Whitton as Trustee of the Estate of John Emmanuel Rose v Regis Towers Real Estate Pty Ltd

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: ROBERT WILLIAM WHITTON AS TRUSTEE OF THE ESTATE OF JOHN EMMANUEL ROSE, A BANKRUPT

AND: REGIS TOWERS REAL ESTATE PTY LIMITED (IN ADMINISTRATION)

BETWEEN: REGIS TOWERS REAL ESTATE PTY LIMITED (IN ADMINISTRATION)

AND: ROBERT WILLIAM WHITTON AS TRUSTEE OF THE ESTATE OF JOHN EMMANUEL ROSE, A BANKRUPT

NEW SOUTH WALES DISTRICT REGISTRY NSD 2400 OF 2006

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: REGIS TOWERS REAL ESTATE PTY LIMITED (IN ADMINISTRATION)

AND: ROBERT WILLIAM WHITTON AS TRUSTEE OF THE ESTATE OF JOHN EMMANUEL ROSE, A BANKRUPT

MARSHALL AND TRACEY JJ 1 We have had the benefit of reading, in draft form, the reasons for judgment of Buchanan J. 2 Subject to one reservation, we agree with his Honour's reasons and with the orders his Honour proposes. The reservation is that we prefer to express no view about the correctness of the analogy employed by the Full Court in Re Jury; Ashton v Prentice (1999) 92 FCR 68 at [55]. 3 As Buchanan J has noted, on the facts of this matter, it cannot reasonably be inferred that Mr Rose had the purpose referred to in s 121 of the Bankruptcy Act 1966 (Cth). 4 We agree that the Court should order that each appeal and the cross-appeal is dismissed and that the parties should file and serve written submissions on the question of costs within 14 days of the date of the publication of these reasons. I certify that the preceding four (4) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Marshall and Tracey.

NEW SOUTH WALES DISTRICT REGISTRY NSD 2392 OF 2006

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: ROBERT WILLIAM WHITTON AS TRUSTEE OF THE ESTATE OF JOHN EMMANUEL ROSE, A BANKRUPT

AND: REGIS TOWERS REAL ESTATE PTY LIMITED (IN ADMINISTRATION)

BETWEEN: REGIS TOWERS REAL ESTATE PTY LIMITED (IN ADMINISTRATION

AND: ROBERT WILLIAM WHITTON AS TRUSTEE OF THE ESTATE OF JOHN EMMANUEL ROSE, A BANKRUPT

NEW SOUTH WALES DISTRICT REGISTRY NSD 2400 OF 2006

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: REGIS TOWERS REAL ESTATE PTY LIMITED (IN ADMINISTRATION)

AND: ROBERT WILLIAM WHITTON AS TRUSTEE OF THE ESTATE OF JOHN EMMANUEL ROSE, A BANKRUPT

REASONS FOR JUDGMENT BUCHANAN J: 5 These appeals concerns a contest between the trustee of a bankrupt's estate and the administrator of a company in administration of which the bankrupt was the principal shareholder and sole director over the remnants, if any, of their failed property investments. 6 Two appeals are involved because the competing relief sought by each side in the proceedings below was rejected in each case by the primary judge (In the matter of Rose, A Bankrupt; Whitton v Regis Towers Real Estate Pty Ltd (In administration) [2006] FCA 1553) who later ordered that there be no order in respect of costs (In the matter of Rose, a Bankrupt; Whitton v Regis Towers Real Estate Pty Ltd (In administration) (No 2) [2006] FCA 1734). There is also a cross-appeal by the administrator against the trustee on the question of costs in the trustee's application at first instance. For convenience in these reasons for judgment I will refer to the bankrupt as 'Mr Rose', Mr Whitton, his trustee, as 'the trustee', the company in liquidation as 'Regis Towers' and its administrator Mr Godfrey as 'the administrator', 7 Mr Rose was a solicitor who practised as John Rose & Co, Solicitors & Attorneys. He ceased active practice at about the time of the events upon which the appeal was focused, which occurred in 1999. His personal and business interests shifted to real estate investment. Before the events with which the present appeals are concerned Mr Rose already had some real estate interests. 8 Early in 1999 he developed an interest in a residential and commercial building development with frontages to Pitt, Castlereagh and Campbell Streets, Sydney. Three towers were built. The Pitt Street Tower was known as 414-418 Pitt Street, Sydney, the Castlereagh Street Tower was known as 303-321 Castlereagh Street, Sydney and the address for the Campbell Street Tower was 40-54 Campbell Street, Sydney (later 317 - 321 Castlereagh Street, Sydney). The developer was Meriton Apartments Pty Limited ('Meriton Apartments'). Lots in the relevant strata plans were being sold by Meriton Property Management Pty Limited ('Meriton Property Management'). Mr Rose (in part with his wife) entered into contracts to purchase eleven lots to a value of $4,603,500. He purchased three lots jointly with his wife (one in the Castlereagh Street Tower and two in the Campbell Street Tower) and he acquired, in his own name, eight lots in the Campbell Street Tower. Settlement of those purchases occurred between 7 July 1999 and 10 December 1999. Settlement was facilitated by the provision of vendor finance and revaluation of some, at least, of the lots which released further cash to Mr Rose. 9 Mr Rose had commenced with the idea of conducting a serviced apartment business within the complex. However he discovered that leasing arrangements within the complex were reserved under special by-laws for the strata plan to a caretaker/manager to be appointed by the owners of the strata plan. By this time, on his evidence before the primary judge, he was financially extended. However, a conversation with a Mr Craig Stewart, with whom he earlier had some professional association, yielded the information that Mr Stewart's mother-in-law, Ms McInnes, was 'cashed-up at the moment and looking for real estate businesses to purchase'. Mr Rose disavowed any financial capacity to become involved in a further investment. However, Mr Stewart and Ms McInnes made further enquiries and shortly afterwards (either in the afternoon on 19 April 1999 or in the morning on 20 April 1999) Mr Stewart said: 'Kerrie's accountant has given everything the thumbs up so it's okay to go. I propose to incorporate a company to buy this business and we would like you in the deal as you know about it already. Kerrie would like a partner.' 10 Mr Rose again disclaimed any present financial capacity to participate until he had completed a development at Rozelle which he thought would be finished 'in about September' but Mr Stewart responded: 'Look, Kerrie agrees to put all the money in now and you can put your half share in later in September when you finish at Rozelle.' 11 Mr Rose's evidence was that the company which was to be the vehicle for the arrangement was acquired by Mr Stewart. It was originally called Cesscut Pty Limited ('Cesscut') and later changed its name to Regis Towers Real Estate Pty Limited. On 20 April 1999 Ms McInnes wrote cheques for the deposit on five lots to be acquired by Regis Towers from Meriton Property Management and also for the benefits under a 'Head Agreement' to be made between Regis Towers and Meriton Apartments. The cheques were for a total of $218,750. Ms McInnes was the secretary of the company between 20 April 1999 and 6 May 1999. In that capacity she witnessed the affixing of the common seal of Cesscut to the Head Agreement between it and Meriton Apartments on 20 April 1999. Mr Rose witnessed the affixing of the common seal as a director. On the same day Cesscut made contracts with Meriton Property Management to purchase the five lots. Ms McInnes and Mr Rose witnessed the affixing of the common seal in their respective capacities. 12 The following day Mr Rose was informed that Ms McInnes had stopped payment on the cheques. On Mr Rose's evidence the explanation that she gave at a meeting that afternoon was that Mr Stewart, without her knowledge, had assigned himself a share in the new company whereas Ms McInnes' intention was to have a 50% interest with Mr Rose. Mr Rose's evidence is that in response to this development his wife persuaded her parents to offer a property owned by them as security for a loan to pay out Ms McInnes. Ms McInnes then agreed to lift the stop on the cheques if she was reimbursed in ten days. On the security of the property offered by Mr Rose's parents-in-law, Mr and Mrs Pappas, Mr Rose borrowed $327,000 which was used in part to reimburse Ms McInnes $218,750 on 6 May 1999 and pay legal and stamp duty costs associated with the loan of $4,519. Mr Rose retained personally the balance of $103,731. At the same time Ms McInnes and Mr Stewart withdrew from the arrangements and transferred their shares to Mr Rose. As a result the four shares which had been distributed amongst Mr Rose, his wife, Ms McInnes and Mr Stewart became held by Mr Rose (three shares) and his wife (one share). Mr Rose thereafter was the sole director of the company. 13 The Head Agreement made on 20 April 1999 contained a promise that Meriton Apartments would procure the owners of the strata plan to enter into a caretaker/manager agreement with Regis Towers. This would give Regis Towers the exclusive leasing and property management rights over the complex. Payments totalling $676,000 per annum were also in due course guaranteed under the caretaker/manager agreement to Regis Towers for ongoing services to be provided by it to the owners of the strata plan. The purchase price for the benefits of the Head Agreement was $1,750,000 of which $131,250 was payable as a deposit. This sum was included in the amounts paid initially by Ms McInnes and reimbursed shortly thereafter by Mr Rose. The balance due under the Head Agreement was to be paid as follows - $1,017,500 on completion of the purchase of lot 454 in the Castlereagh Street Tower and $601,250 on the completion of the purchase of lot 650 in the Campbell Street Tower, they being two of the five lots being purchased by Regis Towers. Lots 454 and 650 were the reception areas in the Castlereagh Street Tower and the Campbell Street Tower respectively. At the time when the first, and major, outstanding amount of $1,017,500 was paid, by an agreement dated 6 August 1999 (executed by Regis Towers on 17 August 1999) between The Owners - Strata Plan No 56443 and Regis Towers, the caretaking and property management rights were exclusively reserved to Regis Towers pursuant to the promise in the Head Agreement. Settlement of lot 454 and another lot purchased by Regis Towers occurred on the same date, 6 August 1999. Payment for the balance of those lots was therefore due as well as $1,017,500 under the Head Agreement. 14 Settlement of the obligations under the Head Agreement was assisted by finance in the sum $770,000 from Meriton Finance Pty Limited ('Meriton Finance') which took a mortgage over unidentified real estate in the same amount also on 6 August 1999. Apart from the $770,000 provided on 6 August 1999 by Meriton Finance towards partial settlement of the Head Agreement the balance of funds due on that day came from funds in a Cash Management Call Account with the Commonwealth Bank of Australia (the cash management account) in the name of Mr Rose. Mr Rose opened this account on 13 July 1999 with a deposit of $491,232.92. Those funds were generated by mortgaging a property known as 736 Darling Street, Rozelle which was held by Mr Rose and his brother, Nicholas Rose, as tenants in common in equal shares. On 9 August 1999 Mr Rose drew cheques on the cash management account in the amounts of $257,814.51, $14,499.47 and $35,790.89 to settle the obligations of Regis Towers under the Head Agreement, for lot 454 and for the other lot settled on that day, respectively. 15 On 3 December 1999 settlement was due by Regis Towers for the remaining three lots (including lot 650) and the outstanding balance of $601,250 under the Head Agreement. According to findings made by the primary judge some of the funds necessary were provided by Meriton Finance ($455,000 for the Head Agreement and $315,000 for lot 650). These loans were made to Regis Towers. In addition Mr Rose drew, on the cash management account on 2 December 1999, a cheque totalling $361,103.28 which settled outstanding amounts on the purchases of lot 650 and the benefits of the Head Agreement (together $259,325.73), two other lots purchased by Regis Towers ($35,925.48 and $39,188.67) and also a lot purchased by Mr Rose and his wife ($26,663.40). 16 Mr Rose apparently paid little regard to any commercial principle that his personal funds and those of Regis Towers should be capable of separate identification. Many of his personal expenses were paid by Regis Towers. Funds for the purchase of his personal real estate property and that of Regis Towers passed through his cash management account. Funds which were raised on revaluation of properties, including those owned by Regis Towers, were diverted to his cash management account. This intermingling of affairs occurred in circumstances where the primary judge found: 'I would interpolate that a standard technique employed by the bankrupt to generate cash flow both for himself and Regis Towers was to acquire properties at one price, funding a significant proportion of the purchase price with borrowed funds secured over the property purchased, then obtaining revaluations of the properties at higher amounts, which valuations were used to obtain refinancing of the properties in greater sums, thereby allowing the original financier to be paid and surplus funds generated.' 17 The administrator was appointed to manage the affairs of Regis Towers on 17 September 2004. Mr Rose became a bankrupt upon the presentation by him of a debtor's petition and its acceptance on 21 June 2005. 18 The matters with which the primary judge was required to deal concerned the following issues. First, the trustee claimed, relying on s 121 of the Bankruptcy Act 1966 (Cth) ('the Bankruptcy Act') that Mr Rose's bankrupt estate was entitled to the benefits arising under the Head Agreement (including the promise of appointment as caretaker/manager) and the beneficial interest in each of the lots purchased by Regis Towers. Secondly, in the course of his administration of Mr Rose's bankrupt estate the trustee had rejected a proof of debt lodged by the administrator on behalf of Regis Towers in accordance with s 84 of the Bankruptcy Act. The administrator made an application under s 104 of the Bankruptcy Act for a review of that decision. It is convenient to refer to these competing claims as the s 121 claim and the s 104 claim. His Honour rejected both claims.

SECTION 121 19 Section 121(1) and (2) of the Bankruptcy Act provide: '121(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor's bankruptcy if: (a) the property would probably have become part of the transferor's estate or would probably have been available to creditors if the property had not been transferred; and (b) the transferor's main purpose in making the transfer was: (i) to prevent the transferred property from becoming divisible among the transferor's creditors; or (ii) to hinder or delay the process of making property available for division among the transferor's creditors. (2) The transferor's main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.' 20 The trustee's argument had two elements. Both need to be established.

Insolvency 21 As argued on the appeal the first contention arose under s 121(2), namely that it could reasonably be inferred that, at 20 April 1999 when Regis Towers contracted to purchase five lots and the benefit of the head agreement, Mr Rose was, or was about to become, insolvent. Section 5(2) and (3) of the Bankruptcy Act are in the following terms: '5(2) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. (3) A person who is not solvent is insolvent.' 22 Section 121(2) is a deeming provision but it relies on inference, or potential inference. In Re Jury; Ashton v Prentice (1999) 92 FCR 68 ('Re Jury') at [55] it was said: '55 In our view the phrase in s 121(2), "if it can reasonably be inferred from all the circumstances that… the transferor was… insolvent", is not synonymous with "if the transferor was insolvent". 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.' 23 Re Jury dealt with an appeal from Hill J. There were a number of interrelated judgments delivered by Hill J which provided the foundation for the appeal (Ashton v Prentice [1998] FCA 1081 (1 September 1998); Ashton v Prentice [1998] FCA 1338 (23 October 1998); Ashton v Prentice [1998] FCA 1464 (20 November 1998); and Ashton v Prentice [1998] FCA 1583 (11 December 1998). The judgment dated 23 October 1998 contains the findings of fact relevant to the application of s 121(2) and the judgment of 11 December 1998 was accompanied by the final orders which were appealed. 24 It might be noted that, in his judgment of 23 October 1998, Hill J found it proved as a fact that the bankrupt in the case before him had the main purpose referred to in s 121(1)(b) and that he was also in fact insolvent, with the additional result that s 121(2) directed that the main purpose be taken to be established. There was no need for any discussion in the primary judgment about the proper standard to be used to judge whether an inference was reasonably available. 25 Sitting at first instance it would be my duty nevertheless to apply the statement by the Full Court in Re Jury quoted above. However, as a member of a Full Court I feel at liberty to indicate that, with respect to the very experienced judges who constituted that Full Court, I have reservations about whether the final three sentences correctly reflect the intention and language of s 121(2). I am not able to share the view, if this is what their Honours meant by their analogy, that something must be regarded as established for the purpose of s 121(2) if it is not so unreasonable that a civil jury could not be trusted with the issue. One difficulty with the analogy is that leaving a matter to a civil jury is not dispositive. As their Honours point out, a civil jury may not draw the possible inference but decide to the contrary. By contrast a finding that an inference can be made for the purpose of s 121(2) may be determinative of one element of an important issue - namely, whether a transfer of property is void. Also, although I hesitate to put too much weight on such a slender reed, use of the phrase 'can reasonably be inferred' rather than 'could reasonably be inferred' suggests that the assessment is to be made by the Court itself. I am not able, with respect, to embrace the idea that the important consequences which flow from s 121(1), so far as they affect trustees' rights and the rights and interests of creditors and third persons were intended to be disposed of by reference to mere possibilities. In my view the question which arises for determination under s 121(2) is not whether there might be a matter which could, as a matter of law, be left in the hands of a civil jury but whether the trial judge whose task it is to apply s 121(2) is satisfied, as a matter of reasonable inference, and having regard to all the circumstances, that it should be concluded the transferor was, at the time of the transfer, insolvent or about to become so. 26 In any event, on my view of the evidence relied upon in the present case the suggested inference was much too tenuous to be regarded as reasonably open on any test. What was suggested to be a reasonable inference is, in my view, upon examination only guesswork and speculation. As the primary judge pointed out, in the period of time which followed, all of the purchases made by Mr Rose, either personally or with his wife, totalling $4,603,500 proceeded to settlement. In addition, as already indicated, he raised sufficient funds to settle, from his cash management account, purchases for Regis Towers. There was no evidence of any cheques, having been drawn by him, being dishonoured on presentation. During 1999, on his evidence he maintained, without default, leases on Rolls Royce, BMW and Porsche motor vehicles. He did not become bankrupt until more than six years later, in June 2005, upon acceptance of his debtors petition. 27 Reliance was placed by the trustee on balance sheets prepared for Mr Rose in 2002 which suggested that, at 30 June 1999, he had a deficiency of assets over liabilities of $465,584.45. Such a circumstance is far from conclusive (see Quick v Stoland Pty Ltd (1998) 87 FCR 371 per Emmett J at 380). The primary judge observed that this analysis did not take into account capital gains on numerous lots in the strata scheme. It was suggested in argument that there was no possibility of a capital gain in the period before 20 April 1999. It is by no means self-evident that is so in the case of lots purchased, as these were, 'off the plan'. The figures shown in the balance sheets appear to represent only the amount of deposits paid, from as early as 1 March 1999. Another fact which emerges from the balance sheets relied upon is that the liabilities disclosed were very substantially made up of interest bearing liabilities (current $483,550.62 and non-current $2,184,194.27) as at 30 June 1999. There was no suggestion these amounts were payable as at 20 April 1999 or that Mr Rose was not meeting his interest liabilities as required. In my view the rather simplistic comparison offered by the trustee falls well short of raising the necessary inference. 28 The trustee also sought to rely upon evidence of demands for payment, and failure to pay, sums claimed by Leichhardt Municipal Council and Suncorp Metway. The primary judge records that on 13 May 1999 Leichhardt Municipal Council commenced proceedings in Sutherland Local Court for non-payment of rates and charges due and owing by Mr Rose as at 18 March 1999 in the sum of $22,605.15 and for another amount of $20,888. His Honour records that there is no evidence that either matter proceeded to judgment. Neither is there any evidence that Mr Rose was unable to pay either amount, although he stated in his evidence that he did not in fact do so before the commencement of those proceedings. 29 The payments claimed by Suncorp Metway were identified in a series of letters written in April, June and September 1999 and January 2000. The letters referred to loan repayments said to be due. Only the first letter dated 4 April provides any evidence of an amount which might be outstanding at 20 April 1999. The amount is $1,376. A letter dated 4 June 1999 confirms that the amount is still outstanding and that it represented a single month's payment on a loan. An amount of $2,767 due by the date of the second letter was apparently paid shortly thereafter, thus resolving any amount payable at 20 April 1999. A letter dated 4 July 1999 shows no prior amount outstanding, but a fresh amount due and unpaid of $683.99. It was apparently paid. A letter dated 4 September 1999 shows no prior amount outstanding but a fresh amount due and unpaid of $607.95. It was apparently paid. The final relevant letter in the sequence is dated 4 January 2000. It shows no prior amount outstanding but a fresh amount due and unpaid of $1,374.06. There is no doubt that this correspondence suggests some (temporary) delay in making some individual payments (mostly in the period after 20 April 1999) but it is quite inadequate to support the thesis advanced by the trustee. 30 Mr Rose gave evidence in the trustee's case. In an affidavit prepared for that purpose he dealt with these issues as follows: '49 In early April 1999 I was having problems paying mortgage payments to Suncorp-Metway on time. I failed to pay a loan repayment due on 28 March 1999 and also repayments due for May and June 1999. Letters from Suncorp-Metway dated 4 April 1999, 1 June 1999, 4 June 1999, 11 June 1999, 5 July 1999, 4 September 1999, 4 January 2000 and 11 January 2000 are at Tab 7 of Exhibit JER1. 50 I failed to pay rates and charges in relation to the property at 722-724 Darling Street and 2 Red Lion Street, Rozelle. As at 18 March 1999, rates and charges totalling $23,162.15 was due and payable to Leichhardt Council. A copy of page 1 of a statement of liquidated claim issued by Leichhardt Council to me on 13 May 1999 is at Tab 8 of Exhibit JER1. 51 I also failed to pay a Section 94 Open Space Contribution in the amount of $20,000 to Leichhardt Council in relation to the development application for the development at 722-724 Darling Street. A copy of page 1 of a further statement of liquidated claim issued by Leichhardt Council to me on 13 May 1999 is at Tab 9 of Exhibit JER1.' 31 Importantly, neither in his affidavit evidence nor in his oral evidence did he say that he was unable to pay these, or any other, debts as they fell due. More surprisingly, as he was the trustee's witness, he was not asked any question of that kind. 32 Further evidence about his circumstances at the time of the transactions under consideration is also contained in his affidavit, as follows: '15 In April 1999 my financial resources had been severely depleted by: 15.1 the acquisition of the lots in the Regis Towers complex referred to in paragraphs 8 and 12 above and as I needed to fund stamp duty and other costs associated with completion of those acquisitions; 15.2 significant accumulated personal and business losses including losses on negatively geared property; 15.3 continued inability of my legal practice to generate income to cover my business and personal expenses; and 15.4 difficulties associated with the development of a property I owned at 722-724 Darling Street, Rozelle (refer below). 16 By 20 April 1999, I believed that if I entered into any further financial commitments, I would be unable to meet those commitments.' 33 I shall deal, in relation to the next issue, with the significance of him joining Ms McInnes in their intended joint venture. The passages I have quoted, when read with his other evidence, make it clear that he had no intention on 20 April 1999 of going into such a venture on his own. However, they are insufficient to establish that even when, after 20 April 1999, he was left effectively alone in the enterprise he became insolvent. The financial resources to meet this unexpected turn of events were provided, with the assistance of his wife, through a family arrangement that provided added available security for the necessary short term borrowings. 34 Consideration of the principles to be applied when determining whether a person is insolvent at a certain date often begins with the observations of Barwick CJ in Sandell v Porter (1966) 115 CLR 666 (at 670): 'Insolvency is expressed in s. 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.' 35 It is important to note that s 95 of the Bankruptcy Act, as it then appeared, referred to a person paying debts 'out of the debtor's own money'. Many subsequent cases proceed upon an express or implied incorporation of this element as part of the legal test to be applied. This element, however, does not any longer appear in the definitions of solvency and insolvency in s 5(2) and (3) of the Bankruptcy Act which I earlier set out. Nor does this element appear in the corresponding definition in s 95A of the Corporations Act 2001 (Cth) ('the Corporations Act') which is in identical terms to s 5(2) and (3) of the Bankruptcy Act. 36 In Lewis v Doran (2004) 184 FLR 454 Palmer J made the following observation about the change in definition now reflected in the Corporations Act (at [116]): 'For those reasons I conclude that s 95ACA has changed the pre-existing law as to the definition of insolvency as stated in cases such as Sandell v Porter, and that it is no longer necessary in order to assess solvency to ascertain whether the company is able to pay all of its debts "from its own monies", in the sense discussed in those cases. In my opinion, s 95A requires the Court to decide whether the company is able, as at the alleged date of insolvency, to pay all its debts as they become payable by reference to the commercial realities. If the Court is satisfied that as a matter of commercial reality the company has a resource available to pay all its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party.' 37 On appeal (Lewis v Doran (2005) 219 ALR 555) Giles JA (with whom Hodgson and McColl JJA agreed) said (at [109] - [112]): [109] Particularly when the limiting words are no longer part of the test, there is no compelling reason to exclude from consideration funds which can be gained from borrowings secured on assets of third parties, or even unsecured borrowings. If the company can borrow without security, it will have funds to pay its debts as they fall due and will be solvent, provided of course that the borrowing is on deferred payment terms or otherwise such that the lender itself is not a creditor whose debt can not be repaid as and when it becomes due and payable. It comes down to a question of fact, in which the key concept is ability to pay the company's debts as and when they become due and payable. [110] Even before the wording of s 95A, in re RHD Power Services Pty Ltd(1991) 9 ACLC 27 McPherson SPJ was prepared to pay regard to ability to borrow without security. Kearney J in re Adnot Pty Ltd (1982) 1 ACLC 307 took into account that the company "instead of having to resort to some outside lender, is in the fortunate position of having its fellow member of the group of companies to which it belongs, available in effect as banker to provide funds required to meet any shortfall" (at 311; the shortfall was until completion and sale of a shopping centre). In re a company (1986) BCLC 261 Nourse J declined to find that a company was unable to pay its debts as they fell due although it was being "propped up by loans made to it by associated companies and possibly by others" (at 262; his Lordship noted at 263 that he had evidence from a director to the effect that there was no question of the loans being withdrawn, the loans not being repayable for some eighteen months). [111] The Liquidator's emphasis on voluntary assistance from other companies in the group was rather off the point. Provision of funds by a third party on the security of the company's assets is voluntary - the third party can decline. Voluntariness is material to whether the company is able to acquire funds, as part of ability to pay its debts as and when they become due and payable, but if the evidence establishes that the company is able to obtain funds, albeit they are voluntarily provided, that can suffice. [112] This approach is consistent with the acceptance that creditors may voluntarily defer payment whereby solvency is promoted. An illustration is re Kerisbeck Pty Ltd (1992) 10 ACLC 619. An unsecured debt was payable on demand to the company's director. The director gave evidence that he did not intend to demand repayment in the immediate future. The debt was therefore not regarded as due and payable. This was determinative of solvency. In substance, voluntary continuance of an unsecured borrowing brought solvency; it is difficult to see why the result would have been different if there had been acceptable evidence of voluntary provision of an unsecured borrowing.' 38 Applying this approach to the present case there is no reason to treat Mr Rose's decision, with his wife, to continue with the venture commenced with Ms McInnes as rendering him insolvent simply because another borrowing had occurred. There is no evidence that the loan was repayable at the relevant time. It had only just been made. 39 The issue of Mr Rose's solvency was one which arose on the trustee's application. In my view the proper inference to be drawn is that any further evidence Mr Rose might have given about the issue of his solvency would not have assisted the trustee's case. In my view no error in the primary judge's conclusion about the issue of insolvency has been made out. Any inference, based on the material relied upon, that Mr Rose was insolvent on 20 April 1999, or about to become insolvent, would not have been a reasonable one on any test. It would amount to no more than speculation. It follows that an essential element in the trustee's claim under s 121 was not established and that claim could not succeed. 40 In any event, in my view the other aspect of the trustee's claim was not made out either.

Transfer of Property 41 It is necessary to take into account, on this limb of the trustee's agreement the supplementation made to s 121(1) by s 121(9)(b) which is as follows: '121(9) For the purposes of this section: … (b) a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person.' (emphasis added) 42 The incongruity between the idea captured in this deeming provision and the provision to be satisfied in s 121(1)(a), that 'the property would probably have become part of the transferor's estate and would probably have been available to creditors if the property had not been transferred' has been the subject of judicial attention. The resolution of this legislative conundrum provides one of the answers to the trustee's claim. Before I deal with that it is necessary, however, to say something about the factual basis of the claim. 43 The trustee claims that Mr Rose did something that resulted in Regis Towers becoming the owner of something that did not previously exist, firstly by arranging for the Head Agreement with Meriton Apartments which created the valuable chose in action constituted by the promise to Regis Towers to procure the owners of the strata plan to enter into the caretaker/manager agreement with it, and secondly by arranging the contracts with Meriton Property Management which resulted in the beneficial ownership of the five lots purchased by Regis Towers. Had Regis Towers not been interposed as the contracting entity, the argument goes, Mr Rose would have contracted in each of these respects in his own right and the benefit of the Head Agreement and ownership of the five lots purchased would have fallen into his estate. Therefore, it is submitted, the interposition of Regis Towers is void as against the trustee and the purchased lots and the rights under the Head Agreement are properly seen as part of Mr Rose's estate in the hands of the trustee. 44 Apart from the legal difficulties the claims face, which I am yet to address, there is, in my view, no factual support for them. First, there is no gainsaying that it was Ms McInnes who on 20 April 1999, provided the financial foundation for the joint venture for which Regis Towers was the corporate vehicle and legal personality. Her withdrawal from the arrangements post-dated the relevant contracts and was unexpected. All the evidence about this issue was presented in the trustee's case. There is no basis to doubt either the sequence of events to which Mr Rose deposed or the substance of the explanation given for them. When Ms McInnes withdrew, the entirety of the property claimed by the trustee was in the hands of Regis Towers. It was not, and had never been, in Mr Rose's hands. Before 20 April 1999 it was in the hands of Meriton Apartments or Meriton Property Management. 45 Secondly, on Mr Rose's evidence, it was Mr Stewart and Ms McInnes who took the initiative, not Mr Rose. It is quite clear from the evidence which Mr Rose gave as part of the trustee's case that he would not have embarked upon the establishment of Regis Towers without the impetus provided by Mr Stewart and Ms McInnes. It is equally clear that he would not have acquired the lots purchased by Regis Towers or executed the Head Agreement had he not been persuaded to do so by them, and on the footing that he would not be required to make any financial contribution until September 1999 at the earliest. The only available view of the evidence is that Ms McInnes' withdrawal from the arrangements presented Mr Rose with an unexpected dilemma. The fact that he resolved it, with the assistance of his wife and the introduction of additional financial support from Mr and Mrs Pappas, does not support the trustee's case and tells strongly against it. This part of the trustee's case appears to me to be based on little more than a supposition which is decisively contradicted by the evidence in his own case. 46 In any event, the legal aspects of this part of the trustee's claim, as argued by him, are, in my view, resolved against the trustee by the judgment of the High Court in Peldan v Anderson (2006) 80 ALJR 1588; 229 ALR 432 ('Peldan'), notwithstanding the trustee's submission to the contrary. The inconsistency between the literally expressed concepts in s 121(1)(a) and s 121(9)(b) (that property was already existing on the one hand and brought into existence on the other) was resolved by the High Court in Peldan by reading 'property' in s 121(1)(a) to refer to property (as defined in s 5) out of which a new interest is carved and which otherwise would have fallen in its original and undivided form into the estate of a bankrupt. 47 Hence, the High Court said: '[44] Where s 121(9)(b) is relied upon, the phrase "the property" in the opening words of s 121(1)(a) should be construed as signifying "the property in the hands of the transferor prior to the act which is taken to be the transfer". This removes from the operation of s 121(1)(a) the assumption that it is existing property which is being transferred. It involves treating the words "the property" in s 121(1)(a) in a special sense to give to s 121(1) an extended operation as required by s 121(9)(b). [45] The acceptable construction is best illustrated by setting out the paragraph as if it read in this manner: "(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor's bankruptcy if: (a) the property [in the hands of the transferor prior to the act taken to be the transfer] would probably have become part of the transferor's estate or would probably have been available to creditors if the property [in the hands of the transferee after the act taken to be the transfer]had not been [taken to have been] transferred ..." (bracketed words inserted). The [emphasised] words are appropriate because it would be at odds with s 121(9)(b) for the subjunctive clause to read "if the property in the hands of the transferor prior to the deemed transfer had not been deemed to be transferred". Section 121(9)(b) expressly states that the property which is deemed to have been transferred is the "property that did not previously exist". [46] The effect of the acceptable construction is to shift the emphasis of the inquiry in s 121(1)(a), and to focus not upon whether the "transferred property" would have become part of the transferor's estate in bankruptcy, but upon whether that result would have obtained in respect of the transferor's "property" (as defined in s 5(1)) out of which the newly created property has been "carved". [47] Consistently with Project Blue Sky, the above construction gives s 121(1)(a) a degree of sensible operation in cases of the kind where it evidently was designed to operate, namely, where the property that did not previously exist is "carved out" of property of the person who later becomes bankrupt. Such an outcome is consistent with the indications of legislative purpose seen in the Explanatory Memorandum to which reference has been made.' 48 The focus of attention thus falls, not on the transferred property but upon the property out of which it is created. Applying this approach the problem for the trustee's case remains. There was no property in Mr Rose' hands upon which s 121(1)(a), as interpreted by the High Court, can act. The property, before 20 April 1999, was in the hands of Meriton Apartments and Meriton Property Management. Reliance upon implied intentions (even if sustainable on the evidence) cannot conjure up property for the purpose of s 121(1)(a) nor displace the legal interests that were created by the assumption of contractual obligations by Regis Towers as an independent legal entity. 49 In my view no error on the part of the primary judge has been demonstrated. The trustee's claims were correctly rejected. His appeal must be dismissed.

SECTION 104 50 The primary judge decided, in effective confirmation of the trustee's action, that the proof of debt advanced to the trustee by the administrator on behalf of Regis Towers was rightly rejected. He did so principally because the books of Regis Towers, which were relied on for that purpose, were insufficiently reliable. 51 The administrator placed considerable reliance, in the appeal, on the provisions of s 1305 of the Corporations Act which reads: '(1) A book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book. (2) A document purporting to be a book kept by a body corporate is, unless the contrary is proved, taken to be a book kept as mentioned in subsection (1).' 52 It is clear that the primary judge had those provisions in mind. He said: '231 As to the application for review itself, the administrator conceded 'that there weren't proper books and records kept in relation to the company (referring to Regis Towers)'. Indeed, he reported this deficiency to both the Australian Securities and Investments Commission and also Regis Towers' creditors. In the circumstances, the evidentiary value of Regis Tower's books is significantly eroded (cf s 1305 of the Corporations Act). 232 Mr Harris' evidence in respect of the making of the journal entries affecting the bankrupt's directors' loan account as at 30 June 2000 does not allow a finding to be made that those entries were reliable or, for that matter, authorised. I accept the bankrupt's evidence that he probably only saw the directors' loan account record, including the debit entry of $1,198,969.72, recently. He entertained the possibility that he may have seen "some other closely resembling form on another occasion", but I am unable to make a finding that he did see any earlier version.' 53 The reference by his Honour to the figure of $1,198,969.72 requires explanation. Its origins and reliability were the subject of dispute. 54 The administrator claimed the existence of a debt owed by Mr Rose to Regis Towers of $483,970.21. The books of account relied upon by the administrator showed an amount due, from time to time, representing loans to directors. As at 30 June 2000 the figure was $7,875.46. Subject to a further issue as to whether a proper allowance had been made in Mr Rose's favour for director's fees between 1 July 2002 and 31 December 2004 it was accepted that if that figure was accurate the debt alleged by the administrator was made out as a result of undisputed transactions in the succeeding years. However, the figure was disputed. 55 The accounts in question, although purporting to state the position as at 30 June 2000 were compiled in 2002. Some entries in the Ledger Entries Report were identified as payments actually made. Some were identified as receipts. However, there were many journal entries, including 'balancing entries' which were the outcome of an undisclosed process of judgment or inference by the staff in the accounting firm which compiled the accounts retrospectively. In that part of the ledger which related to 'Account number 2140 - Loans to Directors' total credits of $1,458,365.65 and debits of $1,466,241.11 were stated, yielding the deficit amount of $7,875.46 which was the starting point for the administrator's claim. There were a number of journal entries in relation to that account. 56 One particular figure, showing as a journal entry on the debit side, was a figure of $1,198,969.72 accompanied by an entry which read 'Take up Balance of Funds Borrowed per li' It was submitted on the appeal that the last word was probably 'list' but it was accepted that no such list had ever been, or could be, produced in the proceedings by Regis Towers or those who compiled the accounts. 57 Mr Harris, under whose supervision the accounts were compiled, gave evidence. His evidence includes the following: 'MR STREET: Are you able to tell his Honour what the amount of $1,198,969.72 relates to?---Not directly from here, no. HIS HONOUR: Who is LI?---I don't know. I suspect that has been shortened or there wasn't enough space to be printed out. MR STREET: What does "per LI" mean?---Well, the LI is probably an incomplete word. HIS HONOUR: Does "per LI" lead you to believe that somebody has given information suggesting that that's an entry that they want made?---I'd say it may be a line of credit, I'm not sure and I suspect that that entry would be made after looking at other transactions, maybe loan transactions and it was put in there to balance it off. In any event, the "J" stands for journal entry?---Yes. MR STREET: The fact is you don't know, do you, what that amount of $1,198,969.72 relates to, do you?---I don't recall what that relates to. To the extent that it's described as "take up balance of funds" it appears to be a balancing entry, doesn't it?---Yes. From what you've earlier told me, you would agree with me, wouldn't you, that that's a balancing entry that would have been made by your staff and was not something done at the direction of Mr Rose, correct?---I think that entry was made by my staff, yes. … To the extent relevant so far as Mr Rose is concerned and his loan accounts or directors loan accounts you'd agree with me, wouldn't you, that's what happened is that the amount of $1,198,969.72 in the balance of funds borrowed entry that you have recorded that has been added to what is said to be the liabilities of Mr Rose totalling $1,466,241.11, correct?---Sorry, what was the figure you gave? Well, if you look down there's a figure at the end of the directors loan accounts of $1,466,241.11, is that right?---Yes. You'd agree with me that that includes the amount of $1,198,969.62, correct?---Yes. In respect of which you can't tell the court, can you, what transactions that amount relates to, that is, the $1,198,969.72?---I don't recall. I don't recall the make-up of that. You don't know, do you, whether that relates to any moneys borrowed by Mr Rose from the company, do you?---Well, I don't recall what that transaction is, so - - - You can't assist his Honour by saying whether that relates to any borrowings actually made by Mr Rose from the company, can you?---Well, I repeat what I said. I don't recall the make-up of that transaction. HIS HONOUR: Can I ask you this? If he borrowed money from the company and a cheque had been drawn in his favour then the relevant entry would be debit his loan account credit cash, correct?---Correct. This is not a ledger entry that is made based upon a cash transaction, is it? It's a journal entry?---Yes. Can you tell me what the journal entry was that is posted here that entitled you or that provided the basis for the recognition by the company of an indebtedness to him - sorry, of an indebtedness by him of $1,198,000?---I don't recall. I don't know off the top of my head. … Just one last thing; in relation to that entry you were asked questions about in respect of the $1,198,969.72 the position is you are not able to say whether that relates to any moneys that were actually borrowed from the company by Mr Rose; correct?---I don't recall exactly how that's made up. That's the simple answer.' 58 Mr Harris was called in the case for Regis Towers to support the administrator's position. His evidence gives no support to the suggestion that the journal entry refers to a list of transactions which might earlier have been in existence. 59 The particular entry (and many others) is not a direct record of an actual transaction. Section 1305 of the Corporations Act does not elevate the entry to prima facie evidence that any such transaction (or series of transactions) exists. It can be no more than prima facie evidence that an unknown person formed an opinion on an undisclosed basis that, in the absence of any directly recordable transaction nevertheless, as a balancing entry, such a figure should appear in the accounts. Mr Harris took the matter no further and, indeed, eroded any weight the entry may have had. 60 It was accepted in argument on the appeal that there was no evidence Mr Rose had ever accepted the reliability of the entry or that the accounts in question were ever filed with a relevant authority or relied upon outside the counsels of Regis Towers. Neither was he asked to accept that the balance of $7,875.46 showing as a debt in the directors' loan account at 30 June 2000 (or 30 June 2001 where it appears as the previous year's figure) was correct. 61 In the circumstances, the administrator's case was not made out, even with the assistance of s 1305 of the Corporations Act, simply by reference to the books of account compiled under the supervision of Mr Harris. 62 The administrator himself attempted to reconstruct a financial position from records available to him including the ledger entries that identified payments known to have been actually made and received on the part of Regis Towers. He was not able to derive the same result although it was claimed that he produced a result of about the same order of magnitude. In this exercise although credit was allowed to Mr Rose for the payment to Ms McInnes of $218,750 a debt was suggested to be owing by Mr Rose to Regis Towers for an amount of $345,000. This figure was derived from the loan of $327,000, arranged with the help of Mr and Mrs Pappas on 6 May 1999 which had grown, with refinancing on 7 May 2001, to a loan of $345,000. 63 The existence of this loan could not support any suggestion that Mr Rose owed a debt of $345,000 to Regis Towers at 30 June 2000 when the figure of $7,875.46 was calculated. At that date the loan was still $327,000. Moreover, I can see no satisfactory basis upon which Regis Towers could, on the evidence available, treat the whole of the original borrowings as a debt owed to it by Mr Rose for the purpose of the calculations which were made. Mr Rose borrowed the money from third parties originally. The loan was secured by a mortgage over a property owned by Mr and Mrs Pappas. Mr and Mrs Pappas were guarantors of Mr Rose's obligations under the loan. On the evidence, some of the money borrowed was applied to the contractual obligations of Regis Towers, some to costs associated with the loan itself and some was retained by Mr Rose personally. As at 30 June 2000 it is clear that credit needed to be (and in the administrator's calculations was) given to Mr Rose for money provided by him which represented the amounts of the deposits on contracts made by Regis Towers on 20 April 1999. However, there does not appear any basis upon which the whole of the loan could, at 30 June 2000 nevertheless be regarded as a debt owed to Regis Towers. As a matter of fact it was a debt still owed to the third parties from whom it was borrowed. 64 On 7 May 2001, the loan was refinanced. Mr and Mrs Pappas then became direct borrowers, under the terms of the new loan for $345,000, rather than guarantors, and paid out the original loan to Mr Rose. Clearly, Mr Rose may be regarded as then indebted directly to Mr and Mrs Pappas who were in turn indebted to Wizard Home Loans. On the appeal reliance was placed on the fact that on 5 August 2002 Mr Rose executed a document as director of Regis Towers whereby Regis Towers purportedly assumed responsibility for repayment to Mr and Mrs Pappas of an amount of $355,000. This figure was suggested to be derived from refinancing the original debt of $327,000, first to $345,000 and then adjusting it further to $355,000. The document relied upon by the administrator did not have the common seal of Regis Towers affixed to it but did appear to have been lodged with the Australian Securities and Investment Commission on 6 August 2002 as advice of a charge. 65 In his oral evidence before the primary judge the administrator suggested that it should be concluded that this document reflected an arrangement whereby, when Mr and Mrs Pappas refinanced the loan in May 2001, rather than discharging the original loan for Mr Rose, they gave the money to Regis Towers which gave it to Mr Rose for that purpose with the result that Mr Rose owed a debt to Regis Towers (not Mr and Mrs Pappas) and Regis Towers instead was liable to Mr and Mrs Pappas. Such a series of transactions, if they occurred, even in a notional form, obviously post-date the date of the relevant calculation - 30 June 2000. The administrator agreed in cross-examination that the document registered in August 2002 was the only charge of which he was aware which might provide legal support for the suggestion of a debt of the kind appearing in his calculations. His evidence also includes the following: 'You would agree with me, wouldn't you, that if it were to be found that that document didn't come into existence until 2002, which is what Mr Rose has said, it would be inappropriate, as you have done in your reconciliation, to include the amount of 345,000 on page 4 of your reconciliation as an amount in respect of which they should be described as moneys paid to Rose by RTRE. Correct?---As at 30 June 2000. I agree as at 30 June 2000.' 66 The attempt by the administrator to provide some verification of the 30 June 2000 balance sheet figures therefore provides no support so far as it concerned any suggested debt of $345,000. On the appeal it was suggested that the correct approach to these difficulties was simply to reduce the administrator's claim of $483,970.21 by an amount of $345,000, leaving a debt of $138,970.21 which, it was submitted, the Court should accept as a debt provable in Mr Rose's bankruptcy. I find this suggestion difficult to follow. The figure of $483,970.21 is based on Mr Harris's figures. There is no evidence that Mr Harris's figures assume a debt due by Mr Rose of $345,000 as at 30 June 2000 and, for the reasons already given, could not correctly do so. If the amount of $345,000 is excluded from the administrator's calculations he has fallen a long way short of his attempted reconstruction of the financial picture. Attribution of any final figure as a debt said to be provable in Mr Rose's bankruptcy, on this approach, involves a form of guesswork or attempted (but unsuccessful) rough approximation which, in my view the trustee was entitled to resist and the Court should not accept as raising a provable debt. 67 In the circumstances no error has been shown in the conclusion reached by the primary judge that the figures shown in the 2002 accounts as representing Mr Rose's director's loan account as at 30 June 2000 did not sustain the proof of debt advanced by the administrator and that no other satisfactory basis was shown on which the Court should conclude that the administrator should be admitted to proof of a debt in Mr Rose's bankruptcy. 68 The primary judge also expressed some reservations about the lack of credit to Mr Rose for director's fees in the years after 30 June 2002. That issue bore upon the calculations which proceeded from the 30 June 2000 figure of $7,875.46. Acceptance of the accuracy of subsequent adjustments was expressed by the trustee to be subject to the contention that Mr Rose should have been credited with directors' fees from 1 July 2002 to 31 December 2004. Although the primary judge did not need to resolve this issue it is clear that he regarded it as a further indication that the administrator had failed to establish the existence of a provable debt. 69 The only conclusion available is that the administrator failed to prove the case under s 104 of the Act. That is the conclusion reached by the primary judge. In my view no error on his part has been shown. CONCLUSION 70 Each party to these appeals has failed to make out its case, as it did at first instance. Each appeal must therefore be dismissed. We were told that the cross-appeal brought by Regis Towers was to safeguard its position in the event that it succeeded in both appeals. In that event it sought its costs at first instance. That has not happened. The cross-appeal must also be dismissed. COSTS OF THE APPEALS 71 The primary judge made no order as to costs as he rejected all the competing claims. That is the result also of the appeals. At the conclusion of the hearing of the appeals, in response to a suggestion that there may be some issue of detail about costs, it was indicated to the parties that they would have an opportunity to make submissions about costs of the appeals within 14 days of publication of reasons for the disposition of the appeals. I certify that the preceding sixty-seven (67) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Buchanan.

Associate: Dated: 10 August 2007 Counsel for the Appellant / Cross-Respondent Mr S Robb SC with Mr A Spencer (the Respondent in proceeding NSD 2400 of 2006):

Solicitor for the Appellant / Cross-Respondent Piper Alderman (the Respondent in proceeding NSD 2400 of 2006):

Counsel for the Respondent / Cross-Appellant Mr A Street SC with Mr J Hogan-Doran (the Appellant in proceeding NSD 2400 of 2006):

Solicitor for the Respondent / Cross-Appellant Sally Nash & Co (the Appellant in proceeding NSD 2400 of 2006)::

Dates of Hearing: 21 and 22 May 2007

Date of Judgment: 10 August 2007