94 There was some evidence that the Shares were encumbered at the time when the bankrupt was about to transfer them to Mrs Cummins.
95 A contemporaneous note made by Mr Harris on 10 August 1987 (the share transfer was dated 17 August 1987)read "Nat Bk L/Soc has scrip". It is clear that the reference was to the Shares. There was a further note by Mr Harris on 13 August 1987 which read "JC says Bank has CT and Nat L/Soc has scrip". We would infer from those notes that the National Bank of Australasia Ltd, Law Society Branch, held the scrip for the Shares. On 8 October 1987 Mr Harris recorded a telephone conversation with a Mr Bruce Wood, Assistant Manager of the National Bank, which included the following:
'SS security for o/d
would need security @ $60,000 (I to get him to ring you) re alternative SECURITY.'
96 In the context of Mr Harris' two other diary notes, we infer that he used "SS" as a shorthand expression for the Shares. How long the shares had been used as security was, in our view, something which the respondents (with all the powers vested in them as trustees in bankruptcy) could readily have ascertained and put into evidence. The position is that there was simply no evidence that the bankrupt had purchased the Shares out of his professional earnings and in our view his Honour erred in reversing the onus of proof in the manner referred to above. Such an approach tends to nullify the whole point of a "no case" submission, that is, to test whether an applicant has proved its case. A careful application of the "no-case" procedure can result in a considerable saving in costs.
97 Nor did the respondents call any evidence from any officer of the Commonwealth Bank which held a mortgage over the Hunters Hill home and which might have been given as collateral security for borrowings to acquire the units relating to the Parramatta chambers.
98 The truth of the matter was that there was simply no evidence about the source of funds for this acquisition and accordingly nothing to support his Honour's finding that the bankrupt purchased the shares and the units relating to the chambers at Parramatta out of his professional earnings.
99 His Honour also relied on an assumption that he could take judicial notice, in the absence of any dispute by Mr Brereton, of the fact that the bankrupt's appointment as a senior counsel was recognition of his professional attainments and expertise.
100 It might well be expected that, on average, a barrister who had been in practice for 22 years, including six years as senior counsel, would have enjoyed a large taxable income. But, in our opinion, the respondents needed to adduce some evidence (albeit slight) of the likely level of taxable income which this particular barrister enjoyed, i.e. did he fit the stereotype average? Or even, was it likely that he did? Presumably his Honour took judicial notice of this "fact" under the common law doctrine (as to which see now Gattellaro v Westpac Banking Corporation [2004] HCA 6 at [17]). But even using s 144 of the Evidence Act 1995 (Cth) would not, in our view, permit the jump from the significance of the appointment as a senior counsel to an assumption about even the approximate level of the bankrupt's taxable income.
101 The appellants also criticised his Honour's use of the figures for gross receipts and net business income shown in the tax returns eventually filed on behalf of the bankrupt for the subsequent years ended 30 June 1992 to 30 June 1999 respectively. They submitted that there was no evidence as to the bankrupt's other business interests or investments during the earlier period before 1987. There was, so it was put, an inference of equal probability that in the years in respect of which the bankrupt had not lodged income tax returns, his net taxable income did not require him to pay any income tax for those years.
102 In our view, the evidence offered by the respondents, and accepted by his Honour, fell short of the evidence required for the inference drawn by his Honour in the last sentence of paragraph [126] of his reasons.
103 We do not think that, in those circumstances, it was open to his Honour to allay any doubts (which presumably he had) by extrapolating backwards for a period of between four and eleven years as the basis for justifying an inference that in 1987 the bankrupt faced contingent tax liabilities amounting at the very least to several hundred thousand dollars.
104 Given the seriousness of the allegations (even allowing for the fact that there is no need to show fraud) the evidence fell short.
105 It should not have been very difficult for the respondents to have assembled enough evidence to take their case over the line. We have given some examples above. We will mention three more obvious sources of such evidence. A selection of solicitors who had regularly briefed the bankrupt could have been subpoenaed to produce their books to show how much they had paid him on behalf of their clients over some of the relevant years. His bank could have been subpoenaed to produce its records of his deposits of fees. So could the bankrupt's clerk. Nor would it be difficult to assemble sufficient evidence of any other assets in the bankrupt's name in order to produce what in income tax circles is known as a betterment analysis or betterment statement. This is a familiar tool for assessing income where no returns have been furnished. Evidence of substantial unencumbered assets would have helped to tip the scale. There was no such evidence. Nothing of that type was in evidence in this case.
106 The next factual question to which his Honour directed attention was whether the bankrupt had retained insufficient assets to satisfy his tax liabilities.
107 His Honour's findings on this matter were as follows:
'[130] A similar factual question arises as to whether the Bankrupt retained insufficient assets to satisfy his tax liabilities, if the Commissioner were to issue assessments against him. The significance of this question is that, if the Bankrupt left himself insufficient assets to meet his potential tax liabilities, it is much easier to infer that his main purpose was to defeat or delay his creditors, specifically the Commissioner. Once again, Mr Brereton submitted that the evidence did not support the inference that the Bankrupt could not have paid any tax that might have become due. He argued that I could not be satisfied that the Bankrupt did not retain assets, other than those transferred to Mrs Cummins and Aymcopic, that could be used to satisfy any debt to the Commissioner.
[131] There is no evidence that, after executing the transfers in 1987, the Bankrupt retained assets substantial enough to enable him to satisfy his liability to pay tax. (The Bankrupt did retain his units in the Parramatta Unit Trust, but this was due to his solicitor's failure to implement instructions to transfer the units in 1987 by way of gift.) However, the mere absence of evidence that the Bankrupt retained other assets could not, without more, satisfy me affirmatively that there were no such assets. But there is some evidence from which inferences can be drawn.
[132] If, as Mr Brereton contended, one of the Bankrupt's motives for divesting himself of two valuable assets in 1987 was to protect himself against being sued by future clients, it would have made no sense for the Bankrupt to have retained other substantial assets in his own name. Furthermore, if one thing is clear in this case, it is that the Bankrupt was not concerned to make provision for his income tax liabilities. Moreover:
· the Bankrupt's tax returns give no indication that he either disposed of substantial assets or derived substantial income from investment assets during the period 1992 to 2000 (the disposal of substantial assets would have had implications for capital gains tax);
· the Bankrupt's 2001 statement of affairs disclosed no substantial assets in his own name, other than the units in the Parramatta Unit Trust, a motor vehicle and shares worth about $40,000; and
· bank documents record, apparently on the basis of information supplied by or with the authority of Mrs Cummins in 1998, that "all assets are in her name".
[133] The evidence does not enable me to rule out definitively the possibility that the Bankrupt retained assets in his own name after the 1987 transfers, but disposed of them between September 1987 and June 1991 (the tax returns cover the period from July 1991 onwards). However, I regard this as merely a possibility. It is much more likely on the evidence that the Bankrupt disposed of virtually all his substantial assets in 1987. Whether or not this is so, having regard to the documentary evidence to which I have referred, I am satisfied that the Bankrupt, after August 1987, did not retain sufficient assets to meet in full his then liability to pay income tax. A fortiori he did not retain sufficient assets to ensure that he could meet in full his liability to pay income tax and any additional tax that the Commissioner might have chosen to impose.' [Emphasis added]
108 The first sentence of paragraph [131] above strongly suggests that the appellants had some onus to establish the proposition that the bankrupt retained assets substantial enough to enable him to satisfy a correspondingly substantial tax liability. Once again, in our view, his Honour reversed the onus of proof and once again the respondents failed to adduce sufficient evidence. There was simply no evidence to show that, by the transfers, the bankrupt had denuded himself of assets sufficient to pay his supposed liability to pay tax.
109 Furthermore, in our opinion, it is not correct to say that it would have made no sense for the bankrupt to have retained some assets in his own name even if he contemplated being sued by future clients. We think it is quite conceivable, as Mr Brereton submitted, that a barrister facing the prospect of being sued by future clients might seek to protect the matrimonial home and his chambers, but at the same time leave some assets unprotected. But in the absence of evidence, all this is speculation. In our view, there was simply no evidence for his Honour's conclusion that:
'It is much more likely on the evidence that the Bankrupt disposed of virtually all his substantial assets in 1987.'
110 We accept Mr Brereton's submission that those circumstances are equally consistent with the following inferences, namely that:
(a) the bankrupt sold assets between 1987 and 1992;
(b) the bankrupt sold assets after 1992 (but before 1998) which were pre-capital gains tax assets or were personal use assets or did not yield a taxable profit;
(c) the bankrupt had cash (or other assets) sufficient to enable him to discharge the liability and the cash and other assets were neither recorded nor required to be recorded in the tax returns from 1992 onwards; and
(d) the bankrupt had cash, or other assets sufficient to enable him to discharge the liability, but spent this money after 1987 and/or after 1992.
111 Mr Eric Morelli, an accountant, was retained to reconstruct accounts for the bankrupt and prepare income tax returns for the years to which his Honour refers. This may be only a small piece of evidence, but Mr Morelli's trial balances showed the bankrupt's estimated cash at bank on 30 June 1995 was $152,389, at 30 June 1996 $31,617, at 30 June 1997 $35,690, at 30 June 1998 $65,353 and at 30 June 1999 $168,104. The bankrupt's statement of affairsshowed that when he became bankrupt he had cash and other assets amounting to well over $200,000. Just under half of that amount ($100,000) was cash on deposit being the proceeds of sale of the bankrupt's chambers at Parramatta.
112 It is perfectly clear from Mr Morelli's evidence that the documents which he relied upon to prepare those tax returns were incomplete and unsatisfactory in many serious respects. Mr Morelli gave details. He asked for information but, so he swore, on by far the majority of those occasions, no satisfactory information was available. He also swore as follows:
'In cases where I was unsure as to the nature or purpose of a payment or receipt, I treated it as taxable income and as a non-allowable deduction, respectively.'
113 The significance of that evidence is that Mr Morelli made those decisions in favour of the Commissioner.
114 In the light of that evidence it is difficult to understand his Honour's passing remark in parenthesis in paragraph [127] above.
115 The next step taken by his Honour in assessing the bankrupt's purpose or purposes in transferring the assets was to have regard to the form of the transactions and the advice which he appeared to have received. His Honour said that he was not prepared to infer from Mr Harris' contemporaneous notes that he was privy to the bankrupt's "tax delinquency". His Honour opined that if Mr Harris had been so informed the likelihood was that the notes would have been expressed differently. His Honour made the following finding or inference:
'But the Bankrupt was well aware of his own tax delinquency and chose not to tell his solicitor of that critical fact, despite his proposal to divest himself of his major assets.'
116 In our opinion, this factor is neutral. As Mr Brereton submitted, if the bankrupt had been concerned with his tax liability and wished to place his assets beyond the reach of the Commissioner, it is in our view just as likely that he would have told his solicitor about this so as better to secure his family's position. If the discussion had taken place we would not expect the solicitor to have recorded it. The absence of any record of any such discussion, in our opinion, does not support a finding that there was no such discussion. There is simply no evidence that there was or was not such a discussion. We think that the finding was not open to the primary judge.
117 Furthermore, the finding suffers from the deficiency of evidence that the bankrupt in fact had taxable income which he had not returned.
118 His Honour then referred to some of Mr Harris's notes which included observations that the transfer should be for consideration in the hope of surviving subsequent scrutiny. With respect, we agree with his conclusions that that was what Mr Harris recommended. His Honour then said this:
'[136] It is very likely that the solicitor discussed his views with his client, the Bankrupt. The Bankrupt, being aware of his own tax delinquency, would have seen the transactions in a very different light than his solicitor. Given the Bankrupt's state of knowledge, I think it virtually inevitable that, whatever techniques he used to rationalise his tax default, at the time of the transactions he had at the forefront of his mind the impact of the transfers on the Commissioner's chances of recovering the income tax that he (the Bankrupt) should have paid over many years. The fact that the Bankrupt had no intention of "coming clean" reinforces the inference that, in his mind, the principal or leading purpose of the transfers was to protect his major assets from any claims that would be made by the Commissioner if and when the tax delinquency was discovered. Whether the Bankrupt took that view because he thought that the misleading form of the transfers would offer protection when the time came, or because the solicitor's advice gave him reason for optimism, is not necessary to determine.'
119 Once again we accept the appellants' submissions concerning the difficulties which arise with these conclusions, namely that:
(a) it is based on the assumption that the bankrupt did in fact have a considerable tax liability;
(b) it assumes that the instructions to Mr Harris to execute two simple conveyances included instructions to advise the bankrupt on the transactions, or otherwise to provide an occasion for him to "come clean" to Mr Harris;
(c) the evidence was to the contrary - Mr Harris' file disclosed only private file notes and no advice to the bankrupt at all on the question of avoiding liabilities. It included a contemporaneous letter from the bankrupt containing instructions to make a gift; and
(d) the conclusion that the bankrupt wished the transfers to be executed in a "misleading form" was contrary to the evidence that he simply intended the transfers to be gifts, but Mr Harris had expressed them as having been made for consideration, to avoid stamp duty at higher rates on transactions which were gifts.
120 There is one further matter to which we should refer. Contrary to the impression, which might reasonably be gained from reading his Honour's reasons, that the third hypothesis was a matter advanced solely by the respondent [the third hypothesis was that the bankrupt was motivated by his concern that the law relating to a barrister's in-court immunity might change and his desire to avoid the possibility that his assets might be at risk if a future client sued him], the suggestion can be found in the respondents' Second Further Amended Statement of Claim where in the particulars to paragraph 9 the trustees pleaded:
'(v) Further and in the alternative, Mr Cummins in his public examination on 6 June 2001 before Registrar Tesoreiro stated that his intention was "to divest [himself] of any assets in [his] name because of claims being then made on barristers in respect of negligence claims as a barrister in giving advices.'
121 In our opinion, the evidence was not strong enough to exclude that hypothesis on a balance of probabilities. There is nothing in the evidence to suggest that in 1987 the bankrupt anticipated being unmasked as a person who had not filed income tax returns for many, many years. On the contrary, the pattern of not filing income tax returns continued for another twelve years until Mr Harris referred the bankrupt to Mr Morelli for the purpose of preparing and lodging the returns.
122 On the evidence, the only thing special about 1987 was the Giannarelli litigation. On 9 May 1986 Marks J of the Supreme Court of Victoria held in Giannarelli v Wraith that s 10(2) of the Legal Profession Practice Act 1958 (Vic) operated to subject the plaintiff's barristers in certain criminal proceedings to liability in respect of the negligence alleged against them. On 10 April 1987 the Full Court of the Supreme Court of Victoria discharged the orders made by Marks J, but did not publish its reasons for taking that course until 19 May 1987 - see Wraith v Giannarelli [1988] VR 713 at 715, 716. It is true, as his Honour noted, that the bankrupt instructed Mr Harris, in relation to the two relevant transfers, before the High Court of Australia granted special leave in the Giannarelli case (on 14 August 1987). But the application for special leave must have been made shortly after 19 May 1987 or, more likely, shortly after 10 April 1987. Mr Harris received his instructions from the bankrupt no later than 10 August 1987, being the date shown on the first of the diary notes referred to above. The approximate coincidence of the timing is, in our opinion, quite marked. We would not attach the same importance as his Honour did to the fact that the High Court did not grant special leave in Giannarelli until four days later. The litigation was very well known in legal circles at that time.
123 Evidence consistent with the third hypothesis was, first, the observation made by a finance broker in an application, dated 2 March 1998, on behalf of Mrs Cummins to the National Australia Bank Ltd for financial accommodation of $1.3 million:
'The attached Statement of Assets and Liabilities demonstrates the high net worth of Borrower [Mrs Cummins]. In addition to substantial real estate holdings, which are held in her name for legal reasons in view of her husband's occupation, Mrs Cummins currently has $1,000,000 invested in the share market and $300,000 on deposit with Macquarie Bank Ltd.' [Emphasis added]
124 The third hypothesis was also consistent with a notation in the records of the National Australia Bank Ltd, dated 7 October 1998, in relation to Mrs Cummins:
'She is married to John Daniel Cummins who is a Barrister and maintains satisfactory account relationship with our Law Courts branch since 17/6/1983. Due to his occupation all real estate property are in Mrs Cummins name who personally controls financial affairs.' (Emphasis added)
125 The case at first instance appears to have been conducted on the basis that if the bankrupt's main purpose for making the dispositions was to put them beyond the reach of a client successfully suing him for negligence, then that purpose would not fall within s 121(1). We should not be thought to be agreeing with the correctness of that assumption.
126 In answer to the first question in the appeal, in our view, the evidence at first instance did not permit the principal inference, made by his Honour, to be made reasonably and distinctly. As we have mentioned, the principal inference was that the bankrupt's purpose in transferring the Hunters Hill property to Mrs Cummins and the Shares to the second appellant was to defeat or delay creditors. We would allow the appeal on that ground alone.
127 It is not necessary for us to consider his Honour's reliance on Jones v Dunkel (1959) 101 CLR 298 other than to say that we think it was misplaced, for at least two reasons. First, it conflicts, in our view, with the statement of principle, that such an inference may not be drawn in the circumstances such as these, set out in a passage of Young CJ's reasons for judgment in the decision of the Full Court of the Supreme Court of Victoria in Protean (Holdings) Ltd v American Home Assurance Co [1985] VR 187 at 330-331, which was set out with apparent approval in the Full Court of this Court's decision in Rasomen Pty Ltd v Shell Company of Australia Ltd (1997) 75 FCR 216 at 226-227. The circumstance that in both those cases the trial judge had not put the "no-case" moving party to an election only serves to make the present case an even stronger candidate for the application of that principle. Secondly, reliance on Jones v Dunkel in cases such as these undermines the utility of the no-case procedure and, in our view, flies in the face of the policy on which it is based - see paragraph [96] above.