Official Trustee in Bankruptcy (trustee) v Turner[1999] FCA 129

REASONS FOR JUDGMENT 1 In this case a declaration is sought that the Official Trustee in Bankruptcy ("the trustee") is entitled to become the registered proprietor of the land and improvements ("the property") contained in folio identifier 821/2475 (formerly Volume 1035 folio 178). The property is situated at and known as Lot 821 Eleventh Avenue, Austral in the State of New South Wales; it is also described as No 42 Eleventh Avenue. The trustee is the trustee of the bankrupt estate of Edwin John Turner ("the bankrupt"). Mr Turner's estate was sequestrated on 12 November 1991. 2 The bankrupt's first wife was Rose Josephine Turner ("Rose"), the second respondent; their marriage was dissolved by order of the Family Court on 13 July 1978. They were, at one stage, the joint proprietors of the property. 3 It appears from the affidavit dated 17 December 1996 of Cheryl Cullen, a clerk in the employ of the Insolvency and Trustee Service Australia, that on 23 July 1985, the Family Court ordered the bankrupt to pay Rose, by way of a property settlement, the sum of $35,952. In return, Rose was to transfer her interest in the property to the bankrupt. Ms Cullen deposed in par 10 of her affidavit that it appeared to her that the bankrupt had paid to Rose the money due to her under the property settlement; she came to that conclusion because the caveat that Rose had earlier lodged against the property was withdrawn by Rose on 12 August 1991. She also deposed that she had searched the relevant Family Court file and noted that "the matter was removed from the active pending list on 18 February 1991". Ms Cullen concluded that she believed that Rose "has no further interest in the property". In her affidavit, Ms Cullen annexed a copy of an affidavit that had been sworn and filed by the bankrupt in the Family Court. In par 5 of his affidavit, the bankrupt deposed that he had paid $35,900 to Rose on 15 November 1985 which meant that she was then owed only $52 plus interest. Rose filed a submitting appearance but has taken no other part in the proceedings. However, she wrote a letter dated 22 October 1996, in response to an inquiry from the trustee, saying that she has been "fully paid". In these circumstances I agree with Ms Cullen's conclusions and make a finding that Rose has ceased to have any beneficial interest in the property. This finding means that the bankrupt had become the sole beneficial owner of the property with effect from about November 1985. However, notwithstanding the events that have been recounted, the property remained in the joint names of the bankrupt and Rose for a further three years or so. 4 In February 1989, a transfer of the property in favour of the first respondent, Kenneth Edwin Turner ("Kenneth") was purportedly executed and registered in the Lands Titles Office. Kenneth is the son of the bankrupt and Rose. The transferors were named as the bankrupt and Rose and it appeared that their respective signatures had been placed on the memorandum of transfer. The transfer contained the following entry: "The abovenamed transferor (sic) hereby acknowledged receipt of consideration of $80,000." 5 The figures "80,000" were inserted in handwriting; the balance of the entry is part of the printed form. Three months later, on 3 May 1989, a caveat was lodged against the property by Rose who claimed that the transfer to Kenneth was fraudulent and that her signature on the transfer was a forgery. 6 Meanwhile the bankrupt had married for a second time; his second wife's name was Anne. That marriage has also ended in divorce. On 20 September 1988, the Family Court had ordered the bankrupt to pay Anne, by way of a property settlement, the sum of $29,160 plus interest at 15 per cent per annum. The order of the Family Court then went on to make provision for the sale of the property in the event of Anne not receiving the money to which she was entitled by the due date for payment. The order provided: "That if the payment of $29,160.00 . . . is not made by 31st January, 1989, … then Mrs Rose Turner and the Husband shall sign all deeds and documents and do all things to effect a sale of the former matrimonial home at 821 Eleventh Avenue, Austral in the State of New South Wales and from the funds available from the said sale, after payment of [costs commission, rates and secured debts]. . . the proceeds be allocated as follows:- (a) the amount including interest still owing to Mrs Rose Turner pursuant to the Judgment of His Honour Justice Gee in proceedings No. P. 483/77, between the Husband and Mrs Rose Turner; (b) the sum of $29,160.00 plus interest at the rate of 15% per annum, calculated from this date, 20th September, 1988; and (c) the balance to the Husband." 7 The bankrupt not having paid Anne the money to which she was entitled, on 22 February 1990 the Family Court made an order in the proceedings between the bankrupt and Anne, setting aside the purported transfer from the bankrupt and Rose in favour of Kenneth. Although a copy of that order has never been lodged in the Lands Titles Office, the order has never been set aside. A year later, on 25 February 1991, Anne lodged a caveat against the property; she claimed an estate or interest in the property based on the Family Court's order of 22 February 1990 coupled with her appointment by the Court as the sole agent for the sale of the bankrupt's interest in the property. That order concluded with the words "… and that upon the sale of such property the proceeds be distributed in accordance with the Order made herein on 20 September 1988." However, the probabilities of the case are, and I find that ultimately Anne received her entitlement under the property settlement for she withdrew her caveat on 12 July 1991. 8 On 1 October 1996 the solicitors for the trustee wrote to Anne; the letter was addressed to her at her solicitor's address as the trustee had no other address at which to write her. The solicitors for the trustee also wrote Anne's solicitors on the same date. The effect of that correspondence was as follows: · the trustee was proceeding on the assumption that the bankrupt had paid out Anne her entitlement under her property settlement; · the trustee was intending to rely on the order of the Family Court of 22 February 1990 setting aside the transfer of the property to Kenneth; · the trustee was intending to make an application to this Court "for a declaration that the property in fact vested in the Trustee by operation of the Family Court order of 22 February 1990". 9 There is no evidence of the trustee having received any reply from Anne or from her solicitors. 10 On 11 April 1997, Kenneth applied to the Family Court for leave to intervene in the proceedings between the bankrupt and his second wife Anne; in that application he sought an order that the Order of the Family Court of 22 February 1990 (ie the order setting aside the transfer of the property to him) be set aside; the trustee also applied for and was granted leave to intervene in that application. On 1 October 1997 a Registrar of the Family Court issued directions that Kenneth file an amended application on or before 22 October 1997; that was not done and a required hearing fee was not paid. As a result the Family Court Registrar made an order removing Kenneth's application from the pending cases list. In his affidavit that was sworn on 23 December 1997 in these proceedings, Kenneth has said "On advice I do not propose to press the Family Court Application". No further explanation was given for this decision. 11 Since acquiring the property, Kenneth has spent substantial sums of money on improvements. The most expensive item has been the acquisition and installation of an additional transportable home. In all, he has listed details of expenditure totalling almost $75,000. Kenneth tendered in these proceedings the affidavit and report of Salvatore Calandra, a valuer and a member of the Australian Institute of Valuers and Land Economists. He valued the property in 1998 at $330,000, expressing the opinion that without the improvements that Kenneth had added to the property, it would be worth only $280,000. Mr Calandra also expressed the opinion that in February 1989 when the property was transferred to Kenneth for a consideration of $80,000, it would have been then worth about $240,000. The imprint of the ad valorem stamp duty on the memorandum of transfer shows that stamp duty was assessed on a value of $200,000 for the property - not $80,000 12 Mr Turner's bankruptcy commenced on 24 June 1991, being the date of the commission by him of the relevant act of bankruptcy. I do not understand this to be an issue in dispute. Hence, if the bankrupt then retained any interest in the property, the trustee's title to that property related back to that date: subs 115(1) of the Bankruptcy Act 1966 (Cth) ("the Act"). Section 58 of the Act operates to vest in the trustee the property of a bankrupt, including any after-acquired property. The word "Property" is defined quite widely in s 5; it means: "real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property". 13 On 22 February 1990, a date preceding the date of the commencement of the bankruptcy and the date of the making of the sequestration order, the Family Court had ordered that the transfer in favour of Kenneth be set aside. The critical question that must therefore be determined is the effect at law of this order. Does it mean that the bankrupt became the sole beneficial owner of the property? And if it does, is his beneficial interest subject to any, and if so what, charge or equity in favour of Kenneth? 14 The expression "the property of the bankrupt" is defined in subs 5(1) of the Act to include the property divisible among the bankrupt's creditors and any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt. Section 116 of the Act is entitled "Property Divisible Among Creditors"; subs (1) of that section provides that subject to the Act: "(a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; (b) the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge; (c) … (d) … is property divisible amongst the creditors of the bankrupt." 15 The title that the trustee enjoys is only as good as that which the bankrupt would have enjoyed if his or her estate had not be sequestrated. In Re Clark; Ex parte Beardmore [1894] 2QB 393 Davey LJ said at 410: "The broad and general principle is, that the trustee in a bankruptcy takes only the property of the bankrupt, and takes it subject to all the liabilities and equities which affect it in the bankrupt's hands …" 16 In Corke v Corke (1994) 48 FCR 359 Lockhart J (with whom Black CJ and Beazley J agree) referred to this passage with approval, having earlier said: "It must be remembered that the trustee's title to the bankrupt's property is no higher or better than the title of the bankrupt himself. . . . The trustee in bankruptcy is generally bound by the equities which affect the bankrupt; so that if a third party has an equitable interest in property, the law protects that property and the property passes to the Official Trustee, but it is "clogged with all the equitable conditions which attach to it": Whyte v Williams (1903) 29 VLR 69 per Madden CJ at 81. See generally the discussion on this matter in Sonenco (supra) per Beaumont J at 111-113 and Ryan and Gummow JJ at 120-123." 17 If therefore, the order of the Family Court setting aside the transfer in favour of Kenneth is to be given full force and effect, pars (a) and (b) of subs 116(1) of the Act would mean that the property, now beneficially owned wholly by the bankrupt, would become property divisible among his creditors. 18 The evidence with respect to the consideration passing from Kenneth in return for the transfer of the property into his name is sparse. I accept that at the time of the execution of the transfer, he signed a mortgage in favour of the State Bank of New South Wales. That mortgage secured the property for unspecified advances. A letter was sent by the bank in February 1989 to Kenneth (the exact date is obscured); it identified that the bank had advanced him $68,000 on the security of the property and then listed the manner in which that amount had been disbursed. The following extract from the letter is significant: "In accordance with your instructions, Bank Cheques were issued to the following representing proceeds (sic) the advance to enable the above purchase:- · Bank Cheque in favour of Anthony Turner $30,738-46 · Bank Cheque in favour of Office of State Revenue 5,490-00 · Bank Cheque in favour of K.J. Turner 11,245-00 · Bank Cheque in favour of Kencalo & Rimes, Sol. 1,265-00 · Bank Cheque in favour of Commonwealth Bank of Aust. 7,903-71 · Bank Cheque in favour of Avco 11,357-83 $68,000-00" 19 Anthony Turner, who received $30,738.46, is another son of the bankrupt and is Kenneth's brother. There is no evidence before the Court explaining why this amount of money was paid to Anthony. The payment of $5,490 to the Office of State Revenue was for the Stamp Duty that was payable on the transfer. Traditionally, this is payable by the purchaser. There is no evidence explaining why, in this case, it was effectively paid by the vendor. 20 The next payment that is recorded in the bank's letter is a payment of $11,245 to "KJ Turner". The applicant submits that this was a payment to Kenneth, notwithstanding that his second Christian name is "Edwin". There is no other evidence on this subject. 21 Kencalco & Rimes were the solicitors who acted for the parties in relation to the transfer. Whether the amount of $1,265 that was paid to them was the exclusive responsibility of the vendor or whether it was the combined costs of the vendor and the purchaser is not clear. 22 The payment of $7,903.71 to the Commonwealth Bank of Australia is acknowledged by the trustee as being a payment for the benefit of the bankrupt to discharge the mortgage that was formerly registered over the property. The last payment of $11,357.83 to AVCO is also acknowledged by the trustee as a payment that was made for the benefit of the bankrupt. It was to discharge a debt to a finance company that was jointly owed by the bankrupt and his second wife, Anne. There is no evidence about the identity of the recipient of the balance of the purchase price $12,000. In his affidavit of 23 December 1997 Kenneth said: "I paid the Bankrupt the sum of $80,000.00 for the property. I obtained these funds by way of a loan of $68,000.00 from the State Bank. I granted a mortgage over the property to the State Bank to secure repayment of this loan. Annexed hereto and marked "C" is a true copy of that Mortgage. The balance of $12,000.00 came from the sale of the property that I owned at Lot 7, Knowles Road, Aylmerton. Annexed hereto and marked "D" is a true copy of the Transfer relating to the sale of that property." 23 The first sentence in this quoted passage is not literally accurate. For example, the payment of $30,738.46 was made to Anthony, not to the bankrupt. Why? If it was to satisfy a debt or an obligation, then perhaps one could loosely say that this sum was paid to the bankrupt but there was an obligation, on Kenneth to advance more information than is presently before the Court. It is possible to give Kenneth the benefit of the doubt with respect to the payments for solicitor's costs and stamp duty and it is clear that the payments to the Commonwealth Bank and Avco were for the bankrupt's benefit. But these payments total only $26,006.54. 24 There is no evidence that would justify a finding that the balance of $80,000 was paid to or for the benefit of the bankrupt. And, of course, the problem is compounded by the valuer's opinion that the property at the time of the transfer was worth about $240,000. The factors lead to the obvious conclusion that the transfer to Kenneth was not an "arms-length" transaction. But, there being no allegation that the transfer was executed for the purpose of defeating or delaying creditors, it is not a matter that need play any part in the outcome of these proceedings. Its inclusion is (subject to one remaining factor that is discussed later) only for the purposes of completing the narrative of a complicated story. 25 It was agreed by the parties that the order of the Family Court that was made on 22 February 1990 was made by a Registrar of that Court acting under the powers contained in s 85 of the Family Law Act 1975 (Cth). It was also agreed that either no reasons were given by the Registrar with respect to his or her decision to make the order or, if there were any reasons given, they can not now be found. Searches have been made at the Family Court but without success. Section 85 of the Family Law Act provides as follows: "(1) In proceedings under this Act, the court may set aside or restrain the making of an instrument or disposition by or on behalf of, or by direction or in the interest of, a party, which is made or proposed to be made to defeat an existing or anticipated order in those proceedings or which, irrespective of intention, is likely to defeat any such order. (2) The court may order that any money or real or personal property dealt with by any such instrument or disposition may be taken in execution or charged with the payment of such sums for costs or maintenance as the court directs, or that the proceeds of a sale shall be paid into court to abide its order. (3) The court shall have regard to the interests of, and shall make any order proper for the protection of a bona fide purchaser or other person interested. (4) A party or a person acting in collusion with a party may be ordered to pay the costs of any other party or a bona fide purchaser or other person interested of an incidental to any such instrument or disposition and the setting aside or restraining of the instrument or disposition. (5) In this section, disposition includes a sale and a gift." 26 Although there is no evidence of the date when the divorce proceedings involving the bankrupt and Anne commenced, there is evidence that on 20 September 1988, that is, before the date of the transfer of the property from the bankrupt and Rose to Kenneth, the Family Court had ordered that the bankrupt pay certain moneys to Anne. One is left therefore to assume that the Family Court made its order of 22 February 1990 setting aside the instrument because it was satisfied that the disposition had been made by the bankrupt with the intention of defeating the earlier order; this assumption leaves unanswered how the Family Court dealt with Rose's alleged participation in the execution of the instrument, bearing in mind that she was not a party to those divorce proceedings. 27 Mr Tregenza, counsel for Kenneth, attacked the power of the Family Court to make the order of 22 February 1990 setting aside the transfer. Furthermore, he submitted that it was within the power of this Court to declare that the order of the Family Court was beyond its powers. In support of this submission, Mr Tregenza advanced the following arguments: 1. the order of 22 February 1990 did no more than affect an instrument of transfer: it merely set aside the transfer but failed to order a reconveyance of the property; it did not affect the status or the title of the property; the instrument of transfer having been registered in the Lands Titles Office within a short time of its execution and long before the order of 22 February 1990, the transfer had become, what counsel described as, "a spent force". As a result, Kenneth's interest in the property could only be affected by the order of a Court of competent jurisdiction which order effectuated a divestment of or charge upon Kenneth's estate and interest in the land; 2. two of the three parties who were affected by the order, Rose and Kenneth, were not parties to the proceedings as the order had been made in the dissolution proceedings relating to the bankrupt's marriage to Anne; the Family Court did not, therefore, have authority to set aside Rose's execution of the transfer - nor did it have power to interfere with Kenneth's enjoyment of the property; 3. in order to bind Kenneth, the order of 22 February 1990 had to be an order "in rem", whereas the subject order only bound the parties of the proceedings, (ie, the bankrupt and Anne) and was a judgment "in personam"; 4. the order of the Family Court dated 9 July 1991 has, by implication, discharged the earlier order of 22 February 1990. The order of 9 July, so far as is relevant, provided that the bankrupt pay to Anne all moneys (including her costs) that were due to her pursuant to earlier orders of the Family Court by 4.00 pm on 30 July 1991; it also provided that upon payment of all moneys due by the bankrupt to Anne, Anne was to deliver up to the bankrupt withdrawals in registrable form of the caveats that she had lodged over the property.