Trusts - constructive trust - transfer of property by husband to himself and de facto wife as joint tenants in consideration of financial and emotional support - husband now bankrupt - no unconscionable conduct - whether wife was equitable owner of half interest in property at date of transfer - circumstances in which constructive trust arises.

Bankruptcy - voluntary settlement - transfer of share of property to de facto wife in consideration of financial and emotional support - subsequent bankruptcy - whether transfer a settlement - whether constructive trust arises - inconvenience in administration of estate.

Bankruptcy - voluntary settlement - mortgage released by mother - intention to execute mortgage over another property - mortgage executed at later date within the two year period - whether mortgage given "in good faith and for valuable consideration" - forbearance to sue - whether forbearance colourable consideration - policy of the Act.

Bankruptcy Act 1966, ss.116(2)(a), 120

whereby the bankrupt transferred his interest in

the property situate at 224 Slade Point Road,

Mackay and described as Lot 16 on Registered Plan

713504, County of Carlisle, Parish of Bassett, City

of Mackay, Volume N563 Folio 244 ("the residential

property") is void as against the trustee of the

property of Russell Edward Osborn, a Bankrupt;

2. the bill of mortgage bearing date 3 March 1988,

produced on 8 August 1988 and registered 29 August

1988, whereby the residential property was

mortgaged to Alison Isabel Osborn is void as

against the trustee of the property of Russell

Edward Osborn, a Bankrupt;

3. the applicant have leave to apply for further

orders to give effect to the declartationms;

4. the respondents pay the applicant's costs of and

incidental to the application, to be taxed.

NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

The trustee of the estate of Mr R.E. Osborn, a bankrupt, makes two applications attacking transactions which took place within the two year period mentioned mentioned in s.120 of the Bankruptcy Act 1966. Mr Osborn was made bankrupt by a sequestration order of 14 July 1989 on a creditor's petition presented on 13 April 1989.

2. The relevant facts are in dispute in some respects and it is difficult to determine them with any confidence. The respondents rely upon quite brief affidavits. There has been no oral evidence. The applicant trustee does not appear to have investigated the matters sworn to by the respondents; his counsel suggests that I should not accept all the respondents say but should draw inferences against them from certain undisputed facts, mentioned below.

3. On this rather sketchy evidence, and without cross-examination, there must be more than the usual risk of error in finding facts. I do not say this by way of criticism of the parties. It may be that it was thought that the expense of having the respondents attend to give evidence was not warranted; they live in the Mackay area, in the northern part of this State.

4. The trustee, Mr Worrell, seeks two declarations, of which the second is that a bill of mortgage bearing date 3 March 1988 in favour of Alison Isabel Osborn is void as against him. It is convenient to deal with this issue first.

5. The respondent to this part of the application is the bankrupt's mother, who says that she loaned her son $26,000 in 1980 and took a bill of mortgage to secure the debt. She says that the land subject to the mortgage was sold in the same year and the mortgage released; the allegation is that her son promised to give the respondent a substitute mortgage over property at 224 Slade Point Road. The respondent goes on:

"On the basis of this assurance I released by (sic)

mortgage without being paid so that the sale could

proceed."

6. The respondent says in effect that her son did not do what he had undertaken until 1988, by which time the property in question had been transferred - as explained below, in the discussion of the application made against Wilhelmina Osborn.

7. Alison Osborn says that she would not have released the 1980 mortgage if she had known there would be such a lengthy delay in execution of the 224 Slade Point Road mortgage. She says:

"By February 1988 I had become so concerned about

the failure of RUSSELL EDWARD OSBORN to give me the

substitute mortgage that I was considering taking

action to recover the money he owed me and I told

him of this intention. It was only after I told

him this that RUSSELL EDWARD OSBORN in fact

arranged to give me the mortgage."

She adds that at the time of execution of the mortgage she -

". . . had no knowledge that RUSSELL EDWARD OSBORN was

likely to go bankrupt or that he was in any serious

financial trouble."

8. Alison Osborn exhibits a copy of the 1980 mortgage referred to in her affidavit. It is expressed to be collateral to a mortgage of 7 February 1979 between the same parties, securing the same sum. It is puzzling that Alison Osborn does not include in her explanation of the transaction any reference to the 1979 mortgage, but there seems no reason to doubt the truth of her story that she lent $26,000 on the security of a mortgage. A more doubtful point is whether the money was treated as a loan to a company, Professional Communications Pty Ltd, which is mentioned in para.2(vi) of Mr Worrell's affidavit filed on 17 November 1989. That affidavit said that there was a $26,000 loan account in favour of Alison Osborn in the balance sheet of the company as at 30 June 1979, but that does not seem to me of much consequence; whether the bankrupt was the principal debtor or merely secondarily liable, he seems to have made himself liable for the sum in question and given a mortgage to secure the liability.

9. The trustee's affidavit shows that in December 1986 an application was made to wind up the company I have mentioned, and it was wound up by order of the Supreme Court in February 1987. In June 1987, the liquidator wrote to the bankrupt asking for payment of a sum of over $67,000 disclosed in his loan account, and the liquidator followed that request up by a demand made in September and by a threat of legal action in October 1987. However, a writ was not issued by the liquidator until June 1988, by which time the mortgage in favour of Alison Osborn had been executed, instructions to do so having been given in February 1988.

10. It is an inference which is open and one which I draw that the bankrupt was prompted to give the mortgage to his mother by concern about his financial position and, in particular, by concern that the failure of the company would make him insolvent.

11. Section 120(1) reads, so far as relevant, as follows:

"A settlement of property . . . not being -

(a) a settlement . . . 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 bankruptcy."

12. It is clear that the time limit in the section is complied with and the authorities support the view that the mortgage is a "settlement": Re Pahoff (1961) 20 ABC 17; Re Hyams (1970) 19 FLR 232 at 252. The question raised is whether the applicant has shown the mortgage not to have been given in favour of the respondent "in good faith and for valuable consideration".

13. The most authoritative discussion of the latter concept is to be found in Barton v. Official Receiver [1986] HCA 44; (1986) 161 CLR 75, where the High Court held that the necessary consideration must be one which has a "real and substantial value, and not one which is merely nominal or trivial or colourable". It was held that the consideration in issue in that case failed the test.

14. The facts are set out in some detail in the reasons of the Full Court of the Federal Court, reported in [1984] FCA 337; (1984) 4 FCR 380. The essence of the transaction was that the bankrupt (as he ultimately became) lent his brother $170,000 with interest payable, at a low rate, at five-yearly intervals; the principal was repayable after 20 years. The funds were intended to be used mainly to provide for the accommodation and other needs of aged relatives of the bankrupt.

15. The consideration could not be described as nominal or trivial and it must have failed as having been thought "colourable". The High Court discussed the matter as follows:

"In this regard, Sir Maurice pointed to the

substantial amount of interest that would be

payable over the period of the loan and also to the

assumption by the appellant of some obligation to

care for the elderly mothers of Mr and Mrs

Alexander Barton respectively. . . . Having regard

to the very substantial size of the loan, the fact

that it was unsecured, that it was made for a term

of twenty years, that no part of the principal was

repayable until the appellant was eighty-two years

of age, his modest means, the fact that no interest

was payable until five years had elapsed and then

at a low rate of 4.25 per cent per annum, and the

effect of inflation, the finding of the Full Court

that the appellant was not a 'purchaser . . . for

valuable consideration' within the meaning of

s.120(2) of the Act must be affirmed" (p 87).

16. The use of the word "colourable" seems to imply that the consideration is non-commercial or not bona fide and that it is of such a kind as would not be agreed in an arm's length transaction.

17. Mr Dutney, who argued the case on behalf of the respondents in a way which I found helpful, said that the consideration here was, or included, forbearance to sue. In my opinion, in the circumstances of this case, that is not enough. As I have pointed out, the trustee's affidavit shows that at the relevant time the bankrupt was under pressure from the liquidator to pay out the loan account shown in the books of the company; legal action had been threatened. The respondent, according to her affidavit, had been promised some years before that a mortgage would be given over the property in question and had been, apparently, content to wait without taking any positive step. The threat to sue her son for the money, if one was made, must have been rather a hollow one and the forbearance was merely colourable.

18. Mr Dutney also contended that the discharge of the bankrupt's obligation to give a substitute mortgage under the agreement made in 1980 constituted good consideration. On the unchallenged evidence, I find that there was a subsisting obligation to grant a mortgage. In technical language, the consideration given by the respondent was executed, but not past, consideration; she had done all she was required to do, namely, discharge the old mortgage in 1980, but the bankrupt had not carried out his promise.

19. There was, therefore, good consideration as a matter of law, but was it colourable? In my opinion, the answer must be yes. Although the contract to give the mortgage had not been discharged, it was more than six years old and could not, therefore, have been enforced: see s.10 of the Limitation of Actions Act 1974 - 1981 (Q.). The respondent does not contend that she had in mind suing to force the giving of a mortgage; her case is that she was considering suing to recover the money. It seems to me likely that the real reason for the grant of the mortgage was the desire on the part of the bankrupt to improve his mother's position in case he went insolvent, rather than a desire to discharge the obligation to grant a fresh mortgage which he had assumed in 1980, or apprehension about being sued by his mother.

20. Another difficulty in the respondent's case based upon the 1980 agreement, was that there is no evidence as to what the terms of the mortgage were to be - e.g. whether it would provide for payment of interest, and if so at what rate. This is by no means an academic point; in the event the substitute mortgage was for $4,000 more than the original and, according to the respondent, the difference was intended to cover interest.

21. Mr P.W. Beaverson, the solicitor who prepared the mortgage on behalf of the parties, wrote a letter to the respondent about the matter on 24 February 1988. The impression created by the letter is that the consideration for the mortgage was not the agreement made in 1980, to which the letter does not refer, but forbearance. It is my opinion that whether forbearance was the whole of or but part of the consideration, there was no such consideration as to comply with the test laid down in Barton's case, reading that test with the factual background and actual result of that case in mind.

22. I should add that in Barton's case the High Court refers, with apparent approval, to a dictum supporting the view that the corresponding English section -

". . . is clearly framed to prevent properties from

being put into the hands of relatives to the

disadvantage of creditors . . ." (see pp 83 and 84).

The Court appeared to regard this legislative purpose as bearing upon the question before them, namely the nature of the consideration which the section required. Looking at the matter broadly, which is what construing the section "in a commercial sense" seems to involve (see Barton's case at pp 81, 83), the transaction was not in truth entered into by reason of or in exchange for the respondent's undertaking not to sue for the time being, in respect of the debt incurred in 1980. It was arranged, rather, for the same sorts of reasons as operated in Barton's case, i.e., to save something from the impending wreck for the benefit of relatives. There is no suggestion that the transaction was a reprehensible or dishonest one, but it appears to me to be caught by s.120 and this part of the application must therefore succeed.

23. The evidence shows that on 4 August 1987, the bankrupt executed a memorandum of transfer in favour of himself and Wilhelmina Elizabeth Osborn as joint tenants. That was produced at the Real Property Office on 12 October 1987 and registered on 15 October. This is the same property as mentioned in the discussion above relating to the mortgage to Alison Osborn.

24. The respondent, Wilhelmina Osborn, has been living together with the bankrupt as man and wife for 20 years. One aspect of her case is that she claims an equitable interest in the property, arising from her financial contributions.

25. She says that during the relationship she worked from 1971 to 1977 (when the couple's son was born) and during that period all her income went towards buying and furnishing the premises in question, 224 Slade Point Road. From 1981 to date, she has worked in the business of Professional Communications Pty Ltd, of which she and the bankrupt are shareholders, as a secretary receiving $100 per week. During the last two years the bankrupt's health has been poor and the respondent has nursed him. She has also performed housework and child rearing.

26. This respondent says that the transfer I have mentioned was in consideration of the financial, emotional and nursing support she had given him and the financial and emotional support she had given the child in the past "and in consideration of my promise to continue to feed him, nurse him and look after him in the future". The bankrupt suffers from a number of ailments and according to the respondent's affidavit "requires constant care and attention".

27. On the basis of the facts which I have summarised, Mr Dutney argued for the respondent that she was the equitable owner of a half interest in the property at the date of the transfer, and therefore there was no settlement. Mr Dutney's argument was that the case was one in which there was a constructive trust: Baumgartner v. Baumgartner [1987] HCA 59; (1987) 164 CLR 137. I shall mention, first, an earlier decision.

28. In Muschinski v. Dodds [1985] HCA 78; (1985) 160 CLR 583, an unmarried couple took title to property as tenants in common in equal shares, but contributed unequally. It was held that there was a trust to repay the contribution of each party and, as to the residue, in equal shares. Of the majority, Gibbs C.J. rejected the notion that a constructive trust "may be based upon a common intention which does not actually exist, but which is ascribed to the parties by operation of law" (p 595). Gibbs C.J., however, held that one party (the woman) was entitled to contribution from the other, to the extent that she had paid more than her share towards the purchase.

29. Deane J., with whose conclusions Mason J. agreed, pointed out that a constructive trust differs from other forms of trusts in that "it arises regardless of intention" (p 613). It precludes retention of beneficial ownership "contrary to equitable principle" (p 614). Deane J. described the constructive trust as constituting an "in personam remedy attaching to property" and pointed to the possibility of declaring a constructive trust operative only from the date of judgment (p 615). His Honour held that there was, in the circumstances, an equity precluding one party from asserting or retaining his one-half ownership to the extent that it would be unconscionable for him to do so (p 620); there was a constructive trust on the basis that the assertion by the male partner of a legal entitlement was, in the circumstances, unconscionable.

30. Muschinski v. Dodds therefore appears to be authority for the view that, where a de facto relationship breaks up, there may be a constructive trust of property to the acquisition of which both have contributed, but not on the ground of mere fairness; unconscionability must be shown, on established equitable principle. However, only two members of the majority (Mason and Deane JJ.) held there was such a trust.

31. In Baumgartner v. Baumgartner, a majority (Mason C.J., Wilson & Deane JJ.) held that there may be a constructive trust (and in that case, was one) irrespective of actual intention (pp 146, 147) and that fairness "in the ordinary sense of that term" is an unsufficient basis. The majority held the case to be one in which -

". . . the parties have pooled their earnings for the

purposes of their joint relationship, one of the

purposes of that relationship being to secure

accommodation for themselves and their child.

Their contributions, financial and otherwise, to

the acquisition of the land, the building of the

house, the purchase of furniture and the making of

their home, were on the basis of, and for the

purposes of, that joint relationship" (p 149).

The present case reasonably fits the description just set out, except that here much of the work relied on by the respondent was done for the company. Here, as in that case, there is no suggestion of any real intention to create a trust; the question is whether such an intention should be ascribed to the parties, on the ground of unconscionable conduct of the bankrupt.

32. The Court in Baumgartner v. Baumgartner held that a number of financial adjustments should be made in the interests of justice. These are set out on pp 150 and 151, where the Court expresses disapproval of the approach made in the Court of Appeal to the question of adjustments. The parties were invited to agree on the adjustments, on the basis that if they did not there would be a further hearing.

33. The other members of the Court agreed in the orders proposed by the majority, and it is unnecessary to analyse their Honours' views in detail. But it should be pointed out that Gaudron J. mentioned that in making the necessary adjustments, non-financial contributions may have to be taken into account (p 156) and that there should be taken into account in favour of the woman absence from work during pregnancy (p 157).

34. One of the reasons why the process of liquidation or bankruptcy often produces such disappointing results is that the trustee or liquidator finds that litigation is necessary to recover property or resolve legal problems. Creditors tend to be reluctant to fund this. It appears to me that where the law is not quite settled, Courts should lean in favour of results which conduce to certainty in bankruptcy administration. No one could pretend that the doctrine espoused in Baumgartner v. Baumgartner is likely to lead, in the ordinary case, to a simple resolution of the problem of ascertaining the precise equitable interest. There, where the facts were not especially complex, no final order was made but it was found necessary to invite the parties to try to agree on the adjustments.

35. Mr Dutney 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 himself 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".

36. Assuming all else in favour of the respondent, did the constructive trust relied on exist when the property vested in the trustee? It is necessary to refer again to what was said by Deane J. in Muschinski v. Dodds (above). His Honour said that the constructive trust:

". . . has not outgrown its formative stages as an

equitable remedy and should still be seen as

constituting an in personam remedy attaching to

property which may be moulded and adjusted to give

effect to the application and interplay of

equitable principles in the circumstances of the

particular case. In particular, where competing

common law or equitable claims are or may be

involved, a declaration of constructive trust by

way of remedy can properly be so framed that the

consequences of its imposition are operative only

from the date of judgment or formal court order or

from some other specified date."

37. His Honour referred to "competing common law or equitable claims"; plainly the competing claim of the trustee deriving title from the Bankruptcy Act is within the spirit of this dictum. If a declaration of constructive trust were made in this case, it would seem to me inappropriate to predate it to August 1987 (when the transfer was executed). There is a dilemma: before the transfer was executed, there was, so far as the evidence shows, nothing unconscionable about the bankrupt's conduct; the respondent does not suggest that she asked for and was refused recognition of her interest. At the time of and after the execution of the transfer, there was no unconscionable conduct on the part of the bankrupt either; if the respondent's argument is correct, the bankrupt acted in accordance with the dictates of his conscience and established equitable principle by transferring the legal interest.

38. It appears to me, therefore, that the principle of Baumgartner v. Baumgartner cannot assist the respondent against the trustee, unless the Court is obliged to extend it to cover cases where there is no unconscionable conduct alleged against the legal owner - as here. Apart from doubting the propriety of making that extension of the doctrine as defined by the High Court, I am disinclined to do so for the reason indicated above. There is a degree of inconvenience attaching to the laying down of a rule which would require the trustee, in a case of this sort, to conduct an elaborate investigation of and perhaps litigate about the history of a relationship to determine whether property which is, on the face of it, divisible among the creditors is truly so divisible. It appears that in such an inquiry non-financial contributions would be relevant, as, perhaps, would be the question of the cause of any break-up of the relationship. More generally, keeping in mind the remedial character of the doctrine, I do not think the Court should declare a constructive trust in circumstances of this sort, to operate at a date prior to bankruptcy.

39. I therefore hold that the property was not, and should not be declared to have been, subject to a constructive trust in favour of the respondent at a date prior to the transfer. That disposes of Mr Dutney's principal argument, namely that there was no settlement under s.120 of the Act because the respondent had ownership in equity before the transfer.

40. The subsidiary argument put forward on behalf of the respondent was that on the material there was good consideration, namely the financial and other support given before the transfer and the promise to look after the bankrupt in future.

41. It is necessary to mention some events preceding the transfer in question. On 21 August 1985, this respondent wrote to a creditor of "Mackay Communications" which was apparently a name in which the company I have mentioned, namely Professional Communications Pty Ltd, carried on business. The letter said, in effect, that the debt would be paid as soon as possible and referred to steps taken to reduce expenses. This letter has some significance, because it was argued by Mr Dutney that I should decide the case on the basis that this respondent knew nothing of any serious financial difficulties at relevant times. That seems to me improbable; she worked in the business from 1981. On 17 December 1986, an application was made to wind up the company and it was wound up on 18 February 1987. As mentioned above, the liquidator claimed payment of $67,171 from the bankrupt. On 30 June 1987, five weeks later, the transfer which is attacked was executed. According to the material, at that time, the bankrupt's health was bad and he required nursing care.

42. It is unnecessary to summarise the discussion of Barton's case, above. Here, so far as the consideration relied on consisted in financial and other support given before the transfer, it was not good consideration in law. So far as future care is relied on, it appears to me to fall well within the "colourable" category referred to in Barton's case.

43. Therefore, in my opinion, both points relied on by Mr Dutney fail; I am not prepared to hold that there was a constructive trust at any time before bankruptcy, nor that one arises now; I do not think the consideration for the transfer was sufficient to satisfy the principle of Barton's case.

44. I would add that I have not found it necessary to consider what constitutes "good faith" for the purposes of s.120(1). I have looked only at the question of consideration and have decided the case against the respondents on the basis that neither transaction satisfies the test laid down in that case, read against the background of the facts there proved.

45. There will be declarations in the form set out in paragraphs (1) and (2) of the application filed on 12 September 1989, and the applicant will have leave to apply for further orders to give effect to such declarations. The respondents must pay the costs.