IN THE FEDERAL COURT ) GENERAL DISTRIBUTION
OF AUSTRALIA )
WESTERN AUSTRALIA )
DISTRICT REGISTRY )
GENERAL DIVISION ) NO. WAG78 OF 1996
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
B E T W E E N: ALDEN JOHN HALSE as Trustee of the Property of Neville Ross Payne, a Bankrupt
Appellant
(First Respondent)
and
MICHAEL NORMAN NORTON
Respondent
(Applicant)
COURT: BLACK CJ, LEE, R D NICHOLSON JJ
PLACE: PERTH
DATED: 23 JULY 1997
REASONS FOR JUDGMENT
LEE, R D NICHOLSON JJ:
This appeal from a judge of this Court (Carr J) concerns the proper construction of s139ZS of the Bankruptcy Act 1966 (Cth) ("the Act") which is part of Subdiv J (ss139ZQ-139ZT) of Div 4B of Pt VI of the Act and was inserted by the Bankruptcy Amendment Act 1991. The reasons of his Honour are now reported as Norton v Halse as Trustee of the Bankrupt Estate of Payne and Anor (1996) 137 ALR 593.
The appellant ("the trustee") is the trustee of the bankrupt estate of N.R. Payne ("Mr Payne") pursuant to a sequestration order made on 12 October 1992. On a date, and in a form, unknown, the trustee applied to the Official Receiver under s139ZQ of the Act for the Official Receiver to issue a notice requiring the respondent ("Mr Norton") to pay to the trustee an amount equal to the value of property ("the property") received by Mr Norton from Mr Payne under a transaction for the sale and purchase of the property entered into by those parties prior to Mr Payne's bankruptcy. In May 1994 the Official Receiver issued a notice to Mr Norton requiring him to transfer the property to the trustee, or to pay to the trustee the sum of $120,000. In November 1994 Mr Norton filed an application under s139ZS of the Act for an order that the notice be set aside. On 27 February 1995 the Official Receiver issued an amended notice under sub-s139ZQ(4) of the Act which required Mr Norton to pay the sum of $130,000 to the trustee within 28 days of the receipt of the notice, or, alternatively, to transfer the property to the trustee.
It does not appear that Mr Norton made a further application under s139ZS of the Act to set aside the amended notice dated 27 February 1995. The parties accepted that the application filed by Mr Norton in November 1994 also applied to the amended notice. The application to set aside the notice was brought against the trustee as first respondent and the Official Receiver as second respondent. The Official Receiver took no part in the hearing and submitted to any order the Court may make.
Sections 139ZQ and 139ZS read as follows:
"139ZQ(1) If a person has received any money or property as a result of a transaction that is void against the trustee of a bankrupt under Division 3, the Official Receiver:
(a) if the Official Trustee is the trustee - on the initiative of the Official Receiver; or
(b) if a registered trustee is the trustee - on application by the trustee;
may require the person, by written notice given to the person, to pay to the trustee an amount equal to the money or the value of the property received.
139ZQ(2) The notice must set out the facts and circumstances because of which the Official Receiver considers that the transaction is void against the trustee.
139ZQ(3) The notice may:
(a) require the amount to be paid at a time or within a period set out in the notice; or
(b) require the amount to be paid at such times, and in such instalments, as are set out in the notice.
139ZQ(4) After the Official Receiver has given a notice to a person under subsection (1), the Official Receiver may at any time, by a further notice given to the person, revoke or amend the first-mentioned notice.
139ZQ(5) If the Official Receiver gives a notice under this section, the Official Receiver must send a copy of the notice to the bankrupt and, if a registered trustee is the trustee, to the trustee.
139ZQ(6) A notice to be given under this section to the Commonwealth, a State or a Territory, or to an authority of the Commonwealth, of a State or of a Territory, is taken to be duly given if it is given to a person who, by any law, regulation, appointment or authority, has the function of paying, or in fact pays, money on behalf of a Department of the Commonwealth, of that State or of that Territory, or on behalf of the authority, as the case may be.
139ZQ(7) If a person is required by a notice under this section to pay to the trustee the value of any property, the requirement is taken to be complied with if the property is transferred to the trustee.
139ZQ(8) An amount payable by a person to the trustee under this section is recoverable by the trustee as a debt by action against the person in a court of competent jurisdiction.
...
139ZS(1) If the Court, on application by a person to whom a notice has been given under section 139ZQ or by any other interested person, is satisfied that this Subdivision does not apply to the person on the basis of the alleged facts and circumstances set out in the notice, the Court may make an order setting aside the notice.
139ZS(2) A notice that has been set aside is taken not to have been given."
Section 139ZR of the Act provides that if a notice is given under s139ZQ in respect of property, the property is charged with the liability of the person to whom the notice is addressed to make the payment required. The section further provides that if the property is transferred to the trustee the property ceases to be subject to the charge.
In the notice prepared by the Official Receiver on 27 February 1995 the value of the property transferred to Mr Norton was stated to be $240,000. No evidence was adduced before his Honour to show how that value was arrived at or to identify the date to which the value related to justify a claim for payment of a sum of $130,000.
The provisions of Subdiv J establish the means by which a trustee in bankruptcy may claim from a third party payment of an amount of money that, in effect, will provide the true consideration for a transaction under which property of the bankrupt was disposed of to that party being a transaction the trustee claims is void against the trustee pursuant to Div 3 of Pt VI of the Act. It would appear that on payment to the trustee of the amount demanded by the Official Receiver Div 3 ceases to apply to the transaction and the disposition of property thereunder is no longer voidable. Under s139ZR of the Act the person on whom the notice is served may satisfy the demand for the payment made in the notice by transferring to the trustee the property the subject of the impugned transaction but s139ZQ of the Act does not empower the Official Receiver to demand that the property be transferred to the trustee.
As required by sub-s139ZQ(2) of the Act, the Official Receiver set out in the amended notice the facts and circumstances which had caused the Official Receiver to consider that the transaction under which Mr Norton received the property was void against the trustee. The opinion the Official Trustee had formed on those facts was stated as follows:
"The transfer of the Property by the Bankrupt to Norton was a settlement of the Property made by the Bankrupt within 2 years of the commencement of his bankruptcy which was not made for valuable consideration or in good faith and/or the transfer of the Property was made with the intention of defrauding the creditors of the Bankrupt."
According to the terms of the notice the Official Receiver considered that by reason of the operation of either sub-s120(1) or 121(1) of Div 3 of the Act the transaction was void against the trustee.
Sub-sections 120(1) and 121(1) of the Act read as follows:
"120(1) A settlement of property...not being:
(a) a settlement...made in favour of a purchaser or encumbrancer in good faith and for valuable consideration;...
is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy.
...
121(1) Subject to this section, a disposition of property,...with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy."
The trustee conceded that the disposition of property to Mr Norton referred to in the notice was made in good faith. It may therefore be assumed that at all material times Mr Norton acted in good faith for the purposes of sub-s121(1).
The principal facts relating to the transaction claimed to be void against the trustee were not in contention before his Honour and were as follows. Mr Norton for many years had carried on farming as a producer of cattle in the south-west of Western Australia and had been Senior Vice President of the Meat Section of the Western Australian Farmers' Federation. In 1986 Mr Norton, and other cattle farmers in the district, lent money to Mr Payne, or to a company controlled by him, for the purpose of re-establishing an abattoir that had operated in the region in which Mr Norton and the other farmers conducted their farms. Mr Payne had experience in conducting an abattoir business and the business of a wholesale butcher. Approximately $150,000-$160,000 was lent and of that sum Mr Norton, or the family interests he represented, contributed $20,000. It seems to have been accepted that those moneys were lent to the company which re-opened and conducted the abattoir business, Elgin Abattoir Pty Ltd ("Elgin").
In March 1991 Mr Payne approached Mr Norton and offered him "a one-third share in the abattoir business" for a consideration of $120,000. Mr Norton agreed to lend the company a further sum of $80,000 but deferred a decision on the proposal that he purchase an interest in the "business" until he was supplied with audited financial statements of Elgin. Unaudited financial statements prepared by Elgin's accountants for the period ended 31 March 1991 were delivered to Mr Norton in late April or early May 1991.
At a meeting of the directors of Elgin held on 17 May 1991 it was recorded that the directors, Mr Payne and his son, had resolved to accept Mr Norton's offer to acquire a one-third interest in Elgin by the allotment to him of 50 ordinary shares in the company of par value of $1 for a "purchase price" of $120,000. Pursuant to the offer the sum of $100,000 lent to Elgin by Mr Norton was to be applied by Elgin in part payment of the "purchase price". The balance of $20,000 was to be paid on 1 July 1991.
At a meeting of directors held on 27 June 1991 Mr Payne's son resigned as a director and Mr Norton was appointed in his stead. On 1 July 1991 Mr Norton paid the balance of $20,000 to Elgin and was issued with 50 fully paid ordinary $1 shares on which a premium had been paid of $2,399 per share.
At a meeting of directors of Elgin attended by Mr Payne and Mr Norton held on 26 August 1991 Mr Norton resigned as a director and Mr Payne's son was re-appointed. The minutes of the meeting recorded that Mr Norton tendered an application to transfer his shareholding in Elgin to Mr Payne for a consideration of $120,000. The transfer was approved by the meeting. On 6 September 1991 the transfer of the shares was recorded in Elgin's share register.
On 9 September 1991 Mr Payne and Mr Norton executed a Deed by which Mr Payne sold to Mr Norton the property for a price of $230,000 the consideration for which was the sale to Mr Payne of Mr Norton's shares in Elgin for a price of $120,000 and Mr Norton's assumption of Mr Payne's liability under a mortgage registered against the property to secure repayment by Mr Payne to the mortgagee of a sum of $110,000. According to the Deed the settlement date for the transaction was 6 September 1991. It was a term of the Deed that the purchase price for the shares and the property, respectively, be deemed to be paid on transfer of the shares and the property. The transfer of the property from Mr Payne to Mr Norton pursuant to the Deed was registered on 6 November 1991.
On 8 October 1991 a petition was presented for the winding-up of Elgin and on 11 November 1991 a provisional liquidator was appointed. On 4 December 1991 Elgin was wound up by court order and a liquidator appointed.
On 12 October 1992 a sequestration order was made against the estate of Mr Payne.
The trustee did not contend that anything turned on the delay in the registration of the transfer of the property from Mr Payne to Mr Norton, namely, until one month after the winding-up of Elgin had been commenced by the presentation of the petition.
The trustee's case was that from 2 July 1991 Elgin was insolvent and, therefore, that the disposition of the property was not made for valuable consideration in that the shares transferred from Mr Norton to Mr Payne in part payment of the consideration payable for the property were valueless as at 26 August 1991.
His Honour identified the issue raised by the expression "valuable consideration" to be whether the consideration was "real and substantial and not merely nominal, trivial or colourable" and noted that it need not be fully adequate nor equal to the value of the property. (See: Barton v Official Receiver (1986) 161 CLR 75 at 86; Cannane v Official Trustee in Bankruptcy as trustee of the Bankrupt Estate of Cannane (1996) 136 ALR 406 at 416; Century 21 (South Pacific) Pty Ltd (in liq) v Century 21 Real Estate Corporation (1996) 136 ALR 687 at 695.) His Honour noted that although counsel for Mr Norton disavowed any reliance on Mr Norton's assumption of liability under the mortgage which encumbered the property as valuable consideration for the purposes of s120 or s121 of the Act, it could become necessary for his Honour to consider that question if it were found that the transferred shares were "worthless" as claimed by the trustee.
The appeal by the trustee does not challenge his Honour's identification of the relevant issues. The questions raised on the appeal relate to his Honour's construction of s139ZS of the Act and a ruling on evidence made by his Honour in the course of the hearing.
The trustee contends that the provisions of Subdiv J impose an onus on a person who has made application under s139ZS of the Act to set aside a notice issued by the Official Receiver, to prove, on the balance of probabilities, that relevant facts relied upon by the Official Receiver in the facts and circumstances set out in the notice did not exist, or that the facts and circumstances did not disclose that the transaction was void against the trustee under Div 3 of the Act. Given that under sub-s139ZT(1) of the Act a person who refuses or fails to comply with the notice commits an offence punishable by imprisonment, it would appear that the rights of the disponee under the transaction are affected or varied upon service of such a notice. If the trustee's submission were correct it may follow that a notice issued under s139ZQ has the effect of an advice of findings of fact and of the application of law to those facts as determined by the Official Receiver and that an enforceable liability is created by that determination.
The Act, under Div 3, provides the means by which a transaction may be declared void if the validity of that transaction is disputed by a trustee. Those provisions of the Act do not create a right in property in the trustee but do provide the trustee with a right to prosecute an action against a third party, the fruits of the action to be held on trust for the creditors of the bankrupt. That is, under Div 3 the trustee is given a right to seek a judicial determination of facts and law and an enforceable order by reason of that determination. (See: Brandy v Human Rights and Equal Opportunity Commission (1995) 183 CLR 245 at 258 per Deane, Dawson, Gaudron, McHugh JJ; Ward v Aitken, Court of Appeal (UK), The Times, 14 October 1996.)
At least in part, a notice given under s139ZQ is equivalent to the order a trustee may obtain from a court on determination of an application made to the court by the trustee under Div 3 of the Act. The right to recover a sum as a debt, reinforced by sanctions that may be applied under the criminal law, is at least as effective as a declaration by a court of the invalidity of a transaction under Div 3. Having regard to those considerations it should be assumed that the provisions of s139ZS are intended to allow sufficient review of the formation of the opinion of the Official Receiver, and of the acts of the Official Receiver based on that opinion, to save s139ZQ from contravention of Ch III of the Constitution. (See: Re McLernon; Ex parte SWF Hoists and Industrial Equipment Pty Ltd v Prebble (1995) 58 FCR 391 at 402-404.)
It is for that reason that when the operation of s139ZS has been considered in this Court, an application under that section to set aside a notice has been taken to be the means provided by the Act under which any dispute between the recipient of the notice and the trustee as to the application of Div 3 to the transaction is to be litigated. (See: Re Pearson (1993) 46 FCR 55 at 60; Re Lucera (1994) 53 FCR 329 at 335-336.) That is, s139ZS has been construed as a provision by which an application made under that section initiates litigation appropriate to resolve a dispute between the trustee and a third party. Then on that construction it would follow, unless the Act provided to the contrary, that the onus of proof in that litigation would be as provided in Div 3 of the Act. Therefore, where an application under s139ZS involves a dispute between the trustee and the person served with the notice as to the application of Div 3 to a transaction, the onus will be on the trustee to satisfy the Court that the provisions of Div 3 so apply, subject to express contrary provisions such as those set out in sub-ss120(2) and (5), 122(3), 123(2) and 124(2) of the Act which place the onus of proof of certain matters on the person seeking to uphold the transaction.
His Honour held, at pp598-599, that an applicant under s139ZS would be obliged to adduce some evidence to show that there was a real issue to be decided in the proceeding, but that the onus of proving that the provisions of Subdiv J applied to the applicant and, therefore, that the provisions of Div 3 applied to the transaction, would rest on the respondent to the application.
In our opinion his Honour correctly construed the provisions of s139ZS of the Act. We agree with his Honour that the purpose of Subdiv J, namely, to facilitate the recovery of the worth of property, or alternatively the property, in respect of which the trustee has a right under Div 3 that may be made enforceable by litigation, is met by such a construction. If a notice served on a person under s139ZQ remains uncontested, service of the notice provides the trustee with a right that may be enforced against that person, namely, the right to recover as a debt the sum claimed in the notice. If the claim for the payment of money made in the notice is disputed, s139ZS provides a means by which the controversy as to the application of Div 3 of the Act to the transaction is to be resolved and determined by the Court. In most cases it will be necessary for the trustee to be joined as a party to a proceeding commenced under s139ZS, but if the applicant, or the Official Receiver, fails to have the trustee so joined the Official Receiver will stand in the trustee's place and be under the same onus of proof as the trustee.
The trustee submitted that his Honour erred in failing to conclude that the use of the word "satisfy" in s139ZS demonstrated that it was the intention of the Parliament that the onus of proving the absence of a factual foundation for the issue of the notice rested on the person served with the notice. However, the requirement in s139ZS that the Court is to be satisfied that Subdiv J does not apply to the person to whom the notice is addressed is consistent with the application of whatever onus of proof is prescribed in Div 3 to establish whether a transaction is void against the trustee of the bankrupt. Unless the Court is persuaded, on the balance of probabilities, that Div 3 does apply to the relevant transaction, it would be satisfied that Subdiv J does not apply to the person to whom the Official Receiver's notice was directed. The onus of persuading the Court in a proceeding under s139ZS that Div 3 does apply rests on the trustee, but if the applicant in that proceeding contends that Div 3 is excluded on one of the grounds to which sub-s120(2), (5); 122(3); 123(2) and 124(2) of the Act apply, the onus of proving that Div 3 does not apply on that ground will be on the applicant.
It was further submitted that it would be absurd if the word "satisfied" in s139ZS bore a meaning different from that used for the word "satisfies" in the section which precedes it, s139ZR. (See: Commissioner for Railways (NSW) v Wynward Holdings Ltd [1971] 2 NSWLR 70 at 82-83.) In sub-s139ZR(3) it is provided that a charge under sub-s(1) of that section does not have priority over a mortgage, lien, charge or other encumbrance of an associated entity of the bankrupt "if that entity satisfies the Court that that mortgage, lien, charge or other encumbrance arose from a transaction that was entered into at arms length and for valuable and adequate consideration provided by that entity and is not void against the trustee under Div 3". It is apparent in that sub-section that the subject for the verb "satisfies" is the "associated entity". Thus there is a clear expression by Parliament in sub-s139ZR(3) that the "associated entity" bears the onus of satisfying the Court of the existence of the required facts. However, s139ZS states that the Court may set aside a notice if it is satisfied on the hearing of an application that Subdiv J does not apply to the applicant. In the latter circumstance the party bearing an onus of proof is determined according to the nature of the proceeding conducted on the application. No absurdity arises from such different provisions in ss139ZR and 139ZS.
In the other ground of appeal the trustee submitted that his Honour erred in admitting into evidence the set of financial statements prepared for Elgin by its accountants for the period ended 31 March 1991.
The objection taken to the admissibility of the document was, first, the absence of relevance of the document to any issue in the proceeding, the trustee having conceded to his Honour that the "good faith" of Mr Norton was not disputed. Further, it was submitted that if Mr Norton sought to use the document for an inference that shares in Elgin were of value as at 26 August 1991, the contents of the document were hearsay and inadmissible for that purpose.
His Honour rejected the objection and held that the document was made admissible by s1305 of the Corporations Law as a "book" kept by a body corporate under a requirement of company law. On the hearing of the appeal the trustee submitted that his Honour erred in finding that the document was "kept" by Elgin in the sense of being maintained in a systematic or periodic fashion and in finding that it was a book kept by Elgin "under a requirement" of relevant company law.
In his reasons for decision his Honour made it clear that admissibility of the document was not restricted to the ground provided by s1305 of the Corporations Law. His Honour stated that elements of the concepts of good faith and valuable consideration overlapped in determining whether the transaction was of a "commercial nature". (See: Barton at 79; Official Trustee v Mitchell (1992) 38 FCR 364 at 369; cf: Harkness v Partnership Pacific Limited (1997) 143 ALR 227.) In particular, his Honour was concerned that regard to matters which established good faith should not be excluded in determining whether the consideration settled upon by Mr Norton and Mr Payne was valuable consideration in all the circumstances. Therefore, his Honour was satisfied that the financial statements of Elgin provided to Mr Norton in April/May 1991 were relevant to the issue whether valuable consideration was provided by the transfer of the interest in the shares in Elgin in August 1991 and, therefore, admissible.
We agree with his Honour that the document remained admissible notwithstanding the concession as to good faith made by counsel for the trustee. Mr Norton had given evidence that he had required Mr Payne, chairman of directors of Elgin, to provide "a full financial audit of the company" and the document admitted in evidence by his Honour was the financial statement provided to Mr Norton in response to that requirement.
As such it was admissible as a document adopted by Mr Payne on behalf of Elgin and delivered to Mr Norton on Mr Payne's authority in about April/May 1991. If the trustee contended that by 26 August 1991 shares in Elgin no longer had value, any inference to the contrary provided by that document made the document admissible for the purpose of showing that the claimed absence of value was duly put in issue by the application and, therefore, that an onus was on the trustee to prove that the transaction was void under Div 3 of the Act.
The trustee did not adduce any evidence of the value of the shares on 26 August 1991.
The appeal must be dismissed.
I certify that this and the
preceding eight (8) pages
are a true copy of the Reasons
for judgment of their Honours
Justice Lee and Justice R D Nicholson.
Associate:
Date: