McVeigh v Zanella

Background facts 5 The property was purchased in November 1989 by the bankrupt and his brother, Vincenzo Zanella. On 20 November 1989 the bankrupt and Vincenzo were registered as joint proprietors. The purchase price of the property was $168,000. Of this amount, the two brothers contributed $55,000, which they borrowed from the State Bank of Victoria, for which they provided a mortgage over the property. A further $128,000 was contributed by their parents, Cristina and Francesco Zanella. When agreeing to provide funds to buy the property, Mrs Zanella required her sons to write and sign a note to the effect that if they were unable to repay the mortgage loan to the bank, then the parents would take back the property from their sons. This note was handwritten in Italian on a tissue, was dated 16 March 1989 and was signed by the parents and the two sons. 6 The sons purchased the property with the intention of developing it by building units on it and selling them. The intended development was never undertaken. 7 Shortly after the purchase of the property, the bankrupt and Vincenzo lost their jobs as labourers in the building industry. As a result, they were unable to meet the mortgage payments, and Mr and Mrs Zanella commenced to repay the loan. At this time Mr and Mrs Zanella moved into the property and rented out their own home in North Fitzroy. 8 On 2 July 1991 the parents were added as additional joint proprietors. At some time subsequent (the evidence did not clearly show the exact date), the mortgage loan was transferred from the State Bank of Victoria to the Commonwealth Bank, at which time Mr and Mrs Zanella, the bankrupt and Vincenzo all became liable to repay it. 9 On 28 October 1992, the petitioning creditor, Equuscorp Pty Ltd, obtained a judgment in the Magistrates' Court against the bankrupt and his wife, Jackie Zanella, for $14,000. 10 The mortgage loan was fully repaid by October 1995 by Mr and Mrs Zanella, with some small contributions by Vincenzo. According to the evidence of Mrs Zanella, the bankrupt did not make any contribution to the repayment of the loan. 11 On 6 May 1997 the petitioning creditor sent a letter to the bankrupt and his wife stating that payment of the judgment debt was required. 12 On 12 May 1997 the bankrupt effected a transfer of his quarter interest in the property to the three other registered proprietors, his parents and Vincenzo. The transfer of land was completed and lodged by the bankrupt. The consideration for the transfer was stated to be "for love and affection". A retrospective valuation of the property made in August 2000 valued it at $125,000 as at 12 May 1997. 13 In relation to the transfer by the bankrupt, Mrs Zanella gave the following evidence: "… the situation regarding the property was discussed by my husband, myself, Vincenzo and Guiseppe in mid-1995 and it was agreed that as Guiseppe had not made any payments toward the property and that he and his wife and children all lived in the property, he should transfer his registered interest in the property to my husband, Vincenzo and myself." 14 On 23 July 1997 the bankrupt and his wife were served with a copy of a Bankruptcy Notice based on the Magistrate's order. The date of commencement of bankruptcy was 13 August 1997. On 17 February 1998 a sequestration order was made against the estate of the bankrupt and his wife. 15 During 1997 the bankrupt separated from his wife and left the home. His wife continued to reside there with their four children.

The applicant's submissions 16 The transfer by the bankrupt to the respondents of his quarter share in the property on 12 May 1997 took place within five years of the date of commencement of the bankruptcy. Section 120 of the Act operates to avoid the transfer if the respondents either gave no consideration or gave consideration worth less than "the market value of the property". 17 The applicant submitted that the respondents did not give market value for the bankrupt's share of the property. The market value was at least $30,000 at the time of the transfer (Ľ of $125,000 less some amount for realisation costs). The applicant relied upon s 120(5)(d) of the Act which specifically states that the transferee's love or affection for the transferor has no value as consideration. 18 The applicant submitted that even accepting that the Court can look behind the stated consideration of "love and affection" - Official Trustee in Bankruptcy v Arcadiou (1985) 8 FCR 4 - there was nothing more in the present case than an unquantified and notional value for rent free accommodation allegedly enjoyed by the bankrupt and his wife and children. The provision of that rent free accommodation could be viewed as an indulgence on the part of some or all of the respondents, with a forbearance to sue for rental which might otherwise be payable. The applicant submitted that if there had been such indulgence, it had not been the subject of any evidence as to its value. It was not possible to say that it had a value equal to or anywhere near $30,000. The onus was on the respondents to show that there was consideration given by the transferees apart from "love and affection". Even if some consideration were found to have been given, the onus rested upon the respondents to show that it had a value equal to or more than its market value. That onus too had not been discharged. 19 The applicant submitted further that in the absence of any explanation it was to be inferred from the fact that the transfer of the property took place within days of the letter of 6 May 1997 having been sent, that the bankrupt and the respondents intended the result that occurred, namely the removal of the bankrupt's quarter share in the property from the reach of his pressing creditor. The applicant submitted that the proper inference to be drawn in relation to the timing of the transfer was that it was brought about by the demands made by the creditor. 20 During the course of the hearing before me the bankrupt was cross-examined by counsel for the applicant. He was asked several questions about the phrase "for love and affection" which he used when completing the transfer of land form. He said that the term had not been suggested to him by a lawyer, and that he had simply made it up himself. When asked what he understood by the term "consideration" he replied, "Consideration, like - it's on the tip of my tongue. Sorry, I just - well, because I didn't put no money towards the house it was for, like, love and affection to the family." 21 The applicant submitted that the Court should infer that the expression "for love and affection" used in the transfer was one which was unlikely to be known to lay people, unless assisted by lawyers. To that extent, the applicant invited me to reject the evidence of the bankrupt, and to find that there had been legal input into the document. The applicant submitted that if there had been such input, the proper description of the consideration provided for the transfer should have been "being entitled in equity", to be consistent with the trust case now put forward by the respondents. If there were valuable consideration, such as the payment of the mortgage loan or the indulgence or forbearance of the respondents, then once again the wrong words had been used on the transfer. The correct words would have been "for value", that is, so many dollars in respect of the loan repayment and the value of the rent now and in the future to be provided. The applicant submitted that the very language used by the bankrupt in preparing the transfer document denied the case now sought to be made by the respondents. 22 The applicant submitted that the note written on the tissue was not a sufficient memorandum of an agreement to transfer or charge the property. The applicant further submitted that, in any event, the 1989 agreement between the bankrupt and the respondents or any of them had merged entirely in the agreement which led to the registration of all four members of the family in 1991. However, regardless of whether such a merger could be shown to have occurred, it was apparent from the respondents' affidavits that the basis for the 1997 transfer was not so much the pre-existing 1989 agreement, but a separate agreement arising out of the fact that the bankrupt had not paid any rent. 23 The affidavit sworn by the bankrupt contained the following explanation for the 1997 transfer of the property: "In May 1997, following discussions which resulted from the fact that my brother had entered into a relationship with a woman who gave birth to his child in December 1996, it was agreed between my parents, my brother and myself that as I had not contributed any funds towards the purchase and maintenance of the property and had resided in the property rent-free together with my wife and children, I would transfer my share of the property to my parents and Vincenzo and it was agreed that my wife and children and I would continue to reside in the property." 24 In response to the contention that there was an express trust whereby the bankrupt was a bare trustee of his quarter interest in the property, the applicant submitted that there was nothing in writing to support the existence of any such trust. Section 53 of the Property Law Act 1958 (Vic) and s 126 of the Instruments Act 1958 (Vic) would therefore operate strongly against the respondents' case. Further, the transfer acknowledged that there was a transfer of that quarter share not in consideration of any entitlement of the transferees in equity, but for "love and affection". 25 The common intention of the bankrupt and the respondents at the time of the acquisition of the property in 1989 was that the two brothers would be the registered proprietors, subject to the terms of the note written on the tissue. Then from 1991 onwards, that common intention altered. Thereafter it was plain that the common intention was that the two brothers and their parents would be the registered proprietors. The applicant submitted that what then occurred was, at best, an adjustment of the rights between the parties based upon the fact that the bankrupt and his family had been living rent-free in the home. The applicant submitted that these circumstances did not give rise to any express trust. 26 In so far as the respondents contended that there was a resulting trust in their favour which arose by virtue of their contribution of funds to the purchase of the property, the applicant submitted that it could not be presumed that the existence of a trust had been intended. There was no evidence to displace the presumption of advancement which would ordinarily apply in relation to a purchase made in the name of a son or daughter. (See Calverley v Green (1984) 155 CLR 242; In re Vandervell's Trusts (No 2) [1974] Ch 269; and Nelson v Nelson (1995) 84 CLR 538. The property had been registered in the bankrupt's name because it was intended that he, together with his brother, would develop it. It was clearly intended that he should enjoy a half share in the property, reducing to a quarter share when the agreement was varied in 1991. 27 Finally, it was submitted that there were no circumstances giving rise to a constructive trust. Even if there were, a claim to entitlement under a constructive trust could not now be made against the trustee in bankruptcy. The respondent referred, in that regard, to the judgment of Pincus J in Re Osborn (1989) 25 FCR 547, where his Honour said at 553: "Mr Dutney [counsel for the respondent] was unable to refer me to any authority in which a constructive trust based on imputed intention was held good against a trustee in bankruptcy. One conceptual difficulty in doing so is that it cannot be suggested that the trustee is acting unconscionably in attempting to recover property which, on the face of it, is recoverable; the argument has to be that the trustee takes subject to equities good against the bankrupt: see s 116(2)(a) of the Bankruptcy Act. That provision excludes from the divisible property: "property held by the bankrupt in trust for another person"."

The respondents' submissions 28 The respondents submitted that they had given consideration for the transfer of the bankrupt's quarter share of the property, and that the transfer was therefore not void under s 120 of the Act. The evidence before the Court, which was uncontroverted, was that the bankrupt did not pay anything towards the purchase of the property. That being so, it could not be said that the quarter share which was transferred to his parents in 1997 was transferred for no consideration. The parents had paid for the bankrupt's share of the property. Additionally, but less importantly, the promise by the respondents to allow the bankrupt and his family to continue to reside in the house, in effect rent-free in the future, as their forbearance to sue for amounts owing for past rent-free accommodation constituted consideration. 29 The respondents submitted that this consideration was properly to be characterised as "consideration for the transfer", within the meaning of s 120(1)(b) of the Act, rather than past consideration. They submitted that if one were to examine the words written on the tissue, which stated "we can take back the property", those words referred to a transfer of the property. Three witnesses, whose evidence was not challenged, said that the substance of the agreement reflected in that document was that they could "take back" the property if the mortgage loan was not paid. Plainly that expression referred to the transfer of the property to them. 30 The respondents submitted that by reason of the agreement by which they had agreed to provide funds towards the purchase price of the property, and by reason of their having repaid the mortgage debt to the Commonwealth Bank, Mr and Mrs Zanella had an equitable interest in the property enabling them to require a transfer of the bankrupt's interest to them. 31 The respondents submitted that the arrangement whereby a half share in the property had been transferred to them in 1991 did not give effect to the intention of the parties. That arrangement had only been an interim measure. The true intention of the parties was always that reflected in the 1989 agreement, namely that the parents could take back the property if the mortgage debt was not paid. At the time of the interim arrangement in 1991, the mortgage debt was still owing to the bank and there was uncertainty about what the future might hold. By the time of the transfer of the bankrupt's quarter share in 1997 there was no longer any such uncertainty, and what occurred was simply that the 1989 agreement was finally implemented. 32 The respondents submitted, in the alternative, that a resulting trust arose because of the unequal amounts which had been contributed by the registered proprietors to the purchase price. Indeed, the bankrupt had made no contribution to the purchase price at all. The respondents submitted that this fact alone sufficiently evidenced the entitlement of the bankrupt's parents to take back his quarter share of the property. However, the respondents went further and contended that what had occurred was entirely consistent with the 1989 agreement and that this agreement operated to rebut the presumption of advancement which might otherwise arise in the circumstances. 33 The respondents submitted that irrespective of whether the bankrupt had transferred his quarter share of the property in order to avoid the property falling into the hands of the trustee, consideration for the transfer had been given, and at least for the purposes of ss 120(1) and 120(4) of the Act, the bankrupt's motives were irrelevant. Attention was drawn to s 121(1) by comparison, dealing with fraudulent dispositions where the issue of motive is central to the operation of the section. 34 The respondents submitted that the words "gave no consideration for the transfer" in s 120(1)(b) and the words "consideration that the transferee gave for a transfer" in s 120(4) should not be given a restricted or narrow meaning. Those words should be interpreted to apply to any situation where consideration is given, and the transfer is then effected. A restricted interpretation and application of those words would be contrary to the purpose of the legislation. 35 The respondents submitted finally, in the alternative, that if for whatever reason the 1997 transfer of the bankrupt's quarter share were to be found to be void against the trustee, they were entitled pursuant to s 120(4) of the Act to be paid an amount equal to the value of the consideration which they gave for the transfer. They submitted that the amount to be paid pursuant to s 120(4) would be one quarter of the purchase price of the property of $168,000, which was $42,000, plus interest paid pursuant to the mortgage loan, plus the value of the free rental for the bankrupt and his family for approximately ten years. The respondents submitted that the value of the free rental would need to be quantified at a later stage.

Findings 36 In my view the applicant's submissions must be accepted. Any consideration which the respondents may have given for the transfer of the bankrupt's quarter share of the property was, in my opinion, less than "the market value of the property" for the purposes of s 120(1)(b) of the Act. 37 I cannot accept the respondents' submission that the consideration given in the form of free rent to the bankrupt and his family constitutes consideration "of market value" within the meaning of s 120(1)(b) of the Act. Even if I am wrong about this, and the rent-free accommodation were to be taken as consideration, that consideration must properly be characterised as past consideration, and cannot be characterised as consideration for the transfer, as required by s 120(1)(b) of the Act. In these circumstances, and considering that the stated consideration for the transfer was "for love and affection", I find that no consideration was given by the respondents for the bankrupt's quarter share of the property. 38 Nor do I accept the respondents' submission that a resulting trust, or any other type of trust, arose from the circumstances of the purchase of the house and subsequent events. In my view the respondents have failed to displace the presumption of advancement. I reject the evidence of the bankrupt in so far as his evidence was intended to achieve that end. He was not, in my view, a witness of any credibility. I should say that I have serious reservations about the authenticity of the 1989 agreement, though it is not necessary to come to any conclusion about that matter and the applicant did not invite me to do so. 39 The transfer of the bankrupt's interest in the property was intended to remove that interest from the reach of his creditor. I infer that the transfer, taking place as it did only six days after the date of the creditor's letter to the bankrupt, was designed to avoid the consequences which might flow from sequestration orders being made. 40 Given my finding that no consideration was given for the transfer of the bankrupt's interest in the property, it is not necessary for me to consider the respondents' submission in respect of s 120(4) of the Act. I should say however that I would not for one moment contemplate assessing compensation to them upon the basis suggested. 41 Accordingly, the application must be allowed. I will grant the declaratory relief sought and order that the respondents transfer to the applicant an equal undivided fourth share in the property. I will also order that the respondents pay the applicant's costs of and incidental to this application. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Weinberg.

Associate: Dated: 22 December 2000 Counsel for the Applicant: Mr G T Bigmore QC