Official Trustee v Pastro

REASONS FOR JUDGMENT 1 The resolution of this application involves an examination of the relationships and dealings of members of the Pastro family and of the credibility of the evidence given by one family member, the first respondent, Emilio Pastro ("Emilio"). The application itself is brought by the Official Trustee in Bankruptcy ("the Official Trustee") as trustee of the estate of Rodolfo Saverio Pastro ("Rodolfo") under s 120 and s 121 of the Bankruptcy Act 1966 (Cth) ("the Act") to have declared void as against her two memoranda of mortgage granted by Rodolfo to, respectively, his brother Emilio and to the second respondent, his sister Maria Pastro ("Maria"). 2 A sequestration order was made by this Court against the estate of Rodolfo on 12 February 1996 based on an act of bankruptcy committed by Rodolfo on 11 August 1995. I note at the outset that given the date the bankruptcy commenced, s 120 and s 121 apply to this matter in the form in which they existed prior to the changes effected by the Bankruptcy Legislation Amendment Act 1996 (Cth). The Statutory Provisions 3 Section 120, insofar as presently relevant, provided: "120(1) A settlement of property, whether made before or after the commencement of this Act, not being - (a) a settlement made before and in consideration of marriage, or 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." Section 121 provided: "121(1) Subject to this section, a disposition of property, whether made before or after the commencement of this Act, 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. 121(2) Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has, in good faith and for valuable consideration, purchased or acquired the property the subject of the disposition or any interest in that property. 121(3) In this section, "disposition of property" includes a mortgage of property or a charge on or in respect of property." The Factual Setting (a) The Property Dealings in Question 4 (i) At all material times until the Official Trustee applied to become registered proprietor under s 58(2) of the Act, Rodolfo was the registered proprietor of land situated at 45 Hancock Road, Campbelltown in the State of South Australia and at 10 Grandview Grove, Magill in the same State. 5 (ii) Though there is no evidence of the value of these properties at the time of the dealings in question, valuations prepared for Insolvency & Trustee Service Australia in August 1996 gave values of, respectively, $110,000.00 and $85,000.00 for the properties. 6 (iii) On 30 August 1994, Rodolfo as "Borrower" entered into a written agreement with Emilio as "Lender" that recited (inter alia) that: "A. The Lender provided certain financial accommodation to the Borrower on or about the 5th day of March 1990 ("the Accommodation"). B. The Lender's contingent liability on the Accommodation is $70,753.00. C. The Lender advanced the sum of $20,000.00 ("the Advance") to the Borrower on 25th [sic] day of July 1993. D. The Lender advanced a further sum of $32,115.31 ("the Second Advance") to the Borrower on the 1st day of August 1994." 7 (iv) The agreement, entered into "in consideration of the sum of $10.00 payable upon demand by the Lender to the Borrower and of the Lender forbearing to demand or sue the Borrower", stipulated (inter alia) that: (a) Rodolfo would pay interest on the unpaid portions of the sums recited above at 21% per annum, or at the lesser rate of 19% if payment of moneys due was made on or before the due date; and (b) the sums recited were to be secured by a mortgage granted by Rodolfo over the Campbelltown and Magill properties. 8 (v) Again on 30 August 1994, Rodolfo as "Borrower" entered into a written agreement with Maria as "Lender" that recited (inter alia): "A. The Lender advanced the sum of SIX THOUSAND DOLLARS ($6,000)("the First Sum") to the Borrower on the 13th day of February 1990. B. The Lender advanced the sum of SIX THOUSAND THREE HUNDRED DOLLARS ($6,300.00)("the Second Sum") to the Borrower on the 20th day of June 1991. C. The Lender advanced the sum of TWO THOUSAND TWO HUNDRED AND TWENTY THREE DOLLARS AND TWENTY TWO CENTS ($2,223.22)("the Third Sum") to the Borrower on the 14th day of February 1992. D. The Lender advanced the sum of TWO THOUSAND DOLLARS ($2,000.00)("the Fourth Sum") to the Borrower on the 10th day of April 1992. E. The Lender advanced the sum of FIVE THOUSAND DOLLARS ($5,000.00)("the Fifth Sum") to the Borrower on the 3rd day of July 1992. F. The Lender advanced the sum of SEVEN THOUSAND DOLLARS ($7,000.00)("the Sixth Sum") to the Borrower on the 5th day of March 1993. G. The Lender advanced the sum of THREE THOUSAND AND FIVE HUNDRED DOLLARS ($3,500.00)("the Seventh Sum") to the Borrower on the 7th day of May 1993. H. The First Sum, the Second Sum, the Third Sum, the Fourth Sum, the Fifth Sum, the Sixth Sum and the Seventh Sum are due and payable by the Borrower to the Lender." 9 (vi) For a like consideration to that given in the agreement with Emilio, the agreement required both the payment of interest on the unpaid portions sums recited above (though at lesser rates, ie 14% and 12%), and the grant of a mortgage to secure those sums over the Campbelltown and Magill properties. 10 (vii) The two mortgages in question were executed on 30 August 1994 and were later registered. They are the mortgages the subject of these proceedings. (b) The Restaurant Business and the Insurance Litigation 11 (i) In mid-1985 Rodolfo, in partnership with another brother, Luciano and Luciano's wife, Mara, purchased the leasehold business of a restaurant in Adelaide. Rodolfo contributed $50,000.00 to the working capital as did Luciano and Mara jointly. Additionally $90,000.00 was borrowed from the ANZ Bank. 12 (ii) The restaurant business did not flourish and by 1989 was running at a loss. It was destroyed by a fire in that year. In later proceedings in the District Court of South Australia, brought by Rodolfo and his co-partners against their insurer to recover loss and damage under their policy, the trial judge found that the fire was deliberately lit by or under the direction of one or more of the plaintiffs. Judgement dismissing the proceeding was delivered on 19 August 1993. In relation to costs, the trial judge on 3 September 1993 ordered that the plaintiffs pay the defendant its costs of the action. This was later varied to include the costs incurred by the defendant in third party proceedings it had brought. 13 (iii) The agreements and mortgages executed by Rodolfo and, respectively, Emilio and Maria, were made after the judgment dismissing the insurance action but before the actual quantification of the cost liability was finally settled (see below). 14 (iv) The above trial ran for 20 days. Before the hearing had finished Rodolfo's solicitors wrote to him on 23 July 1993 requesting a further "injection" of $20,000.00 towards their costs. The same letter, in proffering advice on the likely outcome of the action, commented that: "In our view, if the matter proceeds to the end, it is more likely than not that the Judge will find against you. If this occurs, you will not only have expended even more money on your own legal fees than you have spent and plan to spend pursuant to arrangements already in place, but you will also be liable to pay the costs of the defendant and the third party. In our opinion, these costs will be enormous. They would already be well over $100,000.00 at present, and in another 3 weeks or so, could be double this amount." 15 (v) On 28 July 1993 Emilio paid $20,000.00 to Rodolfo's solicitors to cover the sum sought in relation to costs. 16 (vi) On 30 November 1994 and on 13 June 1995 separate Consent Allocatur were sealed in the District Court in the insurance action under which the costs payable by the plaintiffs to the defendant were fixed respectively at $27,000.00 and $153,000.00. The latter sum constituted the debt in respect of which Rodolfo became bankrupt. (c) Financial Dealings between Rodolfo and Emilio and Maria 17 (i) Maria made the advances to Rodolfo that are recited in the agreement of 30 August 1994. Her evidence at the examination under s 81 of the Act in relation to them was that: (a) whenever he needed money he asked for it and she would give it to him; (b) he said he would repay it when he could; (c) she did not demand repayment at any time or threaten to sue him for it; and (d) he told her in 1994 that he would not be able to repay her. 18 (ii) On 8 January 1990 the ANZ Bank wrote to Rodolfo indicating that the restaurant partnership's indebtedness to the Bank was $182,771.22 and pressed for arrangements to repay the total indebtedness. In early March 1990, Emilio organised a loan for Rodolfo in the sum of A$110,000.00 from a Swiss company, Ebbtide AG. Over $100,000.00 of the loan moneys were paid to the ANZ Bank almost all of which was used to reduce the partnership's debt to the Bank. 19 (iii) Rodolfo's loan contract with Ebbtide AG also bore Emilio's signature. It is Emilio's evidence that, though the loan agreement itself was silent on the matter, he was guarantor of the loan (it being arranged and signed by him) and that Ebbtide so regarded him. A letter of Ebbtide's of 22 August 1996 indicated that such was Ebbtide's view. It also indicated that repayments were made of interest and capital until 21 June 1994 and that thereafter until the date of the letter the outstanding loan amount was A$70,753.32. That amount represents the "contingent liability" referred to in Recital B of the Rodolfo-Emilio agreement of 30 August 1994. 20 (iv) As indicated previously, on 28 July 1993 Emilio paid $20,000.00 to Rodolfo's solicitors in response to their request to Rodolfo to pay that sum in advance of costs in the insurance action. This was the sum identified in Recital C of the 30 August agreement. 21 (v) During at least July of 1993 Emilio held discussions with Westpac Banking Corporation for the loan of $150,000.00. On 27 July that Bank offered him that sum the purposes of the loan being: (a) to purchase a property for (circa) $120,000 owned by Luciano - it was being sold by the ANZ Bank as mortgagee under its power of sale; and (b) to effect a loan of $30,000.00 to Rodolfo - this being to discharge mortgages held by the ANZ Bank over the Campbelltown and Magill properties to secure a debt of $32,049.31. 22 (vi) Emilio took the loan from Westpac and the purposes referred to were carried into effect. Insofar as Rodolfo was concerned the loan to him was, in the event, for $32,115.31, this being the sum referred to in Recital D of the 30 August agreement with Emilio. The Parties' Evidence 23 The essence of the present application is the proper character, for s 120 and s 121 purposes, to be attributed to the granting of the mortgages by Rodolfo to Emilio and Maria respectively. An agreed bundle of documents was put into evidence. The preceding factual narrative is drawn from it. I would note that it included the transcripts of evidence given by Rodolfo, Emilio and Maria at their s 81 examinations. The latter two of these transcripts - though not Rodolfo's - were used in evidence under s 81(17) of the Act: see s 255(2) of the Act; Colonial Mutual Life Assurance Society Ltd v Donnelly (1998) 154 ALR 417; Re Schofield; Ex parte Rangott v P & B Barron Pty Ltd (1997) 72 FCR 280. Rodolfo's transcript was admitted without objection as part of the agreed bundle: see Evidence Act 1995 (Cth), s 190. 24 Affidavits were tendered by the applicant, and by Rodolfo, Emilio and Maria. I allowed the respondents to reopen their case to tender an affidavit from their solicitor, Mr Meyer. Oral evidence was given by Emilio, Maria and Mr Meyer. As I noted previously the application turns in large measure on the finding that I make as to Emilio's credibility. The Pastros' Evidence 25 I should note at the outset that the Pastros are from Italy. All are now well into middle age. Emilio and Maria gave their evidence through an interpreter. They live together. (i) Rodolfo 26 It is Rodolfo's affidavit evidence that he did not mention the insurance litigation at all to Maria and that, while Emilio knew of it, he did not discuss the case with him much as he (Emilio) was away in Victor Harbour at the time. 27 In relation to the 30 August agreements with Emilio and Maria, he claims that: "I wanted to do something to help Emilio and Maria get repaid the money owing to them and wanted my liabilities to Emilio and Maria recorded, since they had lent me a lot of money, and I mentioned this to Emilio. Emilio made an appointment for us with his lawyers at Lynch & Meyer for this purpose. The lawyers advised Emilio that he should take mortgages over my properties at Magill and Campbelltown as security for my liability to him. I then discussed this with Emilio and I said I wanted to take the lawyers' advice and give him and Maria mortgages over my properties. We therefore asked the lawyers to prepare the agreements referred to in paragraph 10 above. Emilio's lawyers at Lynch & Meyer suggested that I seek advice from a solicitor in relation to the agreements before I signed them and they referred me to the legal firm of Belperio Clark. A lawyer from Belperio Clark gave me advice in relation to the agreements and I then signed them." 28 In his s 81 examination Rodolfo admitted that in 1994 he knew he would not be able to pay all his debts. That state of affairs he related to the mortgage transactions. This is exemplified in the following two extracts from the s 81 transcript. 1. "MR RIGGALL: So you certainly knew in August of 1994 that you would have to pay a lot of money out. THE INTERPRETER: Yes. MR RIGGALL: And you said to Maria and Emilio, "Let's arrange that I'll leave the houses to you." The interpreter: Yes, because - - - MR RIGGALL: Because? THE INTERPRETER: Yes, because I could see that I was not able to have anything else any more. MR RIGGALL: Who raised that suggestion? THE INTERPRETER: I because I didn't want to cheat my brother with everything that they have done for me. MR RIGGALL: Yes. And the family came before the outside creditors, or course. THE INTERPRETER: Yes, but they gave me the money. MR RIGGALL: No. This question is kind of important to me. It was important for you to make sure that your family was paid ahead of the other creditors. THE INTERPRETER: They gave the money to me. MR RIGGALL: And because they had given the money to you it was very important to you to make sure that they got the money back. THE INTERPRETER: I didn't want to cheat my brother and my sister. They gave the money to me. MR RIGGALL: You told Maria and Emilio that you were not able to work any more in 1994. THE INTERPRETER: Well, I was in the house, they could see that. MR RIGGALL: And they knew of the problems that you had as a result of losing the court case. THE INTERPRETER: I think that they knew. MR RIGGALL: Well, they must have known, surely. THE INTERPRETER: Well, that's what I'm saying, of course they must have known. (Transcript, 15-16) … 2. THE INTERPRETER: I said: now I'm ruined, I don't have anything any more. All the work that I have done, it's all disappeared. MR RIGGALL: Did you tell them why you were ruined? THE INTERPRETER: Because of the way things went. MR RIGGALL: And you told them that you would lose your houses? THE INTERPRETER: Yes. MR RIGGALL: And rather than lose the houses outside the family you wanted to leave them to Emilio and Maria? THE INTERPRETER: Yes, because they had given me the money. MR RIGGALL: You left them in no doubt that unless they could get the houses, they would not get their money back. THE INTERPRETER: That's what I said, that they had the houses and they could cover themselves with that for what they were owed. MR RIGGALL: Unless they got the houses they would miss out entirely. THE INTERPRETER: I haven't understood that. MR RIGGALL: If you told them that if they did not grab the houses they would miss out. THE INTERPRETER: Of course if I didn't have any money. What I could give them." (Transcript, 19) 29 In relation to the legal costs of the insurance claim his affidavit evidence is that (a) he remembered being asked for a $20,000.00 contribution to costs, but did not remember receiving or reading the 23 July 1993 letter from his solicitors; and (b) after losing the insurance claim he thought he would have to pay his solicitors and barristers more money but he did not know how much nor that he had to pay anyone else money. 30 The only additional matter to which I should refer is that in 1995 Rodolfo disposed of a property in Sydney. The precise use he then made of about $180,000 of proceeds is unclear from the s 81 examination evidence though it appears to have been used to pay creditors. (ii) Maria 31 Maria's affidavit evidence is that she did not discuss financial matters with Rodolfo. Her version of her execution of the 30 August agreement is that: "Some time after the fire, Emilio asked me to sign a document which he said would help me get my money back from Rodolfo (the "document"). I did not really know what the document said, but I signed it since Emilio had told me that it would help me get my money back through Rodolfo's properties. For me, the money I had loaned Rodolfo was a lot of money, and some time had passed since I loaned the money and I was concerned about this." 32 In her oral evidence she indicated that Emilio explained the document to her before she signed it. She had left it to him to have the agreement prepared and the mortgage executed. In her s 81 examination she accepted that Rodolfo told her in 1994 that he would not be able to repay her. (iii) Emilio 33 Emilio's affidavit evidence concerning the 30 August agreement was that: "Before we entered into the mortgage agreement Rodolfo was worried about all of the money he owed to me and Maria and I could tell that he felt bad about the situation. He said that he wanted to do something to help me and Maria get repaid, and have a document drawn up to record the money he owed to Maria and I. I had meetings with my lawyer at Lynch & Meyer from time to time in relation to my building activities and at one of such meetings I told my lawyer of the money I was owed by Rodolfo and that Rodolfo and I wished to meet with him to discuss having a document to be drawn up to record the money Rodolfo owed to me and Maria. A short time after this Rodolfo and I met with my lawyer, and at this meeting I asked what was the best way to protect myself and my sister in respect of the moneys we had loaned to Rodolfo. The lawyer suggested that, in addition to having documents drawn up recording the amounts Rodolfo owed, Maria and I take mortgages over Rodolfo's properties at Campbelltown, where we lived, and Magill to secure the repayment of the moneys by Rodolfo. After we had met with the lawyer, Rodolfo and I discussed the matter and he said that he wanted to follow the lawyer's advice and give mortgages over his properties to Maria and I. We therefore asked the lawyers to prepare the mortgage agreements and Rodolfo, Maria and I later signed these. The mortgages were then registered on the titles of the Campbelltown and Magill properties. At the time I signed the mortgage agreement, apart from Rodolfo's liability to Maria and I (including in respect of the Ebbtide loan), I was not aware of any other significant debts owed by Rodolfo. In particular, at this time I did not know that had [sic] any outstanding liabilities in connection with the court case referred to in paragraph 3 above. I was concerned about my liability as guarantor under the Ebbtide loan and I also wanted to protect myself in case Rodolfo got himself into financial trouble again in the future. I have since found out, as a result of Rodolfo going bankrupt and me having to give evidence in court in connection with his bankruptcy, that, on account of him losing the court case, Rodolfo had liabilities in connection with the court case for large sums of money." 34 In his s 81 examination he indicated that in 1994 he "saw that everybody wanted money" (Transcript, 119). He drew a link between the loan transaction resulting in the "clearing of title" on the two properties on 1 August 1994 and the 30 August agreement: "THE INTERPRETER: When I bought the house belonging to Luciano - when I bought the other house there as I said I also cleared the title of my brother, Rodolfo, but I didn't know that there was a mortgage on that title as well of $32,000 and from then when I paid for that he came and asked me for more money and that's when I started doing the other procedures and the money that we wanted was too much and I wasn't able to give it to him." (Transcript, 128) He enlarged upon this as follows: "MR RIGGALL: Why did you pay out the mortgage on Rodolfo's house at the same time? THE INTERPRETER: Because I tried to clear everything and I thought there was nothing else to pay. MR RIGGALL: Had you discussed with Rodolfo at that stage that he would be giving you a mortgage over his houses at Campbelltown and Magill? THE INTERPRETER: As I said before this was stated when I saw that I cleared everything here and then there were bills coming for which he asked me for money and I wasn't able to give it to him because the sum was pretty high. It wasn't just 500 or $200. MR RIGGALL: Was the idea that you would clear the mortgages over Campbelltown and Magill and then put your own mortgage on the property? THE INTERPRETER: I actually cleared everything and then I saw that they were coming to us for more money I said, "No, that's enough." MR RIGGALL: Did you have in mind putting your own mortgage on the Campbelltown and Magill properties at the time you cleared the mortgages on those properties? THE INTERPRETER: Yes, then I decided to do that. MR RIGGALL: You had it in mind at the same time? THE INTERPRETER: Yes, when I saw that he wanted more money I said, "No, I'm not giving you any more." "(Transcript, 129) 35 He returned to the circumstances of the 30 August transaction on several occasions later in his evidence. The following is representative: "THE INTERPRETER: Rodolfo decided to do something and I took him to my solicitor. MR RIGGALL: So he told you "I want to do something" and you took him to see Lynch and Meyer? THE INTERPRETER: We decided together to do something. MR RIGGALL: That was after Rodolfo said, "I want to give you the houses?" THE INTERPRETER: This was before when he saw that he was no longer able to pay. MR RIGGALL: Yes. It was Rodolfo who came to that realisation himself? THE INTERPRETER: I did as well because I could see that he was no longer able to pay and so we decided to do something. MR RIGGALL: I asked you before lunch why it was that you saw that he was no longer able to pay and you said he could not pay the interest to the Swiss bank, did you not? THE INTERPRETER: He was not able to pay there and he was unable to pay us because he didn't have enough money. He was still asking for money. We helped him a little bit." (Transcript, 135; see also 137) 36 In his affidavit and again in cross-examination he sought to resile from this evidence to the extent that it suggested that it was his knowledge of further debts that led to the 30 August mortgage arrangement. He claimed that he only became aware of these new debts in 1995 and 1996. He annexed to his affidavit a letter from Rodolfo's accountants of 26 August 1994 that anticipated a tax assessment for the year ending 30 June 1994 (including provisional tax) of almost $6,000. In cross-examination he accepted he saw this letter within a couple of days of its receipt. I note below that this letter post-dates the instructions given to Emilio's solicitors to prepare the mortgages but pre-dates their execution. 37 Emilio further stated in cross-examination that when he purchased Luciano's house and cleared the title on Rodolfo's properties, he had paid all the expenses in respect of the "court case". It is the case, though, that all of the moneys he so paid went to the ANZ Bank in discharge of partnership liabilities to the Bank. 38 The recurrent theme in Emilio's evidence in cross-examination was that he did not know anything about Rodolfo's affairs; he was not interested in them; and he did not ask anything of Rodolfo. It nonetheless is clear for example that he had quite some appreciation of the business arrangement between Rodolfo, Luciano and Mara and of their respective contributions to, and liabilities on account of, the restaurant partnership. Such emerged in part in response to questions I asked relating to the Westpac Bank loan. 39 He denied in cross-examination that it was knowledge of Rodolfo's indebtedness acquired between the clearing of the title to the two properties on 1 August 1994 and the execution of the 30 August agreement that led to the latter. He equally denied that he asked anyone else to make inquiries during that time as to Rodolfo's debts. 40 The final pieces of evidence given by the Pastros to which I need refer were (a) the description of Emilio accepted by Maria that he was "financially astute" (Transcript, 112); and (b) that, Rodolfo, Maria and Emilio all lived, and still live, at the Campbelltown property, save that for some periods Emilio lived out of Adelaide. The Respondents' Case Reopened 41 After the close of evidence the respondents sought leave to reopen their case to adduce the evidence of David Meyer a partner in their solicitors' firm. I gave that leave. Mr Meyer's evidence was that on 16 August 1994 he received instructions from Emilio to prepare mortgages over the two properties. Several days earlier he had had a meeting with Emilio in relation to another matter - it would appear that there were at this time extensive contacts between Emilio and Mr Meyer - and that as a result of advice he then gave to Emilio he received the instructions to prepare the mortgage. Mr Meyer further deposed that prior to the execution of the security documents Emilio did not inform him of Rodolfo's financial affairs save in relation to Rodolfo's liabilities to Maria, Emilio and Ebbtide. Neither was he instructed to make inquiries in relation to Rodolfo's financial affairs. 42 Mr Meyer was cross-examined. He produced his file notes for the relevant period. He accepted he was not a good file keeper. His notes were brief, bordering on occasion on the delphic and in consequence inviting speculation, some favourable to Emilio, some not so. The notes do confirm that instructions were given on 16 August to prepare the mortgage. I would have to say generally though that I have not found the file notes to be particularly helpful or, for reasons I later give, a reliable indicator of Emilio's actual understanding and purpose at the time. 43 Mr Meyer stated he had a frank relationship with Emilio. His recollection of conversations and events was, understandably, slight. I do not doubt that he advised Emilio to have the mortgages prepared: he considered Emilio to be a "dope" for making unsecured loans as he had. The Browne v Dunn Objection 44 The Official Trustee did not require Rodolfo for cross-examination. Neither did her counsel put to Emilio or Maria in cross-examination the substance of their respective s 81 examinations which the Official Trustee seeks to rely upon to impugn their evidence before me. The respondents in consequence have sought to invoke the rule in Browne v Dunn (1893) 6 R 67 for the purpose of submitting that in the circumstances no probative weight should be given the s 81 examination evidence. 45 The rule in Browne v Dunn, as is well known, is a rule of fairness. For present purposes it is only necessary to refer to the observations made on it by the Full Court of this Court in Flower & Hart (a firm) v White Industries (Qld) Pty Ltd (1999) 163 ALR 744 at 757: "As a general rule, before an adverse finding is made against a witness in contradiction of sworn testimony given by that witness, a matter in issue, the subject of that finding, must be put to the witness in cross-examination to enable him or her to give an explanation. However, there can be no need to put such an issue to a witness who has notice that there is other material in the proceedings that will be relied upon to contradict the evidence of the witness." 46 It is clear in this case not only that the course adopted by the Official Trustee occasioned no unfairness to the respondents or to Rodolfo, but also that it falls well within the proviso referred to in the above quotation. This is a proceeding in which evidence in chief was to be by way of affidavit; the affidavit evidence filed and served in the Official Trustee's case included the s 81 examination transcripts, and it was manifest that their contents were to be central to that case; the affidavits of the three Pastros were sworn at least a month after the affidavit embodying the s 81 transcripts; the Pastros and, in the case of Emilio and Maria, their legal advisers were clearly on notice that reliance was to be placed on that evidence; and both Emilio and Rodolfo in their affidavits addressed aspects of their own s 81 examination evidence. They had every opportunity in those affidavits, as did Maria, to explain inconsistencies between their examination evidence and the facts as they were to be presented in their affidavits. As is apparent from the above factual narrative, those inconsistencies are, in places, stark. 47 In these circumstances fault cannot properly be ascribed to the Official Trustee because of a failure to cross-examine the Pastros on their transcripts: "notice [had] already clearly been given of the cross-examiner's intention to rely upon such matters": Allied Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation (1983) 44 ALR 607 at 634. Findings and Credibility 48 As will be apparent from my findings, I consider Emilio's evidence to be unreliable on matters crucial to the determination of this case. I am satisfied that he had far greater insight into the course of, and state of, Rodolfo's affairs leading up to and at the time of the 30 August agreements, than his affidavit and oral evidence sought to suggest. The conclusion that his posture of lack of knowledge of such matters was studied is all but irresistible. He clearly performed a strategic role in some number of transactions designed to protect and to accommodate his brother's interests. I refer to the Ebbtide loan, to the Westpac loan and to the costs payment of $20,000.00. I do not consider these interventions to reflect other than a continuing, if not necessarily a constant and always fully informed, involvement in Rodolfo's affairs. A theme in the evidence of the Pastros was that of "family". I am satisfied that "family" loomed large both in the course of events - the loans, the accommodation, etc - that led to the 30 August agreements and in the steps taken in August to secure the position of Emilio and Maria. It provided the explanation of their actions and objectives. 49 As to Maria, I am satisfied that, while she was kept relatively uninformed as to Rodolfo's affairs and circumstances, she was aware in 1994 of his inability to pay his debts. But as I will indicate below, her actions in any event were contrived by her brothers and she cannot escape the consequences of that. The s 120 and s 121 Issues 50 For the purposes of s 120 the live issue between the parties is whether, in entering into the 30 August agreements and the related mortgages, Emilio and Maria were "purchasers or encumbrancers in good faith". The satisfaction of the other requirements of s 120 is not in dispute. 51 For the purposes of s 121 the live issues are first, whether Rodolfo granted the mortgages with intent to defraud creditors and, secondly, whether Emilio and Maria acted in good faith in that matter. 52 In the cases both of Emilio and Rodolfo, there are clear inconsistencies not only within the evidence given at the s 81 examination but also as between that evidence and the evidence given in this proceeding. There are likewise inconsistencies as between their respective versions of events. While I partially accept their explanations of the inconsistencies between their s 81 examination evidence and that presented to me to the extent that documentary evidence appears to support the latter version, I am not satisfied that these explanations are in any event of particular moment for present purposes when considered in the light of the evidence generally. 53 My own conclusions on the evidence can be stated relatively shortly. 54 (i) The significance of family ties and purposes cannot be underestimated in evaluating the roles, actions and objectives of Rodolfo, Emilio and Maria. Rodolfo's evidence at the s 81 examination is redolent of this as also are the ongoing financial relationships of the various family members and the circumstance of joint residence at Campbelltown of Emilio, Maria and Rodolfo. 55 (ii) Prior to instructions being given to Mr Meyer to prepare the mortgages now impugned, Rodolfo and Emilio were in my view aware that at that time Rodolfo both was unable to pay his debts and was in need of significant sums of money. All three (including Maria) gave some evidence as to knowledge of Rodolfo's inability to pay his debts, though Emilio in particular sought to move the time at which he acquired his knowledge to a later period. To that extent I do not accept Emilio's evidence. In his case his awareness at the relevant time came, I am prepared to infer, from his own judgment of Rodolfo's circumstances consequent upon his borrowing $150,000.00 for Luciano and Rodolfo, but also from the communications made to him by Rodolfo concerning his affairs (see the s 81 examination evidence set out above). 56 (iii) The evidence satisfies me that not only is Emilio financially astute, but also he has some level of sophistication in his understanding of financial relationships and dealings. While I accept that the state of detailed knowledge he had of Rodolfo's circumstances may have varied from time to time, I do not accept that when he made his various strategic interventions as a financier, etc, in his brothers' affairs he did so in relative ignorance of, and with indifference to, Rodolfo's circumstances. Furthermore I do not accept Emilio's evidence that, when the Westpac loan moneys were used to buy Luciano's house and to clear Rodolfo's titles, that money would be used to cover all expenses including the costs from the insurance litigation. Emilio was aware at the time that that case had been lost. I am satisfied, despite their evasion on the matter, that in consequence of that loss, Rodolfo and Emilio then knew that Rodolfo would be exposed to a large costs liability. I am also satisfied that when the Westpac loan moneys were applied to their particular purposes, Emilio knew they were being used to pay off ANZ Bank indebtedness and not the insurance litigation costs as well. 57 (iv) I am unable to make comprehensive findings as to Rodolfo's precise level of indebtedness at the time of the 30 August agreements or of the actual extent of Emilio's knowledge thereof. Nonetheless I am satisfied as I have indicated that both Rodolfo and Emilio knew that Rodolfo was then unable to pay his debts and that he had a large outstanding liability quite apart from what he owed his family members. It probably is the case that Emilio was aware of other specific debts at the time and that additional money was being or would be sought from him. I am satisfied furthermore that both were aware of Rodolfo's expectation that he would "lose his houses". 58 (v) In his evidence in this proceeding Emilio sought to explain away his s 81 examination evidence that he wanted the mortgages because of some big accounts he had received. In this he relied upon his mistake as to when he saw the accounts in question which he now says post-dates the instructions to his solicitors to prepare the mortgage. It is the case that the letter from Rodolfo's accountant foreshadowing a near $6,000 tax liability post-dates the instructions by some days though not the execution of the mortgages and agreements. However, in light of my earlier findings, I do not consider the actual timing of the receipt of the accounts is of particular significance notwithstanding Emilio's direct reference to them in his s 81 examination evidence. The matter of real significance was Emilio's knowledge of Rodolfo's inability to pay his debts and his need for more money. I am prepared to infer that Emilio was made aware of that need quite apart from the accounts to which he referred in his affidavit evidence. 59 (vi) I accept, as his file note indicates, that Mr Meyer received instructions from Emilio on 16 August 1994 to prepare the mortgages. Nonetheless I am satisfied that prior to those instructions being given, both Emilio and Rodolfo were mutually aware of the significance of Rodolfo's indebtedness and that steps were needed to be taken to protect Emilio and Maria if they were not to be left empty-handed when the houses were lost as Rodolfo anticipated would happen according to his s 81 examination evidence. That apprehension probably provided the goad to Emilio's raising the question of loans to his brother when he met Mr Meyer for other reasons on 11 August 1994. While I accept Mr Meyer's evidence that Emilio did not disclose to him the extent of Rodolfo's indebtedness, and while Emilio later is noted in the files as indicating to another solicitor in the firm that he "trusts [his] brother to pay him", I am satisfied that Emilio was far from frank with his lawyers. The solution proposed by Mr Meyer (ie the mortgages) produced the result that the Pastros desired. Though it is unnecessary for me to express a concluded view on the matter, it probably is the case that the advice given by Mr Meyer fell within what would have been anticipated of him by Emilio and Rodolfo. In short I conclude that both at the time he gave his instructions to Mr Meyer, and at the time of the execution of the agreements and mortgages, Emilio was well aware of Rodolfo's inability to pay his creditors but concealed that knowledge from Mr Meyer. Counsel for the respondents has urged against making the above finding on the basis essentially that, if the potential liability for costs in the insurance litigation was to be regarded as a major factor in the mortgage decision, the respondents would not have waited twelve months from the date of judgment against them before taking the decision to grant the mortgages. Having regard both to Rodolfo's declared and repeated purpose in his s 81 examination evidence as also to Emilio's s 81 evidence, I do not consider that the delay so pointed to militates against the finding I have made. 60 (vii) Apart from her 1994 knowledge of Rodolfo's inability to pay his debts, Maria's understanding of Rodolfo's affairs and circumstances was slight. Her actions, and in particular her lendings, were dictated by family ties. They are consistent with no little deference to her brothers. In her evidence at the s 81 examination Maria indicated she did not ask Rodolfo for the 30August agreement; that it was Emilio's idea; and that "Emilio said that we had to do something because he was also owed money": (Transcript, 107). The resultant agreements insofar as she was concerned were orchestrated by Emilio; she did not read the documentation though Emilio explained it to her - she was told it would help her get her money (Transcript, 112) - and she signed the agreement. I have already referred to her view of Emilio's financial acumen. In the circumstances and given the family relationship, I am prepared to infer that Emilio discharged a tutelary function for Maria in relation to protecting the debts owed her by Rodolfo and that she acquiesced in this. While Maria, not Emilio, signed the 30 August agreement - so that in that respect there was no agency relationship - the object and purpose of the transaction was that arranged by Emilio. As I will later indicate, Maria is to have Emilio's knowledge of the circumstances imputed to her. 61 (viii) Whatever the precise extent of Rodolfo's debts, actual and anticipated, at the time of the 30 August agreements, I am satisfied that both Rodolfo and Emilio then understood these to be of such dimensions that, absent resort to the contrivance of the mortgages, Emilio and Maria would not have their debts repaid. "Family" was not to be so "cheated" to use Rodolfo's words - hence the agreements. I should add that I am satisfied both men then appreciated that the costs liability was likely to be of some magnitude - as it later proved to be - and that, following on the ANZ Bank debt and Rodolfo's inability to service that debt, protective measures were necessary if the debts owed Emilio and Maria were not to be lost. Accordingly I am satisfied that Rodolfo intended to prefer Emilio and Maria at the expense of his other creditors, actual and anticipated. Conclusions 62 For the purposes of s 121 of the Act, I find that, when Rodolfo entered into the 30 August agreements and when he executed the two mortgages, it was his intent to defraud his creditors, actual and anticipated. I include in "anticipated" creditors, the successful defendant in the insurance litigation in that, on the date of the mortgages, the costs liability had not as then been quantified. Rodolfo was seeking unfairly to prefer his family creditors over others. I further find that Emilio was aware of, and participated in, this contrivance; he was "privy to the fraud": PT Garuda Indonesia Ltd v Grellman (1992) 107 ALR 199 at 212; see also Official Trustee v Mitchell (1992) 110 ALR 484 at 492ff; and that in consequence he cannot for the purposes of s 121 be said to have "acted in good faith". In making both of these findings, I acknowledge that the onus of proof in each instance is borne by the Official Trustee. My findings in relation to Emilio for s 121 purposes are sufficient as well to deny him the advantage of the "purchaser in good faith" proviso of s 120(1)(a) of the Act, whether or not for the purposes of the provision he had provided "valuable consideration": see Re Hyams; Official Receiver v Hyams (1970) 19 FLR 232 at 253ff. Accordingly I will declare that the mortgage granted Emilio is void as against the Official Trustee under both s 120 and s 121 of the Act. 63 I have arrived at a similar conclusion in relation to the mortgage granted Maria but by a somewhat different route. I am prepared to assume for present purposes that at the time of the 30 August agreement and mortgage, Maria did not have actual knowledge or suspicion of the attempt on Rodolfo's part to defraud his non-family creditors. The case against her as pleaded and put is that her lack of good faith for s 120 and s 121 purposes derives from the imputation to her of Emilio's knowledge of the object and purpose of both mortgages, that imputation being a consequence of the agency role discharged by Emilio for her in relation to the 30 August agreement and the mortgage. 64 In the execution of the 30 August agreement, Emilio did not act strictly as Maria's agent: he did not act, or purport to act, so as to effect legal relations between Maria and Rodolfo: see International Harvester Company of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Company (1958) 100 CLR 644; and see generally Bowstead and Reynolds on Agency (16th Ed, 1996), Ch 1. Nonetheless, as I have earlier found, Emilio performed a tutelary function for Maria in the transaction. Having participated in contriving the scheme for his own and Maria's benefit, he acted as her protector, advisor and functionary in the bringing about and then the carrying into effect of the steps necessary to put that scheme in place. He acted throughout with a knowledge of the purpose of the transaction that Maria, the beneficiary of the transaction, did not actually possess. But Maria, in my view, had put herself in a position in which it was unnecessary for her to acquire anything but the most rudimentary appreciation of the nature of the transaction itself. She had entrusted the preservation of her position to, had given her dependence and judgment to, Emilio in this matter. And she took the benefit of the transaction. The question this raises is whether in the circumstances, hers is a relationship with Emilio sufficient to justify the attribution to her of Emilio's knowledge of the nature and purpose of the scheme in which the mortgage was a part. 65 The respondents submit it does not and place particular reliance upon the observations of the Full Court of this Court in Official Trustee v Mitchell, above, at 492. Having there referred to the three formulations of the meaning of "good faith" considered by Fisher J in Barton v Official Receiver (1984) 4 FCR 380 at 388-389, the Full Court continued: "for the purposes of the present case it is sufficient to note that each of the three formulations mentioned by Fisher J is concerned with the actual state of mind of the person who took under the disposition. Negligence, stupidity, or blindness to what others might be well able to see are not equivalent to lack of good faith. Of course, in a particular case, a failure to make inquiries a person might have been expected to make may be cogent evidence of such knowledge or suspicion as would deny good faith; but in such a case, the court's finding will not be one of an imputed dishonesty, but rather of a dishonesty inferred as a fact from the circumstances. The point was elaborately discussed by Lord Sumner in The Zamora No 2 [1921] 1 AC 801 at 812-13." It is then submitted that, given Maria's actual state of mind - ie actual ignorance of Rodolfo's and Emilio's contrivance - she must be found to be acting in good faith. 66 While not in anyway calling into question the observations in Mitchell'scase, I am unable to agree that they provide Maria with the comfort that is claimed. In the usual case a person's actual state of mind will determine whether or not that person has acted in good faith - as the above observations from Mitchell suggest. Nonetheless a finding that a person actually was unaware of matters that could give rise to a finding of lack of good faith, does not of itself preclude a finding of such a lack - as the same observations attest. The courts have, for example, distinguished wilful blindness (ie deliberate abstention from inquiry) which will result in a lack of good faith, from ignorance caused by a failure to make more extensive inquiries which will not: see Lego Australia Pty Ltd v Paraggio (1993) 44 FCR 151 at 170-171; Lyford v Commonwealth Bank of Australia (1995) 130 ALR 267 at 275. 67 This case, though, is not one of wilful blindness and a lack of good faith cannot here be found on that basis. However it is one in which Maria's ignorance is itself occasioned by the nature of the relationship which she voluntarily had with Emilio. She entrusted Emilio with the carriage of the matter; the scheme he helped devise was for her benefit; and she entered into it at Emilio's behest after the most rudimentary explanation of its purpose. Having so subordinated her knowledge of, and judgment in, the matter to Emilio she cannot, in taking the benefit of the transaction, be in a better position than Emilio would be if he was acting for himself. The cocoon in which she so placed herself cannot avail her when the mortgage is impugned under s 120 or s 121. She must be fixed with the knowledge of Emilio in the matter. Indirect support for this conclusion of imputation in a "control-type" relationship where the transaction in question is for the benefit of the subordinate person, is provided in the observations of von Doussa J in Beach Petroleum NL v Johnson (1993) 115 ALR 411 at 566-574 on the imputation to a company in civil proceedings of the knowledge of a director. I should add, for the sake of completeness, that the type of relationship and the operative knowledge in question here are far removed from that considered in Re Hatzimarcos; Ex parte Dixon (FCA, 11 September 1984, unreported) as not justifying imputation to a client of a solicitor's knowledge of a fact for s 120 purposes. Conclusion 68 I will then declare that, pursuant to s 120 and s 121 of the Bankruptcy Act 1996, the Memorandum of Mortgage Registered Number 7789769 granted by Rodolfo Saverio Pastro (also known as Rudolfo Saverio Pastro) in favour of Emilio Pastro and dated 9 September 1994 over the land situated at 45 Hancock Road, Campbelltown 5074 in the State of South Australia comprised in Certificate of Title Register Book Volume 5214 Folio 197 and the land situated at 10 Grandview Grove, Magill 5072 in the said State comprised in Certificate of Title Register Book Volume 5214 Folio 196 is void as against the Applicant. 69 I will also declare that, pursuant to s 120 and s 121 of the Bankruptcy Act 1966, the Memorandum of Mortgage Registered Number 7789770 granted by Rodolfo Saverio Pastro (also known as Rudolfo Saverio Pastro) in favour of Maria Pastro and dated 9 September 1994 over the land situated at 45 Hancock Road, Campbelltown 5074 in the State of South Australia comprised in Certificate of Title Register Book Volume 5214 Folio 197 and the land situated at 10 Grandview Grove, Magill 5072 in the said State comprised in Certificate of Title Register Book Volume 5214 Folio 196 is void as against the Applicant. I certify that the preceding sixty-nine (69) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn.