Lumsden v Snelson

REASONS FOR JUDGMENT 1 The applicant ("the trustee") is the trustee of the bankrupt estate of the first respondent ("Mr Snelson"), a sequestration order having been made against the estate of Mr Snelson on 20 April 2000. The second respondent ("Mrs Snelson") is the wife of Mr Snelson. 2 The applicant seeks declarations that: · the transfer on 11 September 1997 by Mr Snelson to Mrs Snelson of his interest in their then matrimonial home at 5 Marissa Crescent, Greensborough, Victoria ("the property") is void as against the applicant pursuant to s 120 or s 121 of the Bankruptcy Act 1966 (Cth) ("the Act"); · certain investments and a caravan acquired with the proceeds of the sale of the property by Mrs Snelson are held on trust for herself and the trustee in equal shares; · the transfer of 600 shares (or instalment receipts) in Telstra Limited by Mr Snelson to Mrs Snelson by instrument of transfer signed on 5 March 1998 is void as against the applicant pursuant to s 120 or s 121 of the Act. The trustee also seeks consequential relief in order to obtain the realisation of the assets to which he claims an entitlement. 3 Prior to 11 September 1997, Mr Snelson and Mrs Snelson were registered as joint proprietors of an estate in fee simple in the property, having been registered as such joint proprietors on 1 August 1986. On 11 September 1997, Mr Snelson and Mrs Snelson executed an instrument of transfer whereby Mr Snelson transferred to Mrs Snelson all his estate in fee simple in the property. The consideration expressed in the instrument of transfer was "in consideration of natural love and affection". 4 On 11 December 1989 Mr Snelson was the owner and driver of a motor vehicle which was involved in an accident with another motor vehicle in which Mr Snelson and two persons in the other motor vehicle were injured. At the time of the accident, Mr Snelson was not aware that his car was not registered or insured for compulsory third party insurance. The relevant documents to renew the registration had apparently been sent to the wrong address prior to the accident. 5 As a result of the accident, the Transport Accident Commission ("the Commission") incurred obligations to the injured persons in the other motor vehicle and made payments to them or on their behalf. By virtue of the provisions of s 96 and s 104 of the Transport Accident Act 1986 (Vic), the Commission became entitled to recover from Mr Snelson a total amount of $148,338.04. On 4 July 1997 the Commission wrote to Mr Snelson informing him that it had recovery rights against him for the amount of $148,338.04 and advised him of its intention to seek recovery of that amount from him. 6 Mr and Mrs Snelson were not living at home at the time the letter from the Commission was delivered to their home. They had set out to travel to Western Australia by car in early July 1997. Mr Snelson said they were away for about fifteen weeks and returned home in or about October or November 1997. Mr Snelson and Mrs Snelson gave evidence that whilst they were driving to Western Australia, relatively early in the journey, Mr Snelson spontaneously told Mrs Snelson that he would transfer the property into her name as he was concerned for his health and did not want her to have to worry. 7 Whilst Mr and Mrs Snelson were travelling to Western Australia, their daughter was looking after their home and they spoke to her on the telephone from time to time. After they arrived in Perth, Mr Snelson and his daughter spoke on the telephone and she told him that a demand for payment of money had arrived from the Commission. Mr Snelson said that this conversation occurred after he had told Mrs Snelson that he would transfer the property into her name. He denied that it was the conversation with his daughter which prompted him to transfer the property to Mrs Snelson. The telephone call from Mr Snelson's daughter occurred before the date on which the transfer was signed. Mr Snelson said that after they arrived in Perth, he contacted his solicitors in Melbourne and asked them to send to Perth documents transferring the property to Mrs Snelson for them to sign. 8 I do not accept Mr Snelson and Mrs Snelson's explanation as to how Mr Snelson's decision to transfer his interest in the property to Mr Snelson came about. I am satisfied that the catalyst for the decision to transfer the property, and the reason why the transfer was signed by Mr Snelson and Mrs Snelson, was the knowledge that the Commission was claiming a large sum of money from Mr Snelson which he could not pay out of his assets other than from the sale of his property. Mr Snelson was not in the course of a bout of bad health at the time Mr and Mrs Snelson said that Mr Snelson told Mrs Snelson he was going to transfer the property to her. Further, there was no reason relating to the health of Mr Snelson which made it desirable for him to transfer his interest in the property to Mrs Snelson. They owned the property as joint proprietors, so that, in the event of Mr Snelson's death, Mrs Snelson would become the sole owner of the whole of the interest in the property. Although Mr Snelson had suffered bouts of bad health subsequent to the accident on 11 December 1989, he was not suffering from any particular health problem at the time of the journey to Perth. Indeed, his health was such that he was able to undertake the journey to Perth in July 1997 by car and share the driving with Mrs Snelson. Mrs Snelson said that Mr Snelson had been in poor health off and on since 1989, but that by the time of the journey to Perth he was starting to feel all right. 9 Up to the time of the transfer, Mr Snelson and Mrs Snelson had treated everything each of them owned jointly. Mr Snelson said that they shared everything they had equally. Mrs Snelson agreed that up to the time of the transfer they kept their affairs mingled together. Mr Snelson was asked whether at the time he decided to transfer his interest in the property, he was concerned that, if he passed away, Mrs Snelson might have difficulties in relation to the property. Mr Snelson replied that he did not give consideration to that matter. In other words, Mr Snelson was not contending that he decided to transfer his interest in the property to Mrs Snelson to ensure that nothing happened to the property on his death which might be detrimental to Mrs Snelson. I reject Mr Snelson's explanation that the reason why he decided to transfer his interest in the property was related to his health condition. Counsel for the trustee pursued this issue in cross‑examination in the following passage: "What I'm trying to understand, Mr Snelson, is why you thought that your poor health was a reason to transfer the property. What difference did it make to your wife that it was transferred to her because you were in poor health as you saw it?---Well, I would have thought maybe that there was financial things that she would have to do that she wouldn't have to do, by just transferring the house, or my share of the house at that stage to her. What sort of things would she have to do?---Well, that, I don't know, because I'm not legally minded. What did you have in mind?---Just to pass the house over to her and say there would be no troubles at any time that should happen - - - What sorts of troubles were you expecting or concerned about?---I have had serious heart problems from and during that time, and of course there are other problems I've had over the last 12 months hasn't been in relation to that at all. Yes, but how were your serious heart problems connected with the need for your wife to own the house in her own name?---Because I just thought that's the thing that you do." Mr Snelson could not give any rational or logical reason why he made the decision to transfer his interest in the property for health reasons. 10 I am satisfied that the real reason Mr Snelson decided to transfer his interest in the property to Mrs Snelson was the reason he gave to Mr Adrian Brown, who was assisting the trustee in the administration of the bankruptcy, when he was interviewed by Mr Brown about his financial affairs on 3 May 2000. In the course of the interview, he told Mr Brown that there was no consideration for the transfer of the property to Mrs Snelson other than natural love and affection and that the reason for the transfer was "because I knew I had the judgment coming". Although Mr Snelson said he was "clouded" in what he told Mr Brown and was nervous at the time, he did not deny Mr Brown's evidence and only said that he could not remember giving Mr Brown that reason. I accept Mr Brown's evidence. 11 In fact the judgment had come in the County Court on 28 October 1999. The Commission obtained judgment on that date against Mr Snelson for $250,759.05 in respect of his liability pursuant to s 104(1) of the Transport Accident Act to indemnify the Commission for its liability to make payments to the persons injured in the accident. It was that judgment which founded the issue of a bankruptcy notice on 23 November 1999 which was served on Mr Snelson on 30 January 2000. He failed to comply with the bankruptcy notice by 20 February 2000, and the creditor's petition was presented on 1 March 2000. 12 There was no consideration from Mrs Snelson for the transfer of Mr Snelson's interest in the property to her. Mr Snelson said that Mrs Snelson did not pay him anything for his interest in the property and he got nothing in return for the transfer. Mr Snelson admitted that at the time he became aware of the letter from the Commission, he did not have the amount claimed by the Commission and he had no assets, other than his interest in the property, which he could use to pay that amount. 13 Mr Snelson denied that when he signed the transfer he thought that the transfer would make it hard for the Commission to recover the money it was claiming from him, and he denied that he transferred the property to Mrs Snelson so that the Commission could not use the property to satisfy its claim. 14 After the transfer of the property, Mr Snelson was not in good health and in or about May 1998 Mrs Snelson decided to sell the property because it was too big and she could not maintain it. The property was sold in February 1999 for $330,000. A deposit of $33,000 was paid in March 1999 and, after the costs and expenses of the sale were deducted, Mrs Snelson received $25,000 in respect of the deposit of which she directed $3,000 to be paid to her daughter and son‑in‑law. The sale was settled on 11 June 1999 and Mrs Snelson received at settlement the proceeds of sale of $297,049.65, which was paid into Mrs Snelson's bank account with the National Australia Bank on 11 June 1999. On 22 June 1999, $235,025 was withdrawn from Mrs Snelson's bank account. The amount was used by Mr Snelson to obtain a bank draft for $235,000 which Mrs Snelson said she deposited with an overseas offshore company called Prosper International Ltd. Mrs Snelson used most of that money to purchase shares in three companies, Stock Generation, Advance and Quantum Gold ("the companies"). Mrs Snelson said that the companies in which she invested turned out to be scams and that all that is left in the account with Prosper International Ltd is US$1,980. 15 Mrs Snelson purchased a caravan in July 1999 and paid $36,000 for it upon delivery in December 1999. The $36,000 came out of the bank account in which the sum of $297,049.65 had been deposited on 11 June 1999, and it appears from the bank statements that the $36,000 formed part of that sum. Mrs Snelson also said that Mr Snelson "transferred his Telstra shares to me because of his health concerns". A transfer of those shares, which appear at the time to have been instalment receipts, was signed by Mr Snelson and Mrs Snelson on 5 March 1998. There was no consideration for the transfer. 16 I am satisfied that Mr Snelson transferred his interest in the property to Mrs Snelson in order to try to prevent the Commission from satisfying any judgment debt and recovering the amount it had claimed from him by the forced sale of the property. Mr Snelson told Mr Brown that the reason for the transfer was that he knew there was a judgment in favour of the Commission against him coming. In short, Mr Snelson's purpose in effecting the transfer was to prevent his interest in the property from becoming available to a creditor. At the time of the transfer, Mr Snelson did not have the means to pay the amount claimed by the Commission. I am satisfied that Mr Snelson believed that he was at risk of having a judgment obtained against him which he could not satisfy, and that his interest in the property would become available to the judgment creditor. 17 I am satisfied that the transfer of Mr Snelson's interest in the property and the transfer of the Telstra shares fall within s 120(1) of the Act. Section 120(1) provides: "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 of the transfer or gave consideration of less value than the market value of the property." None of the exemptions provided for in s 120(2) of the Act is applicable and, on the evidence before me, Mrs Snelson has not proven, and could not prove, for the purposes of s 120(3) of the Act, that Mr Snelson was solvent at the time of the transfer of Mr Snelson's interest in the property. The fact that the transfers of the property and the Telstra shares were made in consideration of natural love and affection does not take the transfers out of the reach of s 120(1) of the Act as s 120(5) provides, inter alia, that a transferee's love or affection for the transferor has no value as consideration for the purposes of s 120(1). 18 The transfer of the property is also void against the trustee, by virtue of s 121(1) of the Act. Section 121(1) provides: " (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. (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." 19 The findings I have made have the result that this provision is applicable to the transfer of Mr Snelson's interest in the property. The evidence does not enable me to be so satisfied in relation to the Telstra shares. 20 In addition to seeking declaratory relief in relation to the transfer of Mr Snelson's interest in the property, the transfer of the Telstra shares and the purchase of the caravan, the applicant seeks consequential relief that Mrs Snelson transfer to the applicant the benefit of the investments which were made in Prosper International Ltd and the companies ("the investments"), the benefit of the caravan and the Telstra shares, and that the applicant be allowed to realise the same and account to Mrs Snelson for her share in the investments and the caravan after deducting sale costs and the costs of this proceeding. The applicant does not seek a money judgment against Mrs Snelson, but only orders which will enable him to realise his interests in the assets into which the proceeds of the sale of the property can be traced and the Telstra shares. 21 Mr and Mrs Snelson resisted this consequential relief in relation to the caravan on the basis that they contended the caravan was purchased out of Mr Snelson's half‑share of the proceeds of the sale of the property. Mrs Snelson said that when they sent the money offshore to Prosper International Ltd, Mr Snelson wanted all the proceeds of the sale of the property to go, but she wanted to keep money to pay for a caravan. However, at the time the money was sent to Prosper International Ltd and at the time the caravan was purchased, Mrs Snelson was entitled to the whole of the proceeds of the sale of the property. Mr Snelson was not entitled to a half‑share, or indeed any share, of the proceeds of the sale of the property at any time up to the date of the sequestration order against him. The transfer by him of his interest in the property to Mrs Snelson was effective until avoided in proceedings brought by his trustee in bankruptcy under the Act: Official Trustee in Bankruptcy v Alvaro (1996) 66 FCR 372 at 426. 22 It is therefore incorrect to say that Mrs Snelson purchased the caravan out of her half‑share of the proceeds of the sale of the property, and that what was sent offshore to Prosper International Ltd was the whole of Mr Snelson's half‑share of the proceeds and that part of Mrs Snelson's half‑share which was not set aside for the purchase of the caravan. The creation of the trustee's half‑interest in identifiable property only arises upon the defeasance of the title acquired by an avoided transaction. That half‑interest did not exist at the time the proceeds of the sale of the property were received by Mrs Snelson. At that time, Mrs Snelson was entitled to the whole of the proceeds. She cannot therefore assert that she purchased the caravan out of any half‑interest in the proceeds of sale of the property which half‑interest is immune from any accounting to the trustee or tracing by him. 23 Upon the making of the Court order, it is only the interest acquired by the avoided transfer which is set aside. Mrs Snelson remains entitled to the interest she had in the property prior to the transfer of Mr Snelson's interest in the property to her. As the property was sold and as the proceeds of sale can be traced to identifiable property, in this case the investments and the caravan, the trustee is entitled to realise the extent of his interest in the identifiable property. That entitlement is subject always to Mrs Snelson being entitled to realise the extent of her interest, not acquired through any transfer which has been avoided, from that identifiable property. 24 There is authority that supports the consequential orders sought by the applicant. In Official Trustee in Bankruptcy v Alvaro (supra) a Full Court of the Federal Court allowed an appeal from a decision dismissing an application by the Official Trustee for declarations that certain transfers of real estate and shares by the bankrupt were void as against the trustee pursuant to s 121(1) of the Act. In the course of their judgment, Wilcox and Cooper JJ (with whom Moore J agreed in respect of this part of the judgment) considered the form of relief to which a trustee is entitled where a disposition is declared void pursuant to s 121 of the Act. Their Honours said at 426: "Although s 121 states that a disposition to which it applies is void, the courts will treat the disposition as effective until impugned in proceedings brought by the trustee in bankruptcy. Thus, where there is a disposition of property to which s 121 of the Act applies, the title which the donee receives is a defeasible one [citations omitted]. Until the title is defeased by the trustee in bankruptcy calling for delivery up or revesting of the property to the trustee or by instituting proceedings to establish the trustee's entitlement to the property, the donee may deal with the property as owner and is not required to account for any profit made. If the property is sold and the proceeds of sale dissipated by the donee prior to defeasance the donee is not personally liable for the value of the property: Brady v Stapleton [(1952) 88 CLR 322] at 332‑335. Upon defeasance, if the property remains in its original form or in some derivative form in the hands of the donee, title to the property revests in the trustee in bankruptcy and the donee thereafter continues to hold the property as trustee for the trustee in bankruptcy and will be ordered to do all necessary acts to revest the property in the trustee in bankruptcy. Once the property has revested, the donee thereafter becomes personally liable to account for the property and any profits made by or from the use of that property since the time of revesting of the property. … Where there has been a disposition of property and that property has not been retained but has been transformed into other identifiable property or mixed with the property of a third party, the court will allow a remedy against the identified specific property in order to give the trustee in bankruptcy an effective remedy upon the avoidance of the original disposition of property Re Mouat; Kingston Cotton Mills Co v Mouat [1899] 1 Ch 831 at 834‑835; Trautwein v Richardson [[1946] ArgLR 129] at 130, 132, 133. The decision in Re Mouat demonstrates that although the avoidance of the disposition brought about by s 121 and its predecessors is a legal remedy the courts will grant equitable relief to make good the remedy: see May on Fraudulent and Voluntary Dispositions of Property (3rd ed. 1908), pp306‑307. Where the property has altered in form, but remains in the hands of the donee, equity will allow the trustee in bankruptcy to claim the property in its altered form as property to which it is entitled, the original disposition of the bankrupt being void as against the trustee." In my view, this analysis, which applies equally to dispositions avoided under s 120 of the Act, justifies the orders sought by the trustee, save for the order as to how the costs of the proceeding are to be recovered. 25 Because the transfer of Mr Snelson's interest in the property is void against the trustee, he is entitled to trace the proceeds of the sale of the property to the extent of Mr Snelson's half‑share of those proceeds which re‑vests in the trustee: Trautwein v Richardson [1946] ArgLR 129; Official Trustee in Bankruptcy v Alvaro (supra). I am satisfied that the $36,000 which Mrs Snelson used to purchase the caravan was part of the proceeds of the sale of the property which were deposited into Mrs Snelson's bank account on 11 June 1999. 26 In the circumstances of this case, it is appropriate that the trustee have the consequential relief he seeks as to the manner in which he is to obtain and realise his interest in the investments, the caravan and the Telstra shares. It is desirable that any further costs and expenses be minimised so that both the trustee and Mrs Snelson obtain as much as they can from the property to which the trustee is entitled to have recourse. The history of this proceeding, especially in relation to the examination of Mrs Snelson under s 77C(1) of the Act and her unwillingness to answer certain questions, leads me to conclude that if realisation of the caravan, the shares and the money held by Prosper International Ltd is left to Mrs Snelson, who does not have the benefit of access to legal advice, there is likely to be further litigation and the incurring of further costs and expenses. 27 The trustee should, therefore, have the opportunity to obtain his share of the proceeds of the sale of the property out of the identifiable property into which those proceeds can be traced, and to be able to have the investments, the caravan and the Telstra shares realised so he can obtain his share of their value. However, he should be obliged to account to Mrs Snelson for her equal share in the investments and the caravan after deducting one half of the costs incurred in their sale. 28 However, I am not prepared to order that the trustee be secured for the costs of this proceeding out of that property. Although I am prepared to order that the respondents pay the applicant's costs of the proceeding, I am not prepared at this stage to give the trustee a security for those costs. 29 On 4 August 2000 I granted an interlocutory injunction restraining Mrs Snelson from dealing with some of the assets into which the proceeds of the sale of the property could be traced, namely any funds held by Prosper International Ltd and the caravan. That injunction should be continued in aid of the orders for realisation of those assets. 30 There will be orders in terms of the relief claimed by the trustee, save for the source of the payment of the costs of the proceeding.