Sharrment Pty Ltd v Official Trustee in Bankruptcy [1998] FCA 1583 | Case summary

The Lease and Application for Possession On 23 October 1998 I published reasons for judgment in which I indicated that I proposed to make a declaration that the transfer of a house referred to in that judgment to the Bankrupt, Eric Abraham Jury, be declared void and to order that Mr Jury execute a transfer in registrable form but subject to a mortgage in favour of Robert Stewart Anderson and Wayne Scott Hibbert as joint tenants. I did not at the time make any orders but directed that the matter be listed for argument as to the form the relevant orders take. A reason for so doing was, in particular, to hear further argument as to whether a lease of the house purporting to have been entered into between Mr Ashton and Mr Jury and his children bearing the date 1 July 1997 was, as the Trustee in Bankruptcy, Mr Prentice claimed, likewise void and whether, as was sought by Mr Prentice, orders for possession of the house should be made in his favour. The relevant facts are set out in that judgment and I do not repeat them. Two things only need be repeated. The first is that I held that both s 120 and s 121 of the Bankruptcy Act 1966 (Cth) (Òthe ActÓ) operated to avoid the transfer to Mr Ashton. Second, I found that the date on the lease agreement of 1 July 1997 could not be accepted and that the continuing bankruptcy inquiries made of Mr Ashton shortly before a public examination on 21 August 1997 prompted its preparation. For present purposes I am prepared to accept one of Mr AshtonÕs versions, namely that it was prepared two weeks before the public examination took place on 21 August 1997. Section 115(1) of the Act provides that: ÒThe bankruptcy of a person who becomes a bankrupt on a creditorÕs petition or by virtue of a sequestration order É shall be deemed to have relation back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by that person within the period of 6 months immediately preceding the date on which the creditorÕs petition was presented ÉÓ In the present case the petition was presented on 12 June 1996. It was based upon non compliance with a 14 day bankruptcy notice served upon Mr Jury on 14 March 1996. Accordingly, Mr Jury committed an act on bankruptcy on 28 March 1996, the earliest known act of bankruptcy. Hence for the purpose of s 115 of the Act the bankruptcy is deemed to have relation back to and to have commenced on 28 March 1996. The lease, as I have found, was entered into on 7 August 1997. Even if it commenced on the date it bore it was entered into after the commencement of the bankruptcy. Mr Jury became a bankrupt on 22 May 1997 when a sequestration order was made by Lockhart J. On that day Mr Prentice became Trustee of Mr JuryÕs bankrupt estate. The lease on any view was entered into after that date. It was, however, entered into prior to the commencement of the present proceedings, and, of course, prior to the orders that I can make in them. The Trustee submits that the lease is of no effect for two reasons. The first is that it is a sham. The second is that once s 121 or s 122 is found to operate to avoid the transfer to Mr Ashton, the statutory effect of the Act is to relate the title of the Trustee back to the commencement of the bankruptcy, or, it being immaterial for present purposes at least back to the making of the sequestration order. Counsel for Mr Ashton submits that the lease is not a sham and that the effect of an order under s 121 or s 122 operates only from the time the transfer to Mr Ashton is held by the Court to be void and, the lease being entered into before that day, is unaffected.

Sham The submission that the lease was a sham has no substance. First it can be said that this was not pleaded. I am content to proceed however on the basis that it was, for it is still not possible to hold the lease to be a sham in the sense that word is used in the cases. The meaning of the ÒshibbolethÓ sham, and the tests to be applied in determining whether or not a transaction is to be so treated are dealt with in detail in Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 and the many cases referred to in that case including Snook v London & West Riding Investments Ltd [1967] 2 QB 786, where Diplock LJ said, at 802, of sham that it meant: Ò É acts done or documents executed by the parties to the ÔshamÕ which are intended by them to give to third parties or to the Court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.Ó To paraphrase, a transaction or instrument will be a sham where there is a common intention that it is a disguise for some other, and real transaction, or no transaction at all. It is clear law that one must focus upon the intention of all the parties. No evidence has been given by any party other than Mr Ashton. No doubt, if any inference favourable to the Trustee were open I could infer, from the absence of evidence, that it would be of no assistance to Mr AshtonÕs case and could more readily draw the inference already open. But even if an inference were open to infer that the lessees intended the transaction to be a sham (and it is not), I could not find the necessary common intention because I think it is patently obvious that all parties intended the lease to be effective. I shall explain why. There is no doubt that the whole transaction, that is to say the transfer and lease back, was entered into for the purpose of defeating creditors and guaranteeing to the bankrupt that he could remain in the family home for a very long time. Such a purpose could only be achieved, not merely by the transfer to Mr Ashton, which perhaps could be set aside as I have found, but by securing to the Jury family the right to reside in the home for the term and successive option periods. So it is inconceivable that either Mr Ashton as the willing participant in the transaction or the members of the Jury family intended the lease to be a disguise for what can only be said to be no transaction at all, and thus ineffective. The purpose could only be achieved if the lease was effective. Second, Mr Jury had transferred his house for inadequate consideration to Mr Ashton. It was necessary for him to be protected, not merely against creditors but also against Mr Ashton. So the only inference that could be drawn is that Mr Jury (and the members of his family) intended the lease to be effective, even if Mr Ashton, contrary to my view, did not. The same is true of the family. It follows that the lease was intended, in my view, to be effective by all the parties to it. There was no common intention that it be ineffective. It was not a sham, and the TrusteeÕs submission that it was must fail. That leaves the more difficult question for resolution. In the discussion which follows I propose to consider only s 121 of the Act, although I have held that s 122 applies in the alternative. I do not think for present purposes that the issue differs in any material way whichever section is to be applied, although the historical derivations of the sections differ. Section 121 finds its origins in the Fraudulent Conveyances Act 1571 (Eng) (13 Eliz 1 c 5) (Òthe Statute of ElizabethÓ). That statute provided that transfers of property for the purpose of delaying, hindering or defrauding creditors or others of their lawful debt were : Òto be clearly and utterly void, frustrate, and of none EffectÉÓ It did not, however, extend to transfers: Òupon good Consideration and bona fide lawfully conveyed or assured to any Person or Persons É not having at the Time of such Conveyance or Assurance to them made, any Manner of Notice or Knowledge of such Covin, Fraud, or Collusion as is aforesaid.Ó Despite what may be thought to have been the clear words of the operative provision (tempered perhaps by the exclusory provision) it has consistently been held that a fraudulent conveyance within the Statute of Elizabeth was not void but voidable. So, the transferee had, until the transfer was set aside under the Statute, a title which could be passed on. It subsisted unless and until steps were taken to avoid the transaction. So, for example, in Higgins v The York Buildings Company [1740] 2 Atk 107; 26 ER 467 Lord Hardwicke LC, in refusing to order an account of profits against a defendant who had taken property under a fraudulent conveyance said: ÒI do not know in the case of fraudulent conveyances, that this court has ever done any thing more than remove such fraudulent conveyances out of the wayÉÓ Hence, the title of the conveyee was often described as being both, on the one hand a Ògood titleÓ and on the other ÒdefeasibleÓ. The conveyee was able to pass a good title to another, for the title was good until set aside. Indeed even upon an application to set aside the transfer, the title was good except to the extent that it was necessary to set it aside: Ideal Bedding Company, Limited v Holland [1907] 2 Ch 157 at 173-4. So, if the whole property was not required to meet debts, the balance was not set aside, notwithstanding the fraudulent nature of the conveyance. As the judgment of the Full Court of this Court in PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 at 522 notes, the Statute of Elizabeth was adopted in the various States and Territories of Australia in what is essentially conveyancing legislation. The interpretation given to the Statute of Elizabeth has consistently been adopted in Australia when such legislation came to be applied. One citation will suffice. In Brady v Stapleton (1952) 88 CLR 322 at 333 Dixon CJ and Fullagar J said: ÒThe truth seems to be that, although the statute uses, and most emphatically uses, the word ÔvoidÕ, the courts have always treated a fraudulent assignment as effective unless and until a creditor or creditors intervene by levying execution or taking legal proceedings.Ó Their Honours in the judgment refer to comments of Pollock CB in the course of argument in the case of Morewood v South Yorkshire Railway & River Dun Co (1858) 3 H & N 798 at 800, (157 ER 690 at 691) where his Lordship said: Ò ÔVoidÕ does not mean utterly and absolutely void, but void sub modo. Here, before the question of the validity of the bill of sale arose, the property was divested out of the first assignee.Ó Bankruptcy legislation did not, initially, provide for the avoiding of fraudulent conveyances as such. Rather, the making of such a conveyance was made an act of bankruptcy: cf s 52(b) of the Bankruptcy Act 1924 (see now s 40(1)(b) of the present Act). The origins of s 52(b) are to be found in English bankruptcy statues, some of which are cited in Garuda at p 521-2. Hence, in the older cases prior to the 1966 Act in Australia, where a trustee sought to set aside a fraudulent conveyance, he or she did so by proceeding under laws comparable to the Statute of Elizabeth, rather than under the bankruptcy laws. Brady v Stapleton was such a case. The enactment of s 121 followed the Report of the Committee Appointed by the Attorney-General of the Commonwealth to Review the Bankruptcy Law (the Clyne Committee). Paragraph 173 of the Clyne CommitteeÕs report states: ÒUnder the Statute 13 Eliz c 5, enacted in 1570 but now to be found in various Property Law Acts passed in England and in the several States, fraudulent dispositions were liable to be set aside at the instance of any person thereby prejudiced. The Committee considers that, where a fraudulent disposition has been made by a debtor who subsequently becomes bankrupt, the trustee of the estate should have the power, at any time, subject to exceptions in favour of persons who have dealt with the bankrupt in good faith, to have it set aside for the benefit of the estate of the bankrupt.Ó The Full Court of this Court in Garuda warned that while the terms in which s 121 stood at the time the case was heard were reminiscent of the language of the Statute of Elizabeth, nevertheless s 121 had to be interpreted in the context in which it appeared. That being accepted, it must be said that it has never been suggested in cases which concerned s 121 in the form in which it appeared before it was amended in 1996 (see item 208 of Sch 1 to the Bankruptcy Legislation Amendment Act 1996) that despite the context ÒvoidÓ meant anything other than ÒvoidableÓ cf Barton v Official Receiver (1984) 4 FCR 380 at 386, 389 and 397, and Baker v Official Trustee in Bankruptcy (unreported, Full Federal Court, Burchett, Ryan and Carr JJ, 3 August 1995). For my part I can see nothing in the change of language of s 121 by force of its amendment in 1996 which should suggest any attempt to change the settled interpretation of the word ÒvoidÓ as it now appears. Baker involved, relevant to s 121, a complicated series of transactions. Suffice it to say that there was a disposition of debts in fraud of creditors and a subsequent transaction in which the debts were extinguished. It was held, following Brady v Stapleton that there was no ability to recover the debts, because at the time the extinguishment occurred no action had yet been taken to set aside the disposition. It should, perhaps for completeness, be said that there was no ability in that case to trace the initial debts. Had that been the case the creditors would, following Brady v Stapleton, have had a remedy. Baker is distinguishable from the facts of the present case. For in Baker the extinguishment had occurred before the act of bankruptcy had been committed, and for that matter before the petition was presented. It, and the numerous other authorities applicable to s 121, all concern facts where the fraudulent disposition has occurred and the property dealt with by the disponor so that it then came into the hands of another before the bankruptcy commenced. The present case is, as has already been intimated, one where the disponee disposes of the property after the commencement of the bankruptcy and the making of a sequestration order to persons not without notice of the fraudulent transaction. This, implies the submissions from counsel for Mr Ashton, is a distinction without significance. I do not agree. Section 121 must be construed in its context as has already been said. It is not just concerned with the avoidance of fraudulent conveyances for the benefit of creditors. It is to be found in a group of sections which are concerned to define the property which is to be available to the trustee in bankruptcy for the purpose of rateable division among creditors. Division 3 of Part VI of the Act is headed ÒProperty Available for Payment of DebtsÓ . It commences with s 115 which provides that the bankruptcy is deemed to have relation back and to have commenced at the time of the commission of the earliest act of bankruptcy within the period of six months of the time the creditorÕs petition is presented. The significance of s 121 and the definition of the commencement of the bankruptcy is to be found in ss 58 and 116. Under s 58 it is the Òproperty of the bankruptÓ (and after acquired property) which vests in the trustee in bankruptcy. Section 116 provides that all property that belonged to or was vested in the bankrupt at the commencement of the bankruptcy is, with other property defined in the sections, property divisible amongst the creditors of the bankrupt. To be included in the property divisible among creditors is the property the subject of transfers which s 121 renders void, subject of course to the proposition that the area of voidability extends only to the extent that the property is necessary for division among creditors. The doctrine of relation back is unique to bankruptcy. Subject now to specific statutory protection to be found, for example, in ss 121(4) and (8), the title of the trustee in bankruptcy relates back to the commencement of the bankruptcy. So, for example, if a debtor executes an assignment for the benefit of creditors which constitutes an act of bankruptcy, the title of the trustee to the property relates back to the time of that act of bankruptcy. As Lord Esher MR said in In Re Pollitt; Ex Parte Minor [1893] 1 QB 455 at 457: ÒThe result of the relation back is, that all subsequent dealings with the debtorÕs property must be treated as if the bankruptcy had taken place at the moment when the act of bankruptcy was committed. The debtor must be considered as having become a bankrupt the moment the deed was executed. Then, he being a bankrupt, all the money which he then had, and all the money which was owing to him, passed to the trustee in the bankruptcy for the purpose of being distributed by him amongst the bankruptÕs creditors.Ó Where the question was merely whether a transfer in fraud of creditors should be avoided under the Statute of Elizabeth no question of relation back would operate. The avoidance of the transfer would operate from the moment of time when the Court order operated to avoid it. But the situation was always different in bankruptcy. The difference was explained by Lord Sterndale MR in In re Gunsbourg [1920] 2 KB 426 at 441, where his Lordship said: ÒThe arguments for the appellant seem to me to ignore the fact that the doctrine of relation back puts the trustee in a position entirely different from that of an ordinary person who avoids a transfer, and from that of the trustee himself when he avoids a transfer which is not an available act of bankruptcy, and to which therefore his title does not relate back.Ó In re Gunsbourg was a case where the assignment was in fraud of creditors and was itself the act of bankruptcy upon which, in due course, a receiving order was made. There was no provision in the relevant bankruptcy legislation equivalent to s 121. It was held that a purchaser in good faith from the assignee was not protected because the title of the trustee related back to the commission of the act of bankruptcy and there was no statutory protection afforded in the then English bankruptcy legislation. It might be thought that In re Gunsbourg depended upon the fact that the assignment was itself the act of bankruptcy. But this is not so. Lord Sterndale said at 443: ÒIn my opinion the judgment of Horridge J was right though he attached too much importance to the original transfer being an act of bankruptcy, while in my opinion the case depends not only upon that point, but upon the point whether it is within the period to which the trusteeÕs title relates back, whether itself an act of bankruptcy or not. If it be within that period the property transferred must in my opinion be treated as property to which the bankrupt had and could confer no title upon anyone and therefore transferees from his transferee could not obtain any title.Ó There is, of course, a distinction between the facts of the present case and those in In re Gunsbourg in that in the present case it is not the transfer in fraud of creditors itself which occurred within the relation back period Ð it is the lease. Further, the avoidance of the transaction arises under a specific section, s 121, and the title of bona fide purchasers for value without notice has clear statutory protection. However the case provides some assistance by way of analogy. The 1924 Bankruptcy Act contained a specific provision (s 96) for the protection of certain transactions which were bona fide, which provision was extended to bona fide purchasers for value in ss 96A and 96B. Section 94 operated to avoid certain settlements and s 95 certain preferences, although there was not, as already noted, any equivalent section to s 121. The 1966 Act enacted s 121. After the operative provision avoiding dispositions made to defraud creditors it provided in subs (2): ÒNothing 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.Ó This statutory protection for bona fide purchasers operated thus to avoid the consequences of the decision in In re Gunsbourg. When s 121 was rearranged and redrafted in 1996 and in a way which in essence made the requirement to prove fraud unnecessary, the statutory exclusion was split in two. Subsection (4) provided protection to transferees acting in good faith and has no present relevance. Subsection (8) provided for the protection of bona fide purchasers for value from the transferee. It is in the following form: ÒThis section does not affect the rights of a person who acquired property from the transferee in good faith and for at least the market value of the property.Ó One might ask rhetorically why there would be any need for the protection of purchasers from the initial transferee if the avoidance operated only as and from the making of a court order for it is hard to see how thereafter there could be any transaction which might fall within subs (8). If anything, the subsection confirms the proposition that there is relation back of the avoidance of the disposition, for it is for that reason that there is a need to protect innocent third persons who take from the transferee. That Parliament contemplated such a relation back is confirmed, if confirmation is required, by the Explanatory Memorandum which accompanied the 1996 amendments. In para 23 under the heading Ò(b) Revision of antecedent transaction avoidance provisionsÓ, the Memorandum states: A fundamental feature of the law of bankruptcy is that in certain circumstances, it operates to enable property and money given or transferred by a person who subsequently becomes a bankrupt to be recovered by the bankruptcy trustee, to enable its sale, and the distribution of the proceeds of sale to the bankruptÕs creditors. The current law provides for a period of Ôrelation backÕ, and makes specific provision in relation to ÔsettlementsÕ of property (section 120), fraudulent transactions (section 121) andÉ The Bill proposes changes to this area of the law to simplify it, and to change the focus of the provisions away from the intention of the parties to particular transactions, to the nature of the transactions and the likely effect on the creditors. To the extent that a personÕs intention in dealing with property is relevant Éobjective criteria are laid down ÉÓ Further support for the view that the avoidance of the transfer is to relate back to the commencement of the bankruptcy, so that the property transferred vests in the Trustee on the making of a sequestration order, is to be found in the judgment of Drummond J in Re Aley; Ex parte Sweeney v Aley (1996) 63 FCR 294. It has to be said that the facts of the case did not really raise the problem which is evident in the present case. However, it should be noted that his Honour said (at 301): ÒBut, given that this transfer is void as against the trustee in bankruptcy, the applicant trustee is entitled to enforce his rightsÉ The declaration that the transfer by Mr Aley of his interest in the property to Mrs Aley is void as against the applicant trustee confirms that that interest was vested in possession in the trustee from the time when Mr Aley became bankrupt, pursuant to s 58 of the ActÓ. [emphasis added.] Adapting what his Honour there said to the present case, the transfer to Mr Ashton was void as against Mr Prentice and in consequence the home vested in Mr Prentice as and from the making of the sequestration order on 22 May 1997. The lease was entered into at the earliest on 1 July of that year. To the extent that there was some valid, albeit oral, agreement to lease entered into prior to that date, the execution of the new lease would have operated as a surrender of any estate which the tenants may have had. There is, in any case, no suggestion that there was anything more than a tenancy at will, or perhaps a weekly tenancy. Given the sporadic nature of the rental payments it is not easy to say what, if any terms there were prior to the lease bearing date 1 July 1977. It follows that unless the lessees are entitled to the protection of s 121(8) their title is of no effect. Clearly Mr Jury was in no way a bona fide purchaser. It is simple to infer that the members of the Jury family knew all the relevant circumstances. That inference, which is open, can more readily be drawn from the failure of any of them to give evidence. I find accordingly that they are not entitled to the protection of s 121(8). I would accordingly declare that the lease is void as against the Trustee, and order that the bankrupt and his family deliver up possession one month after the making of the present orders. The first cross respondent will be ordered to pay the TrusteeÕs costs of the proceedings so far as they relate to the lease and orders to deliver up possession. As I have already indicated, the first cross respondent should also pay the applicantÕs costs of the cross claim. The reference to solicitor and client costs was an error. I intended the cost order to be on a party and party basis. There will be no order as to the costs of the other cross respondents who submitted to any order the Court might make other than as to costs.

Sharrment Pty Ltd v Official Trustee in Bankruptcy

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