The First Issue: The Validity of the Richardson Mortgages
108 For purposes of applying s 121 of the Act, while it is necessary and appropriate to consider each of the Richardson mortgages separately, simply because they were entered into at different times, many of the facts and evidence referred to above are relevant to an assessment of the validity of both of the Richardson mortgages. I will consider the validity of both mortgages concurrently, but will nonetheless flag when considerations are relevant to only one of the two Richardson mortgages.
109 With respect to s 121 of the Act (its terms are set out above in paragraph [27]) there is no dispute about the elements required to be satisfied, nor their substantive content.
110 The grant of a mortgage constitutes a transfer of property for the purposes of s 121 of the Act: Pastro v Official Trustee in Bankruptcy [2000] FCA 744 and Mr Frost is a person who later became bankrupt.
111 Prima facie, both Richardson mortgages are void if the criteria in s 121(1)(a) and (b) are established. For purposes of criteria (a), I am satisfied that the Mayflower Crescent property would probably have become part of Mr Frost's estate and been available to his creditors but for the transfer of that property.
112 The principal question then is whether Mr Frost's main purpose in granting the Richardson mortgages falls within either of the two purposes enumerated in s 121(1)(b). The transferor's main purpose is said to be deemed to be that described in s 121(1)(b) if s 121(2) is satisfied: that is if it can reasonably be inferred from all the circumstances that, at the time of the transfer, Mr Frost was or was about to become insolvent: s 121(2).
113 The formulation of the test expressed in s 121(2) was considered by the Full Court in Re Jury; Ashton v Prentiss (1999) 92 FCR 68 (Ryan, Heerey and Katz JJ). Their Honours at [55] said that the formulation is not synonymous with the expression "if the transferor was insolvent". They continued:
The statutory provision, as a matter of ordinary language, leaves open the possibility that it may also reasonably be inferred that the transferor was solvent. In other words, it is sufficient if the inference of insolvency is reasonably open. An analogy is the leaving of a case to a civil jury. If it can reasonably be inferred from all the circumstances that the defendant was negligent, or that the publication complained of was defamatory of the plaintiff, then the matter must go to a jury. Nevertheless, the jury is not required to draw the relevant inference and may not do so.
114 Their Honours continued at [56]:
[The] conclusion about the existence of a reasonable inference concerning the bankrupt state of solvency was supported by the conceded inability of the bankrupt to pay current legal expenses or expected future legal expenses in connection with the litigation … Also, in this context, his Honour relied on the large sums being claimed by … which the bankrupt could not pay. Although those claims had not by then merged in a judgment, his Honour held that they represented "a debt which came into existence, no doubt, at the latest when the bankrupt was called upon to pay under his guarantee. That is to say, it was a debt which existed and was due and payable at the time the transaction was entered into".
115 On the appeal, the finding at first instance was not challenged, and it was argued that the presumption created by s 121(2) could be rebutted by direct proof that the transferor's main purpose was other than that prescribed in s 121(1)(b), particularly having regard to a language of s 121(3). That contention was rejected. Their Honours at [59] confirmed that ss 121(2) and (3) have independent spheres of operation. Consequently, because the finding that s 121(2) was enlivened, the transfer in question was void unless s 121(4) was satisfied. That is a contention developed in this matter as well and which will be addressed later in these reasons.
116 Section 121 in its pre-amended form was also the subject of consideration in Prentiss v Cummins (2002) 124 FCR 67 (Prentiss), in particular at [87]-[103]. I respectfully agree and adopt the analysis of Sackville J in that decision. He referred with approval to a passage in Re Jury at [81]. As his Honour there explained, if reliance is placed on s 121(2) the transferor's subjective intention is likely to be irrelevant. If it can reasonably be inferred that the transferor was insolvent at the time of the transfer or was about to become insolvent at the time of the transfer, it does not matter if his or her subjective intention did or did not fall within s 121(1)(b). On the other hand, if there is no reliance upon s 121(2), the trustee would need to establish that the transferor's subjective purpose was that described in s 121(1)(b).
117 His Honour at [96] noted that the expression "main purpose" is not defined in the Act. His Honour adopted a meaning of "main" as a principal or leading purpose, and not necessarily the sole purpose, so that the transfer might be caught by s 121 even though the transferor had other purposes in mind. As is clear enough from the wording, the onus lies upon the party invoking s 121 to show that the terms of s 121(1) have been met: see Prentiss at [97] and Re Williams; Williams v Lloyd (1934) 50 CLR 341 at 372.
118 Since reliance is placed on s 121(2) in this case, I will proceed to address the question of Mr Frost's insolvency at the relevant times of the granting of the Richardson mortgages (namely 27 January 1999 and 1 February 2000), before any further consideration of s 121(1)(b).
119 As noted above, on 24 July 1998, an order had been made restraining Mr Frost from dealing with his assets, other than in the ordinary course of business as an accountant. With the assistance of Mr Richardson, he had prepared two affidavits in relation to that application disclosing the extent of his assets and liabilities. A comparative analysis of Mr Frost's assets and liabilities at the relevant times translates to an unfavourable statement of his financial position.
120 At neither times of the granting of the first and the second Richardson mortgages did Mr Frost have any significant assets capable of realisation at short notice to discharge his liabilities. The evidence indicates that his income stream from his accounting practice was a modest one, apparently allowing him to meet day-to-day expenses, expenses of the accounting practice, and outgoings on the Angas Street property but with little surplus. (It is not presently necessary to consider whether the outgoings on the Angas Street property were ultimately borne by ABPH itself or as trustee for the FFT). No personal income tax returns have been adduced in evidence, nor any other evidence to indicate that Mr Frost was earning sufficient income to pay in any timely manner that liability or accumulate or borrow funds to enable him to do so. His principal equity was his half share in the Mayflower Crescent property, then jointly held with Ms Frost. I find that his equity in that property at that time was not sufficient, even if realised, to meet that liability. It was then valued at about $105,000, so Mr Frost's share was worth about $52,500. Since it was a matrimonial home, it was not a readily realisable asset. As I have found, Mr Frost also owned one of the two shares in ABPH which, in turn, owned the Angas Street property. In 1997 it was valued (as ascribed by Mr Frost) at about $240,000. The AIC primary mortgage was for $185,000. Whilst, there is no independent evidence of its value at January 1999, one half would have been worth in excess of $25,000 after discharge of the mortgage. Allowing for some inflation of property values, I shall assume Mr Frost's share at January 1999 was worth about $40,000. Again, assuming that that asset could be readily realised, it would not have enabled payment of the judgment debt at January 1999.
121 I also do not think Mr Frost's accounting practice was capable of being sold at any significant value. In his Statement of Affairs and application for a loan to support the acquisition of a property in Darwin, Mr Frost estimated its worth at $400,000. However, contrary to this, he stated in his evidence, that the practice had such a client base that it could not be sold for any significant sum. There is no basis for thinking that it had any real saleable value, based upon the little evidence as to its revenue, or any available financial reports, so I accept Mr Frost's own assessment on that matter. That approach is consistent with Mr Frost's affidavit sworn in the Supreme Court proceedings on 24 July 1998, where Mr Frost adhered to the view that the value of his accounting business was not significant.
122 Neither am I of the view that the property at Cullen Bay in Darwin had any significant value to improve his net asset position. It was purchased in October 1997 for $239,950, subject to mortgages of about $219,000, and was sold in 2004 for $230,000. The mortgages were discharged and the net realised profit upon that sale was nearly $27,000. It is apparent that it was not appreciating in value significantly, or at all, at the time of either of the two Richardson mortgages. I think it is realistic to allow a sum of no more than about $30,000 by way of equity.
123 So far as the evidence discloses, Mr Frost's liabilities primarily arose as a result of the Supreme Court proceedings.
124 By January 1999, judgment against Mr Frost (and others) had been given on the issue of liability in the Supreme Court proceedings and in favour of both family groups on 19 November 1997. It was only on 3 July 1998, that quantum had been assessed for a particular and not insignificant sum of $103,734 plus interest on one of the two family claims on 3 July 1998. The second judgment was not quantified in amount, but was obviously to be of not a dissimilar amount. At the time of the first Richardson mortgage, an appeal to the Full Court of the Supreme Court from the judgment of 19 November 1997 had been heard but not yet determined. I have expressed reservations about the optimism which Mr Frost then held as to the likely outcome of that appeal, but for the purposes of s 121(2) of the Act, his subjective assessment of those prospects is irrelevant. The subsection merely requires an objective assessment of all the circumstances.
125 By the time of the granting of the first Richardson mortgage, the solicitors previously acting for Mr Frost (through an insurer) had ceased to act for him and had made a claim against him for reimbursement of legal costs and disbursements in the sum of $160,000. It was apparent at that time that Mr Frost's professional indemnity insurer had declined to indemnify him in respect of the liability in the Supreme Court proceedings.
126 The liabilities at the time of the grant of the first Richardson mortgage were substantial, and obviously in my view were in excess of $200,000 plus interest and costs. I accept that there was some, but no strong prospect of succeeding on the appeal setting aside the judgment against Mr Frost. It was not contended, on behalf of Mr Frost, that I should not take into account in an assessment of his liabilities, the yet to be crystallised judgment debt relating to the second family claim. In those circumstances, and bearing in mind what I have found as to the cash flow and earnings potential of his accounting practice, I am satisfied that it can be reasonably inferred from all the circumstances that at the time of the first Richardson mortgage Mr Frost was, or was about to become, insolvent. Indeed, Mr Frost acknowledged in his cross-examination that from November 1997, when judgment for damages to be assessed was entered against him, he had no ready funds to pay any such judgment debt and interests then, nor subsequently in January 1999, or in February 2000.
127 Consequently, since I am satisfied of s 121(2), I conclude that Mr Frost's main purpose in granting the first Richardson mortgage was that described in s 121(1)(b).
128 Turning to the second Richardson mortgage, it can also reasonably be inferred from all the circumstances that Mr Frost was or was about to become insolvent. This conclusion is readily apparent since at that time the Full Court appeal had been dismissed, and Mr Frost's liabilities arising out of the Supreme Court proceedings were affirmed. The quantum of the second family claim had been fixed in excess of $200,000. He was also liable for the costs of the proceedings. There had been some appreciation in the value of both the Mayflower Crescent property to about $115,000 (the value of Mr Frost's share would be about $55-60,000) and the Angas Street property (after payment of the primary AIC mortgage, but ignoring costs of realisation) increasing his share in ABPH to about $75-80,000. At the time of the grant of the second Richardson mortgage, Mr Frost's asset position described above (relevant to the assessment of the first Richardson mortgage) was about the same, his income potential was no greater, and the liabilities had not been reduced. I am similarly satisfied that s 121(2) applies to the grant of the second Richardson mortgage.
129 In reaching the conclusions on s 121(2) with respect to both of the Richardson mortgages, I have not taken into account any liability on the part of Mr Frost to pay Mr Richardson in respect of legal work completed as at January 1999 or February 2000. On or around January 1999, I am not satisfied that the arrangement between them was such as to give rise to liability for legal costs, rather than a liability contingent upon there being funds available to meet them. I am also not satisfied that there were any such costs outstanding and payable, of approximately, and not less than, $50,000 at that time. I find that the arrangement between Mr Frost and Mr Richardson from 1995 was that Mr Richardson would somehow account for the serviced office facilities he was provided with, and from November 1997 the receipt of services would be offset against his legal fees. It is not possible to quantify the value of the serviced office facilities he used, albeit that they may have been modest. There is no evidence as to their value.
130 By the time of the grant of the second Richardson Mortgage, Mr Richardson's professional fees outstanding are likely to have been substantial, and to have exceeded the amount of any set off to account for the provision of the serviced offices. I am not able to determine a precise amount. That amount would only add to the liabilities of Mr Frost as summarised above. However, my conclusion stands as follows: the arrangement between them, and the recovery of Mr Richardson's legal fees, remained contingent on there being funds available to meet them.
131 As foreshadowed above, and independent of my conclusions based on s 121(2), I return to briefly consider the criteria set out in s 121(1)(b).
132 Mr Sheahan contends that Mr Frost's true purpose behind the grant of the Richardson mortgages was not to secure any legal fees allegedly owing to Mr Richardson, but that the main purpose was to prevent the Mayflower Crescent property from being divisible amongst his creditors, in particular the judgment creditors of the Supreme Court proceedings.
133 I have recorded my findings about the circumstances in which Mr Richardson came to do legal work for Mr Frost, and the arrangements entered into. The arrangement that the precondition to payment for legal work was the completion of the proceedings, followed from a mutual understanding between Mr Frost and Mr Richardson that Mr Frost would not be in a position to meet legal fees as and when they were incurred. There was initially no suggestion that the fees to be incurred would be secured by mortgage over certain property. That intention only arose in January 1999 shortly after the appeal hearing in the Full Court of the Supreme Court (in which judgment was delivered on 2 July 1999). There is some direct evidence, namely the admission by Mr Frost to Ms Frost when he arranged for her to sign the Richardson mortgages that their purpose was to lessen the value of the Mayflower Crescent property in case anything should happen. It remains unclear what circumstances Mr Frost was referring to. Mr Frost also told Ms Frost that she should not worry about the mortgages as Mr Richardson would not want to claim on them, and in fact shortly after the second Richardson mortgage was granted Mr Richardson executed the Discharges of Mortgages. I have accepted generally Ms Frost's evidence on these matters.
134 For the reasons which I have explained, I do not place any weight on Mr Frost's direct evidence as to his reasons for granting the Richardson mortgages. I am also cautious about placing any weight on the evidence of Mr Richardson relevant to the same.
135 Neither do I think Mr Richardson's conduct tends to support the claim that the grants of the Richardson mortgages were a condition of him acting or continuing to act for Mr Frost. In support of this conclusion is the absence of any attempt on the part of Mr Richardson to quantify in formal or reliable terms an estimate of the amount of the legal fees owing by Mr Frost to Mr Richardson leading up to the grant of either Richardson mortgages. There was clearly an arrangement whereby Mr Richardson would, as he did, occupy premises within the Angas Street property and use its facilities without being charged a fee, purportedly as a contribution towards his legal expenses. However, at about the time of either of the grant of the Richardson mortgages Mr Richardson had not estimated the legal costs that had been incurred, nor did he prepare and submit a formal bill of costs in accordance with s 41 of the Legal Practitioners Act 1981 (SA). The failure to do so, suggests a lack of concern for the recovery of his legal fees owing at the time of the grants, in direct contradiction to their contended purpose.
136 Furthermore, I have taken into account the terms of the first Richardson mortgage. The peculiar manner in which the terms are expressed was not explained and does not fit consistently with the claimed purpose said to support the grant of the first Richardson mortgage, with specific regard to the $20,000 purportedly advanced to Mr Frost and Ms Frost, but which in fact had not occurred. Nor do I think either Mr Frost or Mr Richardson satisfactorily explained the purpose of the Discharges of Mortgages. I have accepted that, for whatever reason, they felt threatened by events outside their control, but I do not accept that the perception of being threatened is consistent with the preparation of the Discharges of Mortgages and their handing over to Ms Frost, rather than to some reliable third party.
137 Additionally, the subsequently negotiated terms of the property settlement which included the proceeds of Mr Frost's claim against his former solicitors as transferred to Ms Frost, is conduct on the part of Mr Frost and Mr Richardson which is inconsistent with a pursuit to secure payment of Mr Richardson legal fees.
138 Finally, I discerned in the course of Mr Frost's evidence a firm view on his part that he should not have been found liable in the Supreme Court proceedings, and that he felt cheated by the plaintiffs' success in the same. Consistent with that attitude, Mr Frost's motive for granting the Richardson mortgages perhaps can be implied − not so much an attempt to avoid liability to creditors generally − but to prevent or frustrate, the recovery of judgment debts for reasons associated with the circumstances in which the liability arose. This view accords with what I accept Mr Frost told Ms Frost about the reason for granting the Richardson mortgages.
139 Independent of the deeming operation of s 121(2) (which in these circumstances I have indicated as applicable to both Richardson mortgages), Mr Frost's main purpose in granting the Richardson mortgages was to prevent his equity in the Mayflower Crescent property from becoming divisible amongst his creditors, in particular the two families who had brought the Supreme Court proceedings against him, or alternatively, to hinder or delay the process of making that interest in the Mayflower Crescent property available for division amongst those creditors. I reject the contention that they were to secure the legal fees due to, or which may become due to Mr Richardson. Thus, s 121(1)(b) is satisfied.
140 In my view the two Richardson mortgages are void as against Mr Sheahan, subject to considering the implications of s 121(4), which operates to preserve the transfers if successfully invoked.
141 For the purposes of s 121(4)(a), I regard the value of Mr Frost's equity in the Mayflower Crescent property as being half the "market value of the property". That was about $52,500 in January 1999 and about $57,500 in February 2000. Mr Richardson did not persuade me with any detail that consideration for each of the Richardson mortgages, namely the provision of legal services, equated to those values. He merely asserted that his outstanding legal fees, as at the time of the first Richardson mortgage, were at least $50,000, and so at least as valuable as the market value of the mortgaged property. I do not accept that. The failure of Mr Richardson to provide any detailed costing analysis at the time of that mortgage fortifies that conclusion.
142 I now turn to the application of s 121(4)(a) within the context of the grant of the second Richardson mortgage. As mentioned, Mr Frost's equity in the Mayflower Crescent property on 1 February 2000 was about $57,500. In the space of the 12 months or so, since the grant of the first Richardson mortgage, clearly Mr Richardson had undertaken significant legal work for Mr Frost including in relation to the Full Court appeal and having taken instructions and brought the application to seek special leave to appeal to the High Court. He had also acted for Mr Frost in quantifying the liability relevant to the Supreme Court proceedings, between 2 July 1999 (when the Full Court appeal was dismissed) and 19 January 2010 when those damages were assessed. I am not satisfied that any significant work in the proposed action against the former solicitors of Mr Frost had, by then, been undertaken. The onus of establishing that lies on Mr Richardson: Ashton v Prentice at [67]. Once again, however, there is no attempt to accurately quantify outstanding legal costs as at 1 February 2000. Even allowing for the set off for the provision of serviced offices, I am inclined to think, in the absence of any real costs analysis having been provided, that Mr Richardson's legal fees by that time would have exceeded $57,500. It is an assessment made assuming that the scale of fees was applied to the work done. Mr Richardson has not satisfied s 121(4)(a) in relation to the second Richardson mortgage.
143 Turning to an evaluation of s 121(4)(b), there is also evidence to suggest that Mr Richardson was aware of Mr Frost's main purpose in the granting of both Richardson mortgages. I have referred to that evidence above. It resulted in my findings about the nature of the arrangement between Mr Frost and Mr Richardson concerning the payment of his legal fees and also the existence of the two undated Discharges of Mortgages and Mr Richardson's awareness that they were to be given to Ms Frost. Mr Richardson engaged in those matters with a knowledge of Mr Frost's financial position (as he had prepared the affidavits of Mr Frost filed in the Supreme Court proceedings). I am therefore not satisfied of s 121(4)(b).
144 In light of Mr Richardson's appreciation of Mr Frost's financial circumstances and liability as a result of the Supreme Court proceedings (which had been fully quantified by the time of the grant of the second Richardson mortgage), I am also not satisfied that Mr Richardson could not reasonably have inferred that, at the time of each of the two Richardson mortgages, Mr Frost was, or was about to become insolvent. Section 121(4)(c) is also not made out.
145 The consequence of the findings and conclusions referred to above, is that each of the two Richardson mortgages are void pursuant to s 121 of the Act. As I propose to ask the solicitors for Mr Sheahan to propose the form of orders to give effect to my decision about ABPH holding the Angas Street property in its own right, I will defer making orders on this aspect of the claim at this point. Mr Sheahan's proposed orders concerning the Mayflower Crescent property can be included in that document.