White (Trustee), in the matter of Vlahos (Bankrupt) v Ljubicic

BEACH J: 1 The present application filed by the applicants is for summary judgment under s 31A(1) of the Federal Court of Australia Act 1976 (Cth). The principal proceeding has been brought by the applicants as trustees in bankruptcy of the estate of William Vlahos (the bankrupt) seeking declarations and ancillary orders to the effect that various transactions entered into by the bankrupt or relating to his property are void as against the trustees under s 120 of the Bankruptcy Act 1966 (the Act). 2 I propose to grant the trustees' application. The background facts are relatively straightforward. 3 On 16 December 2013, the bankrupt presented a debtor's petition and the applicants were appointed joint and several trustees of his estate. 4 Since the date of their appointment, the trustees and their staff have carried out investigations in relation to the examinable affairs of the bankrupt. As part of the bankrupt's debtor's petition he provided a statement of affairs which showed realisable assets of $6,200.00 plus an interest in two race horses of unknown value, and liabilities totalling $26,696,000. On 17 December 2014, the trustees issued a report to creditors which summarised their findings in relation to the affairs of the bankrupt. Apparently the bankrupt had conducted a punting club known as "the Edge" pursuant to which he had "invested" money, which had been pooled on behalf of a number of syndicates and members, by personally betting on horse races. This scheme, unsurprisingly, was marketed as achieving higher returns than were available through financial institutions. In addition to acting for members and syndicates of individuals, a number of the syndicates had as members, sub-syndicates. After their investigations, the trustees reached the conclusion that the punting club operated by the bankrupt was a Ponzi scheme. The trustees' investigations also revealed that despite reporting to members of the punting club that he was placing bets on their behalf, the bankrupt failed to wager those bets to the extent or at the odds reported to the members of the punting club. Further, the net winnings reported to members of the punting club were substantially overstated by the bankrupt. 5 The trustees' investigations have revealed that the bankrupt utilised the funds of some punting club members to meet withdrawal requests of other punting club members. Further, the bankrupt was living off the proceeds of the funds invested and also used these funds in certain companies controlled by him, including Noble Edict Pty Ltd (in liquidation) (ACN 128 305 028) (Noble Edict). 6 As to Noble Edict, the bankrupt was the sole director thereof. The bankrupt operated the bank account of that company, such that he would transfer payments from his own bank account into the bank account of Noble Edict, and usually draw an equivalent sum in payments to punting club members. 7 Generally, the trustees' investigations have revealed that any return to members of the punting club appears to have been sourced from new members' funds. Members of the punting club have to date submitted claims in the administration of the bankruptcy totalling $154,144,151.00. 8 Relevantly to the application before me, between 29 December 2008 and 12 August 2013, the bankrupt made 21 separate payments to the respondent totalling $1,563,233.49, as set out in the following table: No Date Payment Method 1 29/12/2008 $ 10,000.00 EFT 2 29/12/2008 $ 10,000.00 EFT 3 16/02/2009 $ 10,000.00 EFT 4 2/07/2009 $ 111,067.69 Cheque 000040 5 5/10/2009 $ 120,000.00 Cheque 000089 6 24/12/2009 $ 106,087.37 Cheque 000109 7 6/07/2010 $ 35,538.54 Cheque 000247 8 4/10/2010 $ 97,376.00 Cheque 000353 9 29/12/2010 $ 20,000.00 EFT 10 31/12/2010 $ 20,000.00 EFT 11 5/01/2011 $ 100,084.10 Cheque 000397 12 10/02/2011 $ 704.00 EFT 13 4/04/2011 $ 112,086.94 Cheque 000262 14 4/04/2011 $ 7,823.00 Cheque 000263 15 30/06/2011 $ 82,467.23 Cheque 000541 16 7/10/2011 $ 108,593.86 Cheque 000621 17 12/01/2012 $ 94,948.43 Cheque 000722 18 5/04/2012 $ 92,674.11 Cheque 000673 19 9/01/2013 $ 164,421.70 EFT via Noble Edict 20 15/07/2013 $ 100,000.00 EFT via Noble Edict 21 12/08/2013 $ 159,360.52 EFT via Noble Edict Total $1,563,233.49

9 The bankrupt transferred the sums numbered 1 to 18 (inclusive) in the table above from his account with National Australia Bank Limited (NAB) (Vlahos Account) to the respondent in the manner described in the above table. 10 The bankrupt transferred the sums numbered 19 to 21 (inclusive) in the table above from an account with NAB in the name of Noble Edict (Noble Edict Account) to the respondent by EFT. 11 The payment of $164,421.70 to the respondent made on 9 January 2013 (numbered 19 in the above table) was made from funds transferred by the bankrupt from the Vlahos Account to the Noble Edict Account. In this respect: (a) on 8 January 2013, the balance in the Noble Edict Account was $763.02; (b) between 8 and 10 January 2013, the bankrupt made four payments totalling $7.5 million from the Vlahos Account to the Noble Edict Account; and (c) from those funds, the bankrupt made several payments to members of the punting club, including the payment of $164,421.70 to the respondent. 12 The payment of $100,000.00 to the respondent made on 15 July 2013 (numbered 20 in the above table) was made from funds transferred by the bankrupt from the Vlahos Account to the Noble Edict Account. In this respect: (a) on 12 July 2013 the balance in the Noble Edict Account was $71.32; (b) on 5 July 2013 the bankrupt made three payments totalling $740,000.00 from the Vlahos Account to the Noble Edict Account; and (c) from those funds, on 15 July 2013, the bankrupt also made 3 payments out of the Noble Edict Account totalling $540,000.00, including the payment of $100,000.00 to the respondent. 13 The payment of $159,360.52 to the respondent made on 12 August 2013 (numbered 21 in the above table) was made from funds transferred by the bankrupt from the Vlahos Account to the Noble Edict Account. In this respect: (a) on 8 August 2013 the balance in the Noble Edict Account was $1,189.43; (b) on 9 August 2013 the bankrupt made three payments totalling $1,249,000.00 from the Vlahos Account to the Noble Edict Account; (c) on 12 August 2013 a credit of $240,000.00 was applied to the Noble Edict Account with the notation "club [X] INCORRECT ACCOUNT REVERSAL CREDIT", however a corresponding payment of $240,000.00 was made from the Noble Edict Account the following day; and (d) on 12 August 2013, the bankrupt also made two payments out of the Noble Edict Account totalling $259,360.52, including the payment of $159,360.52 to the respondent. 14 On 16 January 2015, the trustees sent a letter to the respondent by which they identified payments which the bankrupt had made to the respondent between 20 December 2007 and 15 July 2013. They requested the respondent to provide details of the basis upon which he received the funds, and to provide documentary evidence. 15 On 23 March 2015, the respondent sent a letter to the trustees' office, advising that he was assisting the Victoria Police Fraud Squad as a witness in relation to his involvement with the punting club operated by the bankrupt, and that until those investigations had been concluded he was unable to assist the trustees. 16 On 26 November 2015, the trustees sent a letter to the respondent, outlining the trustees' claims against him. In the letter of demand, they informed the respondent that to the extent that he contributed to the Edge punting club for the specific purposes of betting, the trustees were willing to concede that those funds should have been held on trust for the respondent. At that time the respondent had invested $20,000.00 into the punting club by way of a payment made on 30 December 2010. Also at that time, a number of payments had been made to the respondent in his capacity as trustee of the Red Sea Superannuation Fund (ABN 27 538 911 026). The trustees advised the respondent that they considered the payments made by the bankrupt to him were undervalued transactions. They further advised that various sums were voidable against the trustees pursuant to s 120 of the Act. 17 Given the trustees' investigations into the Edge punting club, it would appear that the respondent has provided no consideration for the funds received by him. Indeed, there is no evidence of any such consideration. Moreover, the respondent has been given an adequate opportunity by the trustees to put forward any such evidence. 18 Accordingly, the transactions comprising the payments from the bankrupt to the respondent totalling $1,563,233.49 are voidable as against the trustees as undervalued transactions pursuant to s 120 of the Act. 19 Sub-section 120(1) of the Act provides that a transfer of property by a person who later becomes bankrupt to another person is void against the trustee in the transferor's bankruptcy if: (a) the transfer took place in the period beginning five years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and (b) the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property. 20 A transfer of property includes a payment of money (s 120(7)). 21 A transfer is not void against the trustee if it took place more than two years before the commencement of the bankruptcy and the transferee proves that, at the time of the transfer, the transferor was solvent (s 120(3)(b)). A rebuttable presumption arises (s 120(3A)) that the transferor was insolvent at the time of the transfer if it is established that the transferor: (a) had not, in respect of that time, kept such books, accounts and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor's business transactions and financial position; or (b) having kept such books, accounts and records, has not preserved them. 22 There is no suggestion in the present case that s 120(3)(b) could sensibly be invoked or the relevant presumption of insolvency rebutted. And as I have said in relation to s 120(1), there is no evidence of any or any adequate consideration having been provided for the payments. 23 Section 31A(1) of the Federal Court of Australia Act 1976 (Cth) provides that the Court may give judgment for one party against another in relation to the whole or any part of a proceeding if: (a) the first party is prosecuting the proceeding or that part of the proceeding; and (b) the Court is satisfied that the other party has no reasonable prospect of successfully defending the proceeding or that part of the proceeding. 24 A defence need not be hopeless or bound to fail for it to have no reasonable prospect of success (s 31A(3)). 25 Further, r 26.01 of the Federal Court Rules 2011 (Cth) provides that an applicant may apply to the Court for an order that judgment be given against a respondent because the respondent has no reasonable prospect of successfully defending the proceeding or part of the proceeding. The present proceeding is a proceeding brought under a provision of the Act. Unless the Court otherwise orders, the Federal Court (Bankruptcy) Rules 2016 (Cth) apply to a proceeding to which the Act applies (r 1.04 of the Federal Court (Bankruptcy) Rules). However, the other Rules of Court apply to a proceeding under the Act to the extent that they are relevant and are not inconsistent with the Federal Court (Bankruptcy) Rules. Accordingly, r 26.01 of the Federal Court Rules applies to the present application for summary judgment. 26 In my view, the trustees have shown that the relevant payments are transfers of property by the bankrupt to the respondent in the period five years before "the commencement of the bankruptcy" (as defined in ss 5(1) and 115 of the Act). Further, they have not been shown to be supported by any consideration within the meaning of s 120 of the Act. In the absence of any evidence to demonstrate that consideration was given for any of the payments, and further in the absence of any evidence to suggest that the bankrupt was solvent in the period 29 December 2008 to 16 December 2011 (being the period ending two years before the commencement of the bankruptcy), in my view the respondent has no reasonable prospect of successfully defending the claim or any part of it. 27 Accordingly, there will be summary judgment in favour of the trustees. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beach.