,916: s 120(4);
(b) Jacqueline Poumako retains her interest in the other half of the property;
(c) The rights of the mortgagee, secured by a mortgage over the property granted by Jacqueline Poumako are preserved, as the property right granted by the mortgage was for the market value of that property right: s 120(6), so Mr Ambrose must hold his half interest in the property subject to the mortgage: s 120(6). It is clear enough that the granting of a mortgage includes the granting of a charge: Sutherland v Brien (1999) 149 FLR 321; Travaglini v Spender [2008] FCA 1618 at [15]; Sheahan v Frost [2011] FCA 356 at [110]. Under the previous expression of s 120, prior to its amendment by the Bankruptcy Legislation Amendment Act 1996 (Cth), the status of a bona fide mortgagee under a mortgage granted by the transferee whose transfer is void (avoided upon the bankruptcy: see Anscor at [43]) as against the trustee in bankruptcy of the transferor was similarly preserved; Re Hart; Ex parte Green [1912] 8 KB6; Re Fitzgerald; Ex Parte Burns (1986) 10 FCR 261. However, that case did not address the particular circumstances which have been found to exist.
99 There are a few additional issues upon which further submissions are sought.
100 It appears to have been assumed that any increase in the market value of the Crittenden Road property by the effluxion of time - if that has occurred - enure to the benefit of Mr Ambrose to the extent that the transfer of his half interest in the property has been avoided by operation of s 120. There has been no evidence to indicate whether there has been any such appreciation in the market value. That matter has been little ventilated in previous decisions, although it was adverted to by Allsop J in Trustee of the Property of O'Halloran; In the Matter of O'Halloran v O'Halloran [2002] FCA 1305 at [83]-[84]. Any focus should probably be on any increase in value to the date of the bankruptcy, when the statutory effect of s 120 operated. On the one hand, the voiding of the transfer does not operate retrospectively to invalidate any bona fide third party dealings between the impugned transfer and the bankruptcy. On the other hand, the transfer is "void" as against the transferor. That issue was discussed, to some extent, in Anscor. As there was some evidence of capital expenditure on the Crittenden Road property by Jacqueline Poumako, I think it is appropriate now to proceed on the basis that the parties have adduced such evidence as they considered appropriate as to value. I therefore conclude that there is no relevant capital appreciation, in the absence of evidence that such had occurred. Capital appreciation in the period after the bankruptcy may, in any event, be for the benefit of the trustee.
101 Jacqueline Poumako gave evidence that, since acquiring the property, she has made considerable improvements to it, costing around $20,000. She described those improvements. There is no evidence about how those improvements increased the value of the property, either at the time s 120 operated or to the present time. Mr Ambrose contended that, if the Court were to take an adverse view about the credit worthiness of the respondents, it should simply proceed on the existing evidence. On that basis, he submitted, the existing evidence did not make out the actual incurring of expenditure on improvements. It might also be necessary, if the Court accepted some such expenditure, to make allowance for or to take into account rental income received by Jacqueline Poumako (and, I assume by inference, other expenditure on the property for things such as rates and taxes). This topic, too, has been little ventilated in the authorities.
102 At this point, I indicate that in my view the parties, in particular Jacqueline Poumako, have had the opportunity to adduce evidence about both cost of the capital improvements, and the extent to which they have contributed to any increase in the present value of the Crittenden Road property.
103 Subject to any further written submissions, I indicate that I accept her general evidence that she spent money on improving the property. In the absence of any confirmatory evidence, I propose to adopt a conservative sum as to the amount of that expenditure; she could readily have produced any documentary evidence. The depreciation schedule she produced goes only part of the way, as it is a secondary document. I find that expenditure totalled some $15,000. I consider also, in the absence of any evidence to the contrary, that the capital value of the property increased only by the amount of that expenditure. Such evidence might have been given by either party, to show that the expenditure significantly increased the capital value of the property or, on the other hand, had no effect upon its capital value. It would follow that the orders I will make should reflect an obligation in equity on the part of Mr Ambrose to account for her one half of that amount.
104 It is not clear whether, or the extent to which, Jacqueline Poumako has paid the recurrent outgoings on the property, particularly since s 120 operated to revest Mr Poumako's half interest in Mr Ambrose, from the time of his bankruptcy. Jacqueline Poumako also said she made payments of interest, and to reduce the amount secured by the mortgage of the property, although evidence was not given as to how much has been paid off. The position of the parties in relation to those payments, particularly in relation to such payments after the bankruptcy of Mr Poumako is not entirely clear. Jacqueline Poumako said one half of them should be treated as paid on behalf of Mr Ambrose. I also accept, and arguably should take into account that Jacqueline Poumako had the benefit of receiving rent from the property during that time.
105 In relation to those matters, I do not consider that the evidence justifies any further adjustment between the parties. The reduction of the mortgage debt, if it has taken place, is a reduction of a personal liability of Jacqueline Poumako. The interest paid on the mortgage is also in discharge of her personal liability. She has had the benefit of full right of occupation of the property, and on the evidence she has received rental income. There is no reason to impose on Mr Ambrose any additional obligation to give her credit for the outgoings related to the right of occupation she has exercised to date in those circumstances; nor is there any reason to impose on Jacqueline Poumako any additional obligation to account to Mr Ambrose for the rent received or any part of it. The evidence leaves me with the view that the balancing of those matters would be about neutral. None of the parties have sought to prove otherwise.
106 For the reasons given, I do not think it is appropriate to proceed to make orders for the sale of the Crittenden Road property until the orders about the amount payable under s 120(4) and about who is responsible for the ongoing liability under the mortgage over the Crittenden Road property, and how that responsibility might be fulfilled, is resolved. It may be that the parties, in addition to making further submissions on those topics, may reach some arrangement for their practical resolution by consent.
107 I am mindful of the relatively small amount involved, and the costs to the parties. I am also aware that in "exceptional circumstances" orders have been made for the shortfall of the consideration to be paid by the purchaser to avoid the selling of the property: Schmierer v Horan [2004] FMCA 16 and Thomas v Tyler (No 2) [2005] FMCA 342. There may be some basis upon which Mr Ambrose and the respondents, particularly Jacqueline Poumako, may reach an agreed position in relation to the Crittenden Road property.
108 I do not consider that the orders to be made should be any different because I have found in terms of s 121(1)(b) that Mr Poumako's main purpose in making the two transfers was to prevent the transferred property from becoming divisible amongst his creditors. The transfers are void as against Mr Ambrose, but s 121(5) and 121(8) operate in the same way as s 120(4) and s 120(6).
109 I do not accept that Jacqueline Poumako was aware of Mr Poumako having as part of his reasons for arranging the transfer to her that he wished to put the property beyond the reach of his creditors. As I have found, his was the mind behind the transfer - and all the family finances - but in my view Jacqueline Poumako was entitled to, and did, see the transfer as her parents providing for her. I do not accept that she also shared in, or understood, any intention on the part of Mr Poumako to put the property beyond the reach of his creditors, even though she appreciated in a general way that his interest in the Fernilee Lodge proposed development was putting him under financial pressure. She was still, then, only young and was quite financially unsophisticated. That conclusion accords with my reasons for rejecting Jacqueline Poumako's evidence in part, where it conflicts with what she said in her s 81 examination; her evidence in this matter on the "family financial arrangements" (to use a generic description) including in relation to the Cassell's loan was no more than the trusting product of Mr Poumako's briefing given at about the time her affidavits in this proceeding were filed. It is therefore unnecessary to consider whether the appropriate orders might have been different if Jacqueline Poumako had been complicit in the purpose of Mr Poumako for the transfer of the Crittenden Road property.
110 In the case of the Crafter Street property, similar considerations arise.
111 In respect of the Crafter Street property, the property was transferred nominally at a fair value but Mrs Cassidy did not pay the full value, but less than the market value. I accept Mrs Cassidy paid the funds received by the mortgage granted by her, leaving some $76,540 unpaid. I also find that, at the least, there was at the time no arrangement in place to pay that balance and no capacity on the part of Mrs Cassidy to do so. It was, in effect, a gift of the unpaid balance to Mrs Cassidy. That property is also subject to an existing mortgage. Although it secures a loan only to Mrs Cassidy, the interest of the mortgagee is and should remain over the property, although the transfer to Mrs Cassidy is void against Mr Ambrose.
112 Under s 120(4), Mrs Cassidy paid $103,460 to Mr Poumako towards the value of the Crafter Street property, that is the agreed transfer price less the unpaid part of the market value of $76,540, so that sum is owing to her by Mr Ambrose. But Mr Ambrose must take the property subject to the mortgage, securing her liability. The mortgage is apparently securing an amount greater than the sum paid by Mrs Cassidy to Mr Poumako. In this instance, the appropriate orders are not further complicated by the property being only half owned by Mr Poumako at the time of the impugned transfer.
113 Nevertheless, the precise form of the appropriate orders needs to be further considered.
114 The applicant accepts that the mortgages on the two properties need to be discharged.
115 In the case of the Crafter Street property, I do not think there is any need for any further adjustment. There is no suggestion that the debt owed by Mrs Cassidy under the mortgage has been reduced. Presumably she has paid, and continued to pay, the interest payable from time to time, but that is a personal liability for her borrowing and she used that loan to partly pay the consideration.
116 In her s 81 examination, Mrs Cassidy stated that the funds obtained on the refinancing of the property in January 2008 were applied to the construction of a pergola, change of carpets, painting and such things. In her subsequent evidence, Mrs Cassidy stated that those funds were applied as consideration for the property. As stated, I do not accept that the funds obtained from the refinancing of the Andrews Farm house were paid as consideration to Mr Poumako. In addition to my views on the reliability of her evidence, there is no evidence of such a payment even though it should readily have been obtainable.
117 However, I accept that Mrs Cassidy refinanced her loan in early 2008, paying out the existing mortgage $113,485 (slightly more than the initial loan) and increasing the mortgage to $140,000. She received net extra funds of $21,025. That was about five months before the bankruptcy of Mr Poumako. I reject her evidence that she paid that sum to Mr Poumako as part of the transfer price for the July 2005 transfer.
118 I accept that she spent some of that amount on improvements to the Crafter Street property, but I am not sufficiently convinced of her reliably recollecting events to find that that expenditure was more than about $12,000. On the basis that she has not repaid any of that debt, and there is no evidence to suggest that she has, any increase in value of the property by reason of the improvements will be offset by the increased charge over the property which Mr Ambrose accepts he will have to repay to secure a clear title. As with the Crittenden Road property, I regard the interests payments by Mrs Cassidy as personal liabilities only, and prospectively she will remain liable for them to the mortgagee, as the borrower, even though as against Mr Ambrose the transfer to her is void. As there is no evidence of any capital value increase by those improvements beyond the expenditure, and as Mr Ambrose as the real owner - subject to the mortgage - must receive the Crafter Street property subject to the mortgage securing that increased debt, I do not consider any adjustment in equity for the expenditure on those capital improvements is called for.
119 In addition, the evidence suggest there is a further charge over the Crafter Street property in respect of unpaid school fees, for about $9000. That is a personal liability of Mrs Cassidy and Mr Cassidy. If it is a valid and enforceable charge, which operates over the property, presumably Mr Ambrose is the real owner subject to the charge. If that is so, it may be appropriate for the orders to be made including under s 120(4) to reflect that situation.
120 Accordingly, before making an order in terms of s 120(1) that the transfer of the Crafter Street property is void against Mr Ambrose, I will give the parties the opportunity to make further written submissions as to the orders I should make. Again, I note s 121(5) and s 121(8) operate in the same way as s 120(4) and 120(6).
121 Finally, I find that, as in the case of Jacqueline Poumako, Mrs Cassidy was not in my view complicit with Mr Poumako in his intention by the transfer of the Crafter Street property to frustrate his creditors. She acted at Mr Poumako's direction. She was aware of Mr Poumako's financial difficulties, but I do not consider that she intended to defraud his creditors in accepting the transfer in the terms she did. I do not think she was sufficiently informed to have shared that intention.
122 As I have found the transfers were undervalued pursuant to s 120 I have not to this point needed to make a positive finding under s 121. It is clear that, had the two transfers not occurred, the equity in both the Crittenden Road property held by Mr Poumako and in the Crafter Street property in his name would have been available to Mr Poumako's creditors. I also find Mr Poumako had the intention referred to in s 121(1)(b). That purpose in making the transfers can be imputed from the reasonable inference that at the time of the transfer, Mr Poumako was insolvent, and from the circumstances in which the two transfers took place. See generally Prentice v Cummins (No 5) (2002) 124 FCR 67 at [98]-[99] and Ebner v Official Trustee in Bankruptcy (1999) 91 FCR 353. Mr Poumako was, by mid 2005, in deep financial trouble because of his involvement in the Fernilee Lodge proposed development, and his experience would have exposed to him the strong likelihood of there being no way to recover. Whilst I do not use my rejection of Mr Poumako's evidence as positive proof of that purpose, it makes my inference from the objective facts one with which I am more comfortable.
123 As I found regarding s 120, consideration was not paid at market rate, so the defence of good faith under sub (4) cannot be made out; the sub-requirements of which being cumulative. The issues as to consideration under sub (5) are the same as those discussed above at [65] and [74].
124 I will give Mr Ambrose 14 days to make such written submissions as he may be advised on the appropriate orders to be made in the light of my findings, and the respondents a further 14 days after they receive the submissions of Mr Ambrose to make written submissions in response. Mr Ambrose will then have a further seven days to make any additional submissions, strictly in response.
I have structured the sequence of submissions that way so the respondents who appeared through Mr Poumako as their agent may be aware of the orders sought in the light of my findings. If I consider it appropriate to do so, I will call the matter on for further oral submissions; otherwise I will consider the written submissions and make what I consider to be the appropriate orders.
I certify that the preceding one hundred and twenty-four (124) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.