Sheahan (Trustee) in the matter of Frost (Bankrupt) v Frost [2011] FCA 686 | Case summary

The Mayflower Crescent property 5 Mr Richardson seeks orders which involve the payment to him of an unspecified sum in respect of each of the two Richardson mortgages by Mr Sheahan, to be paid subject to Mr Richardson providing to him an executed discharge of mortgage in relation to each of those mortgages. The amounts sought are not specified in the proposed orders, but as I understand it from the submissions now made, it is contended that the amount of the costs incurred by Mr Frost to Mr Richardson after the date of each of those mortgages should be the amount of the consideration for each of them. There was a considerable amount of costs incurred prior to the first Richardson mortgage. I was told that, somehow, interest should also be accommodated. It was not explained how. I also raised the question as to how, if at all, there should be an apportionment of the value of the work done, bearing in mind that the Richardson mortgages would each remain enforceable against Mr Frost (that is against Ms Frost, whose share in the Mayflower Crescent house has also now been transferred to Mr Frost as part of a matrimonial settlement) to the extent of his interest in the Mayflower Crescent property. 6 It is first necessary to address the proposal to adduce further evidence on the part of Mr Richardson. He sought to do so by two affidavits which, so far as identified in submissions, contained assessments of an independent costing expert as to the value of the legal work he had carried out for Mr Frost between 17 August 1997 and 4 January 2000, apparently based upon an examination of Mr Richardson's files, and for the work done in respect of the application for special leave to appeal to the High Court. That all occurred after the grant of the second Richardson mortgage. The work done in respect of the first period, I was told, could be broken up from that costing expert's report into work done prior to the first Richardson mortgage and after the first Richardson mortgage but before the second Richardson mortgage. 7 I do not propose to give leave to rely upon those affidavits. Counsel for Mr Richardson indicated that his application was, in essence, for leave to reopen his case to call that evidence. It was evidence which might have been given in the course of the hearing. It was not. No explanation has been offered as to why it was not called during that time. More importantly, although not in precise terms, the primary judgment referred to the then produced evidence as to the extent of, and value of, legal work carried out by Mr Richardson for Mr Frost from time to time. The proposed additional evidence may have two purposes. One is to bolster the reliability of Mr Richardson's own evidence, about which I have made findings as to its reliability, in circumstances where that assessment as to his evidence has fed into other findings made in the primary judgment. It would be improper for further evidence now to be adduced in effect to endeavour to reverse those findings, assuming for the moment that it might have the capacity to do so. Secondly, it is intended to show more precisely, and therefore more reliably, the value of legal services he had rendered to Mr Frost from time to time in relation to the Supreme Court proceedings and in relation to the application for special leave to appeal to the High Court. Again, although not in precise terms, I have made observations about the value of those services in the primary judgment. There has been no attempt, as I am informed, to address all of those concerns. In particular, there has been no attempt to have regard to the value of the serviced offices that Mr Richardson received from Mr Frost from 1997 up to the time of the Richardson mortgages, or at all. If the further evidence was intended to facilitate the making of a more reliable judgment on the value of the legal fees provided by, and outstanding to, Mr Richardson at material times, at this late stage, I would have expected that the assistance that such evidence was to provide would have extended to take account of the matters to which I referred in the primary judgment. It does not do so. It might fill in part of the picture, possibly in a way inconsistent with earlier observations, but it was not intended to fill in the whole picture. 8 In those circumstances, I consider that it would be unfair to receive that evidence and inappropriate to do so. 9 Section 121(5) of the Act was introduced at the same time as s 121 generally was introduced in its terms as in force at material times, by the Bankruptcy Legislation Amendment Act 1996 (Cth). It had no apparent legislative ancestor. It has not since been amended. Nor, so far as I can determine, has it been the subject of specific judicial consideration. In the Explanatory Memorandum (at [84.28]) no other comment is made than what is in effect a paraphrase of the subsection. Published commentary upon the Act also adds little to inform its meaning, other than to suggest that the onus of proof of there being no amount equal to the value of any consideration lies upon the trustee. 10 It is convenient to repeat s 121(5). It provides: The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee. 11 Section 121(6) provides that certain things have no value as consideration: the relationship of the transferee to the transferor, and like matters. It is also worth noting that s 121(8) provides that the 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. That subsection has not sought to be enlivened by Mr Richardson, and for the reasons which are contained in the primary reasons it could not be. 12 I shall not repeat the findings or observations recorded in the primary reasons concerning matters which now might touch on s 121(5). I made observations about the terms of the first Richardson mortgage at [72] about Mr Richardson's conduct and understanding at the time of those two mortgages at [97]-[99], at [101], [103], [105], about Mr Richardson's awareness of Mr Frost's financial position at the time of each of those mortgages at [119] and elsewhere. That is not a complete list of the relevant references. 13 In essence, in terms of s 121(2) of the Act, I found that Mr Frost's main purpose in granting the two Richardson mortgages was to prevent the transferred property from becoming divisible amongst his creditors, or to hinder or delay the process of making that property available for division amongst his creditors. I reached that conclusion not simply because it could reasonably be inferred from all the circumstances that at the time of the transfer Mr Frost was or was about to become insolvent, but as a matter of fact. I also found that s 121(4) had not been established, and in particular I positively found that Mr Richardson could reasonably have inferred that, at the time of the transfer, Mr Frost was or was about to become insolvent. I also found that he knew that Mr Frost's main purpose in making the transfer was the purpose referred to in s 121(1)(b). I also found that the consideration for the transfer given by Mr Richardson was not at least as valuable as the market value of the property. 14 To put the position quite bluntly, in my view Mr Richardson at material times, that is at the times at which the two Richardson mortgages were granted by Mr Frost and Ms Frost, knew of Mr Frost's financial situation and knew that Mr Frost was granting the mortgages for the purpose of preventing Mr Frost's interest in the Mayflower Crescent property from becoming divisible amongst his creditors or to hinder or delay the process of making that property available for division amongst his creditors. 15 That does of itself not preclude the application of s 121(5). 16 Obviously, the question as to the value of any consideration that Mr Richardson gave for the grant of the Richardson mortgages will or may be different in respect of each of the mortgages. I will therefore address them separately. 17 Before doing so, I note the submission that the onus of proof of the value of any consideration is, on the submission of Mr Richardson, to rest upon Mr Sheahan. I do not accept that. In the first place, s 121(5) would not be activated or require consideration unless and until the transferee, against whom a transfer has been held to be void against the trustee in bankruptcy of the transferor, has raised the issue. I do not think it is a matter which a Court would routinely be expected to consider unless there was some reason to do so. There would be little reason for s 121(5) to be ventilated at all unless it was specifically raised by the transferee. In this matter, the issue was raised by Mr Frost and Mr Richardson by the notice of contention. That having been done, whether it is up to the transferee to assert the value of the consideration given for the transfer will depend on the circumstances. In practical terms, that will depend on what the transferee and trustee wish to respectively assert. It is routine to expect that the person who asserts the state of affairs in issue has, at least, an evidentiary burden of proof in relation to that state of affairs. If the trustee says there was no consideration because the transaction was a sham, the onus is upon the trustee to prove that because the trustee is asserting it. That is one of the assertions in this matter. For the purposes of the primary judgment, I did not need to address it explicitly. If the issue as expressed is whether the asserted consideration was in fact given at all, one would expect the transferee to adduce evidence about its character and value. If the trustee says that the value was different from that asserted by the transferee, one would expect the trustee to adduce evidence as to its value. Once the evidence is adduced, I tentatively express the view that, if the issue is as to the value of the consideration given, the legal onus of proof is upon the transferee but if the issue is whether consideration was given at all (because it is said the transaction was a sham) the legal onus of proof of that is upon the trustee. I do not need to finally decide that technical issue. 18 In the primary judgment, I expressed a number of findings in positive terms and some, having regard to the relevant onus of proof in terms of matters not having been proved. As it is now said that it is necessary on the part of Mr Richardson for positive findings to be made as to the value or consideration that he provided for the two transfers by the Richardson mortgages, it is necessary to be a little more explicit in those findings. 19 At the time of the first Richardson mortgage, Mr Richardson had provided extensive legal services to Mr Frost. But I find that there was no amount owing by Mr Frost to Mr Richardson in respect of those services because, having regard to the arrangement between them, the value of the provision of serviced offices by Mr Frost to Mr Richardson was of such a value as to set off or amount to payment of those costs. In the primary reasons, I expressed the view that it was difficult to quantify the value of the serviced offices. That remains the case. However, doing the best I can, I consider that those costs were offset by the value of the serviced offices provided to Mr Richardson from 1997 in any event. I have adopted a quite conservative estimate of the value of those serviced offices for that purpose. I have also assumed that the value of the legal work then done by Mr Richardson for Mr Frost was approximately $30,000. In respect of the balance of the costs incurred by Mr Richardson in relation to the Supreme Court proceedings, that is the costs to be incurred after the first Richardson mortgage, I will make more explicit what I thought was implicit in the primary reasons for decision. In my view, neither Mr Frost nor Mr Richardson intended that it was a condition of Mr Richardson continuing to provide legal services to Mr Frost that the first Richardson mortgage should be given. I am satisfied, and I find, that it was clearly understood between them that Mr Richardson would continue to provide legal services to Mr Frost in relation to the ongoing conduct of the Supreme Court proceedings whether or not the first Richardson mortgage was given. I find that the first Richardson mortgage was given by Mr Frost to Mr Richardson for the purpose expressed in s 121(1)(b) to the knowledge of Mr Richardson. I have made in the primary judgment findings about the reliability of the evidence of Mr Frost and Mr Richardson. I do not accept their evidence that either of the two Richardson mortgages was granted because Mr Richardson was owed legal costs by Mr Frost, nor that but for the grant of those mortgages, he would no longer continue to provide legal services to Mr Frost or would forbear from taking action to recover any legal costs outstanding. To recapitulate what was said in the primary judgment, in reaching that conclusion I have taken into account my overall views as to the reliability of their evidence, the nature of the relationship between them, the ongoing arrangement to provide serviced offices (as the evidence now shows, an arrangement that has lasted for many years), Mr Richardson's knowledge from the time he first commenced acting for Mr Frost that Mr Frost could not pay his legal fees, the file notes of Mr Richardson of 27 January 1998 and 31 January 2000, Mr Richardson's understanding that there was little or no equity in the Mayflower Crescent property in any event, the unsolicited discharges of the mortgages, and the fact that they were given to Ms Frost, the failure of Mr Richardson at any time before those proceedings to either submit a bill of costs to Mr Frost or to attempt to recover any costs from him, including following the settlement of Mr Frost's claim against his former solicitors and following the matrimonial settlement, and features of the terms of the first Richardson mortgage. 20 I find that Mr Richardson was aware of Mr Frost's view, and shared it, that the purpose of the mortgage was to make it difficult for other creditors of Mr Frost to recover from him. Mr Richardson's subsequent conduct in relation to recovering his fees from Mr Frost, his conduct in relation to preparing the discharges of the two Richardson mortgages and having them given to Ms Frost tends to confirm that. 21 In other words, put bluntly, the effect of my findings more cautiously expressed in the primary judgment and as expanded upon above is that the first Richardson mortgage was a sham. 22 As I indicated in the primary reasons, taking into account the value of the ongoing provision of, and entitlement to, serviced offices, in my view Mr Frost by the time of the second Richardson mortgage had incurred legal costs to Mr Richardson considerably in excess of the value of the services provided to him. Notwithstanding that, I find, for the reasons already given, that Mr Richardson did not intend to decline to provide ongoing legal services to Mr Frost if Mr Frost had not given to him the second Richardson mortgage. He was by then aware of the AIC mortgage over the Mayflower Crescent property. Any competent solicitor would have been aware of that mortgage over the Mayflower Crescent property before seeking a second ranking security. I find however that he was not aware of the amount secured by the AIC mortgage which largely absorbed Mr Frost's equity in the Mayflower Crescent property. He gave no evidence of any such search or of any such consideration. He failed to take steps to recover his legal fees at any time subsequent to the resolution of the Supreme Court proceedings, and even up to the time of the family settlement, and to his provision of the discharge of mortgages. In my view, he did not intend to cease to act for Mr Frost if Mr Frost did not give him the second Richardson mortgage. This again leads me to the blunt conclusion that the second Richardson mortgage was a sham to create an appearance of complexity to those potential creditors of Mr Frost who might otherwise seek to enforce and recover any debts owed by Mr Frost to him by access to the Mayflower Crescent property. 23 Consequently, I find that Mr Richardson did not pay to Mr Frost or Ms Frost any consideration for the grant of either of the two Richardson mortgages. 24 It is therefore unnecessary to consider how s 121(5) might have operated in the present circumstances where, as was suggested on behalf of Mr Richardson, Mr Sheahan should pay the full value of Mr Richardson's legal fees (the asserted consideration) pursuant to s 121(5), even though that might have meant that the two Richardson mortgages would have remained enforceable against Mr Frost in respect of that half interest in the Mayflower Crescent property which Mr Frost has received from Ms Frost. 25 It is also unnecessary to address the contention that, although the asserted consideration was Mr Richardson's legal fees, the amount payable under s 121(5) should not simply be the value of the asserted legal fees then outstanding or to be incurred, limited in the case of each mortgage to the limit of $50,000, but also the accumulated interest on that amount said to be payable under the two Richardson mortgages. How the figure of $326,000 was reached (specified in the Notice of Contention) was only generally referred to as representing capital and interest. It is not an immediately obvious proposition that the value of the asserted consideration (whether outstanding legal fees or the preparedness to act on the basis of legal fees to be incurred, in either instance limited to $50,000) includes interest payable under the mortgage. Nor is it immediately obvious that interest should be payable and accumulate on the legal fees before they actually became payable by the submission of a proper legal account for those fees. Nor is it an attractive proposition to claim the nominal upper amount of the mortgages plus interest from the date of the mortgages without proper appraisal of the value of the serviced offices which, in any event, were to be offset against the value of the legal work done. I understand from the evidence that Mr Richardson has now had the benefit of the serviced offices without payment for some 14 years. 26 I declare that Mr Sheahan holds as trustee of Mr Frost's bankrupt estate one half interest as tenant in common in the Mayflower Crescent property. I also declare that the two Richardson mortgages are void against him in that capacity. 27 Although the Mayflower Crescent property is not, apparently presently occupied by Mr Frost, he has proposed, and Mr Sheahan is prepared to agree, that Mr Frost be given the option of acquiring the Mayflower Crescent property. Mr Sheahan is prepared to enable 50% of that property to be acquired, that is his interest in that property, by private treaty between himself and Mr Frost at a price of $290,000, that being the present valuation of the property as at November 2010. I will allow Mr Frost four weeks within which to indicate his acceptance or otherwise of that proposal. If he accepts it in writing within that time, he is to settle on the property within the conventional period of four weeks thereafter. At the time of settlement, the purchase price will have to be adjusted in the normal way for any expenses paid by Mr Frost or Mr Sheahan in respect of the property. If he does not accept that proposal, in my view the Mayflower Crescent property should be offered for sale by public auction, to be held within four weeks of the expiration of that four week period, or such later time as the parties may agree or as an independent licensed land agent engaged to sell the property shall advise in writing. Mr Frost will be at liberty to bid for the property. Mr Sheahan has suggested particular orders appropriate to considering its sale and preparing it for sale. Mr Richardson and Mr Frost have not made any submissions suggesting that they are inappropriate terms. The orders made with these reasons reflect those terms, although I have expanded them a little to avoid any dispute, and they are consistent with the terms of sale proposed by Mr Frost and Mr Richardson. 28 So that it is not seen to be overlooked, I have assumed, as I did in the primary judgment, that the AIC mortgage over the Angas Street property and secondarily over the Mayflower Crescent property will be discharged by the sale of the Angas Street property. If, as seems likely, the sale of the Mayflower Crescent property occurs first, there are a series of options: (1) if Mr Frost buys Mr Sheahan's interest in that proportion, either AIC may agree to release that property from its security (there is no special reason to think that it will do so) or its mortgages will remain over the whole of that property and over the Angas Street property - in that event, the two Richardson mortgages will remain over that property as second ranking securities (I do not need to decide whether, in that circumstance they will give security over the whole of the property now in Mr Frost's name only, or over only that part of his interest in the property which he acquired from Ms Frost through the matrimonial settlement, as to which there has at no stage been a challenge to their effectiveness); or (2) if Mr Frost does not buy Mr Sheahan's interest in the Mayflower Crescent property, presumably at settlement the AIC mortgage will be discharged and the net proceeds of sale shared between them reduced by the payout figure (it is a matter between Mr Frost and Mr Richardson as to whether Mr Frost's half share is payable to Mr Richardson to secure the discharges of the two Richardson mortgages) - in that event, the value of each share in ABPH will be proportionally increased. 29 Mr Sheahan should not be faced with the value of both the Mayflower Crescent property and the share in ABPH being reduced because of the AIC mortgage, because it will have to be repaid only once. On the other hand, the burden of the AIC indebtedness should not rest solely upon Mr Frost. To avoid any outstanding issues which may arise between Mr Frost and Mr Sheahan about such matters, I will reserve liberty to apply in relation to them.

The Angas Street Property 30 As I noted in the primary judgment, the parties, I thought, had agreed that in the event of my finding that ABPH held the Angas Street property on its own behalf, it would be appropriate for the Angas Street property, as the sole asset of ABPH, to be sold and the net proceeds of sale to be applied to the shareholders through the winding up of ABPH. I am now informed that that understanding was not correct. 31 Mr Frost has filed since the last hearing two affidavits, one of which is not pressed to be read on this application, and the other of which exhibits the Memorandum and Articles of Association of ABPH. I do not need to receive it because I accept, as was urged by counsel for Mr Frost, that its Articles of Association would contain the pre-emption clauses commonly contained within Articles of Association of a proprietary corporation with only one or two shareholders and family. I proceed on that assumption. 32 Mr Frost has also indicated he would like an opportunity to buy Mr Sheahan's share (presently held by Mr Sheahan only in equity) in ABPH. I am prepared to accommodate that request, as it is not opposed by Mr Sheahan. 33 Mr Sheahan is prepared to sell his share in ABPH to Mr Frost for one half of the net value of the Angas Street property, less the outstanding capital amount owing on the AIC mortgage which is, I am informed, still $185,000. On that basis, and adopting the valuation given in evidence of $500,000 (which Mr Sheahan is prepared to do), Mr Frost would be given the opportunity in the four weeks expressed in the orders to buy Mr Sheahan's share by agreeing in writing to pay Mr Sheahan $157,500, being one half of the net value of the Angas Street property after allowing for the AIC mortgage. Settlement on that transaction must then take place within four weeks of acceptance of that offer. If that offer is not accepted, and if the rights of pre-emption are to be exercised, I will direct that Mr Frost transfer to Mr Sheahan in his capacity as trustee one of the two issued shares in ABPH. Presumably the pre-emptive procedures will be undertaken pursuant to the Articles of Association although it may be difficult to do so in any consensual way where there is a non-functioning entity, with only one director who is not representing more than 50% of the shares. One option may be to make an order for the winding up of ABPH, and the liquidators may then proceed to dispose of its assets. Another option may be for the parties to agree upon an independent valuation of the ABPH shares to be obtained, to be undertaken by a valuer upon whom they are agreed, or nominated by a particular person. If Mr Frost and Mr Sheahan are agreed about that, I will be disposed to make an order to that effect by consent. The liberty to apply which I have reserved may be exercised if there is no ongoing agreement. 34 I will at present simply make orders in effect limited to securing the transfer of Mr Sheahan's entitlement to one share in ABPH, which will take place subject to any private and consensual arrangement between Mr Sheahan and Mr Frost for Mr Frost to pay Mr Sheahan for the equity in that share. 35 I indicate that, notwithstanding the liberty to apply which I have reserved, I regard the principal orders made at the time of these reasons for judgment as constituting final orders in the proceeding. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.

Sheahan (Trustee) in the matter of Frost (Bankrupt) v Frost

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