Williams v Lloyd: Re Williams {1934} 50 CLR 341

P_T Garuda Indonesia Ltd v Greliman [1992] 35 FCR 515 Re Pearson: ex parte Wansley [1993] 46 FCR 55

Noakes v_ J Harvey Holmes & Son [1979] 37 FLR 5 Re Trautwein [1944] 14 ABC 61

Re: Fiorino: ex parte Woodgate Gummow J unreported 14 April Re_ Barnes; ex parte Stapleton [1962] Qd R 231 Exeem an_v Pope [1870] 5 Ch App 538 % parte Mercer: re Wise [1886] 17 QBD 290

RE ENID DAWN McINNES z ANOR_v OF RECE FOR BANKRUPTCY DISTRICT OF NEW SOUTH WALES N v_ BRUCE ANTH Mc INNE R

EINFELD J SYDNEY ~ 22 NOV 1994 18 NOVEMBER 1994 FEDERAL COURT of AUSTRALIA PRINCIPAL

EQOR LI OFFICIAL RECEIVER FOR THE BANKRUPTCY DISTRICT OF NEW SOUTH WALES Respondent

Section 139ZQ of the Bankruptcy Act 1966 (the Act) provides:

(1) If a person has received any money or property as a result of a transaction that is void

may require the person, by written notice given to the person, to pay to the trustee an amount equal to the money or the value of the property received.

(7) If a person is required by a notice under this section to pay to the trustee the value of any

property, the requirement is taken to be complied with if the property is transferred to the trustee.

(8) An amount payable by a person to the trustee under this section is recoverable by the

trustee as a debt by action against the person in a court of competent jurisdiction.

By notices dated 8 June 1993 issued under section 1392Q of the Act the Official Receiver required Bruce Anthony McInnes and his wife Karen Lorraine McInnes (the respondents) to pay to the Official Trustee (the trustee) the sum of $99,693 which the notices allege the respondents have received pursuant to a transaction void as against the trustee. The Official Trustee is the trustee in bankruptcy of the estate of Karen McInnes' mother, Enid Dawn McInnes (the bankrupt). Bruce McInnes is the son of Colin John McInnes, the bankrupt's husband.

On 18 August 1993 the respondents applied under section 1392S of the Act for an order setting aside the notices. On 2 February 1994, by what was described as a cross-application, the trustee applied for declarations and orders under sections

120 and 121 of the Act in the terms of the notices.

(a) a settlement... made in favour of a purchaser or encumbrancer in good faith and for valuable consideration...

is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy.

(8) In this section, "settlement of property" includes any disposition of property.

121 (1) Subject to this section, a disposition of Property, whether made before or after the commencement of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.

(2) Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has, in good faith and for valuable consideration, purchased or acquired the property the subject of the disposition or any interest in that

A yreference in this Act to an intent to defraud the creditors of a person or to defeat or to delay the creditors of a person shall be read as including an intent to defraud, or to defeat or delay, any one or more of those creditors.

The bankrupt suffers from Huntington's Disease which, although

it had not yet significantly affected her during 1988 and

• 4- 1989, now partially debilitates her both physically and Mentally. As a result of her condition she was unable to give

On 10 November 1981 the bankrupt mortgaged her only significant asset, a property at 22 Drummond Street, Leeton in New South Wales (Drummond Street) to the Leeton branch of the National Australia Bank (the bank) to secure the borrowings of her husband Colin McInnes, largely undertaken jointly with his son Alan McInnes in relation to a farming property, Wyandra, also in Leeton. It would appear from bank records that these debts amounted to $160,000, comprising a $130,000 bill facility and $30,000 in an overdraft cheque account. The oral evidence of Colin McInnes was actually that he owed $300,000, and although it is possible that he had further debts not revealed in the bank's documentation, it seems more likely that this figure represents the total debts of both the

In October 1981 the bankrupt entered into a contract with D.R. & J.L. Deaton (the Deatons) for the erection of a dwelling house at Drummond Street. A dispute developed between the Deatons and the bankrupt pursuant to which proceedings were commenced against the bankrupt in the Supreme Court of New South Wales at Wagga on 10 June 1983. At some later stage the Deatons lodged a caveat on Drummond Street. Following a hearing which commenced on 1 December 1986 an arbitrator gave

a verdict for the Deatons on 10 June i989. Subsequently an

• 5 - application to the Supreme Court to review the arbitrator's decision was dismissed on 8 September 1989 and judgment was entered in the sum of $84,668.32 on 26 September 1989.

Until 1988 the bankrupt and her husband lived in the house constructed by the Deatons at Drummond Street with her daughter Sandra Smith and son-in-law Michael Smith. Then at some time between Christmas Day 1988 and July 1989 the bankrupt and her husband decided that they would build a house on the respondents' land at Bringa Park and leave Drummond Street. There was apparently some arrangement between the bankrupt and the respondents that when the house was built the land on which it stood would be transferred to the bankrupt. I shall return to this arrangement in more detail later. In early 1989 Sandra and Michael Smith left Drummond Street to

In July 1989 the bankrupt entered an agreement with W.D.J. Warburton (the builder), now deceased, for the construction of a dwelling on Bringa Park. The builder quoted her a price of $87,923, although according to a letter written by the builder to the Official Receiver's Office (D17 to the affidavit of Vincent Desgrand), in the event various additional items increased the total cost to $93,508. To finance the construction various members of the McInnes family approached the bank which, some time before 19 July 1989, apparently unaware of the arbitrator's award in favour of the Deatons,

agreed to advance up to $100,000 for the project on the

-6- existing security of Drummond Street. The bank apparently considered Drummond Street to be worth $160,000 and was under the impression that the bankrupt had no other debts. It concluded that once Drummond Street was sold "it is envisaged $50,000 will be available to reduce the debt of" Colin McInnes (JD124). The bank appears to have assumed that the Drummond Street mortgage would not be required to fully satisfy Colin McInnes' debt since he owned Wyandra and had other assets which provided the primary fund from which his debts could be

The builder received in total $99,693, all payments being made by cheques drawn on an account conducted by the bankrupt with the bank (D22 to the affidavit of Desgrand). No explanation was offered to explain the discrepancy with the amount the builder claimed he received but the amount is small enough ($6,185) to be ignored for the purposes of this case. The first of the payments to the builder was made by cheque for $25,000 on 13 September 1989. The last two cheques totalling $17,693 were drawn on 5 December 1989. When the house was completed, the bankrupt and her husband moved in, leaving Drummond Street empty. Since that time Sandra and Michael Smith have also built a house on the land at Bringa Park which

It became apparent by the end of 1989 that the bankrupt would not be able to meet all her debts. Excluding any possible

interest she may have had in the house on Bringa Park, her

-7- only significant asset was Drummond Street valued at $160,000, which was security for her debt to the bank of $99,693 and for her husband's indebtedness of $160,000. The bankrupt also had the unsecured debt to the Deatons of $84,668.32 so that, excluding interest and minor debts, her personal liabilities were $184,361, and her maximum potential exposure was

At some stage towards the end of 1989 or at the beginning of 1990, the respondents decided not to transfer the Bringa Park land to the bankrupt as had been originally intended. Thus the bankrupt's house remained the property of the respondents, and when she became bankrupt on her own petition on 19 February 1990 pursuant to section 55 of the Act, no interest in Bringa Park was disclosed in the bankrupt's statement of affairs. Bruce McInnes admitted in evidence that he was instrumental in the decision of the bankrupt to petition for bankruptcy. On 29 May 1990 the Deatons lodged a proof of debt Claiming $91,536.89 including interest.

Drummond Street was twice valued during 1991 at $125,000 and $130,000 respectively, figures said to be reduced by reason of damage caused to the premises after the McInneses moved out. It was eventually sold for $127,000 in December 1991 by the bank under the mortgage, with the entire balance of $118,057.70 after payment of disbursements being used in reduction of the bankrupt's own debt to the bank, by that time

increased by accumulated interest. None was used in reduction

• gs - of the debt of Colin McInnes, and the trustee in bankruptcy did not receive any proceeds of the sale. The Deatons have

not, therefore, received any dividend from the estate.

I am provided with scant evidence of what eventually happened to the debts of Colin McInnes. It would appear that Wyandra was sold in 1993 for $120,000, and that the bank, having taken the proceeds of that sale, walked away from the remainder of

Two very different versions of the decision of the bankrupt and her family to sell Drummond Street and build on Bringa Park were presented by the parties. The respondents said that the decision was made well before the arbitrator's award that created the debt to the Deatons, and that the loan agreement with the bank and the contract to build were executed before the McInnes family became aware of the decision. Furthermore, they allege that an agreement was reached whereby for a specified price, probably $15,000 and transaction costs, the bankrupt was to have conveyed to her by the respondents the piece of Bringa Park upon which the house was to be built. Thus, they say, the building was not a gift to the respondents, in fact it was not a disposition or settlement at all, but merely an act taken in anticipation of future events that would see formal legal title in the house return to or

• 9 - The trustee alleged that there was never a real agreement before June 1989. It was suggested that the decision to build on Bringa Park was made after the decision of the arbitrator in June 1989 when the McInnes family perceived the likelihood of the bankruptcy. The trustee submitted that the building project was designed to put assets out of the reach of the Deatons. The trustee thus contended that the $99,693 paid to the builder from the bankrupt's loan facility at the bank for the construction of the house at Bringa Park represented either a disposition of property to the respondents with intent to defraud creditors within the terms of section 121 of the Act, or a settlement on them under section 120. As a result of the application of either section it was argued that the transaction is void as against the trustee who asks that the Court order the respondents to pay the $99,693 into the

The respondents relied on the evidence of six witnesses. The respondents themselves, Bruce and Karen McInnes, together with Sandra Smith and Colin McInnes, were all cross examined. Michael Smith and Paul Condon, her doctor, were not called and their evidence was limited to the contents of their affidavits. Dr Condon's affidavit concerned the bankrupt's health, and concluded that she was "medically unfit to give evidence in any Court as a result of her disease". He gave no

• 10 - The trustee relied on two witnesses. Vincent Desgrand, from the Official Receiver's Office, has been entrusted with the Care and management of the bankrupt's estate. His affidavit annexed several pertinent documents to many of which I have already made reference. Kenneth Smith was the manager of the bank at relevant times and was called to prove certain documents produced by the bank. They were not tendered formally during the hearing, but the parties have since agreed that they be deemed to have been so tendered. In these reasons I refer to them by their page numbers in the agreed bundle. The trustee also relied on a notice to admit facts addressed to the respondents dated 4 May 1994 and the response

It is convenient to deal first with the allegation of an intent to defraud creditors, upon which the trustee's application under section 121 relies. The principal issue for determination on this aspect of the case is whether the payment to the builder under the contract was a transaction entered with intent to defraud creditors, the suggested fraud being the deliberate denial of access to her assets to the Deatons. In a written outline of submissions the trustee

It may safely be inferred from all the surrounding circumstances that the transaction was one entered into between the parties with the intention of fraudulently putting the bankrupt's available asset,

namely her equity in the Drummond Street property, beyond the reach of her creditors, DR & JL Deaton.

The fraud required to be shown is that of the bankrupt, although the trustee may also be required to show that the respondents did not act in good faith. Unfortunately, as a result of her ill health, I have not had the benefit of the bankrupt's evidence in this matter. However, the evidence raises a strong inference that all relevant decisions were made by Colin and Bruce McInnes in partial consultation with other members of the family. Bruce McInnes tried to distance himself from the decision-making when he said (affidavit 12

10. I did not have anything to do with the application for a loan to the National Bank for the purpose of the building of the house by Enid on Bringa Park nor did I have anything to do with the building contract.

11. fhe first occasion I became aware that the building was proceeding was mid year 1989. Ir arrived home to find digging of foundations had commenced.

9. I believe that I lodged an application with the Lands Department and signed one document for a Council application for the purpose of subdivision of the land.

• 12 - Under cross examination the assertion that he did not know what was going on was challenged, and he conceded that he had attended at the bank when Colin McInnes put the proposal to

was taken in there by my father to assure Mr Smith that I was a willing party to cutting off an acre of ground to build the house on... I was not 4 party to any application.

Mr Smith's records reveal that the meetings with the bank throughout 1989 and 1990 were conducted by Bruce, Karen and Colin McInnes. Colin McInnes did not attempt to deny that he was instrumental in the arrangements with the bank. Nor is it conceivable that Bruce McInnes would not have known everything that needed to be known about the whole transaction seeing as it concerned his land and the wellbeing of his father and his wife's mother. From the documents and from general observations of and from the evidence of members of the family I am satisfied that for all relevant purposes the bankrupt's family, in particular her husband and son-in~law, acted as her agents, presumably under her instruction or with her approval or acquiescence or in her agreed place. In the absence of any evidence or even submission either way on the point, I have assumed that they kept her informed of the steps they were taking, and that she sanctioned each subsequent' step progressively, either explicitly or by failure to object. Consequently I am satisfied to draw conclusions about her intentions from the actions and testimony of her family in

In the absence of any positive proof of intent to defraud, the trustee has asked that such an intention be implied from the circumstances surrounding the transaction. In Freeman v Pope [1870] 5 Ch App 538 it was said at 541:

-.. it is established by the authorities that in the absence of any such direct proof of intention, if a person owing debts makes a_e settlement which subtracts from the property which is the proper fund for the payment of those debts, an amount without which the debts cannot be paid, then, since it is the necessary consequence of the settlement

(supposing it effectual) that some creditors must remain unpaid, it would be the duty of the Judge to

the settlor to have been to defeat or delay his creditors, and that the case is within the statute.

In P_T Garuda Indonesia Ltd v Greliman [1992] 35 FCR 515 a

Full Court of this Court (Wilcox, Gummow and Von Doussa JJ) quoted with apparent approval at 523 the comments of Clyne J in Re Trautwein [1944] 14 ABC 61 on the requirements of a

tee dit is, I think, clearly established that in determining whether or not an alienation has been made with intent to defraud creditors, a court must look at all the circumstances' surrounding the alienation to ascertain if there were any such intent. It is not necessary to bring actual proof that the alienor had in his mind an intention to defraud creditors: for if it appears from the evidence that the effect might be expected to be and has in fact been to do so, the court will attribute the fraudulent intention to the alienor.

• 14 - An alternate view has been taken in some cases in which it has been held that positive evidence of an intent to defraud must be presented. This view derives from the case of Ex parte Mercer: re Wise [1886] 17 QBD 290 in which Lord Esher MR said at 299:

-». this case was at first argued ... upon the assumption that, if the natural or necessary effect of what the settlor did was to defeat or delay his creditors, the Court must find that he actually had that intent. That proposition or doctrine I entirely abjure.

In order to make this deed void under the Statute of Elizabeth (however far that statute may "be stretched), we are bound in the present case to find that there was an actual intent in the bankrupt's mind to defeat or delay his creditors, and there is no evidence of such an intent. He has sworn that he was not thinking of his creditors.

This view has also found expression in the judgment of Dixon J

in Williams v Lloyd: Re Williams [1934] 50 CLR 341 at 372:

A real intent to defeat or delay creditors must exist, and the question always is whether, upon all the circumstances of the transaction, the transfer or other disposition was in fact made with that vintent. The burden of proof is upon those alleging that it was so made.

In Re Barnes: ex parte Stapleton [1962] Qd R 231 at 237 Gibbs

J, sitting in the Supreme Court of Queensland exercising federal bankruptcy jurisdiction, stated that the primary

whether the evidence establishes that the transfer of the property by the bankrupt was fraudulent. Actual fraud, that is an actual intention to defeat or defraud creditors must be established, and whether the existence of such an intention should be inferred from the circumstances is a question of fact.

In Noakes v_ J Harvey Holmes £& Son [1979] 37 FLR 5 at 10, a

decision of a Full Court of this Court, Justice Brennan, with whom Justices Deane and Fisher concurred, went some way

We were pressed with some observations in Willjams v

Lloyd: Re Williams where the court affirmed that the burden of proof that a transfer was made with a real

intent to defeat or delay creditors is upon the party who so alleges. But that was a case where, at the time of the challenged disposition of property by a husband to his wife, he was in a _ sound financial position, and it was held that subsequent conduct and events were insufficient to Show that the husband had at that time an intent to defraud creditors (see the judgment of Dixon J (at 372)). In the present case, the inevitable result of the transfer of shares on 13 December 1976, was to defeat or delay any attempt to execute the judgment in Norfolk Island. The case falls squarely within the line of authorities of which Freeman v Pope is the leading example...

This . formulation was adopted in Garuda at 524. It is evidently the trustee's position that this case falls within the Freeman type of case in which an inference of an intent to defraud can be drawn from the fact that an inevitable result of the project was to defeat creditors, and from the other circumstances of the case. The principal additional Circumstance alleged to support the inference here is the

coincidence of timing between the arbitrator's award creating

• 16 - the debt to the Deatons and the arrangement to finance the

Six days after the arbitrator's award was handed down on 10 June 1989, there was according to bank records a meeting or telephone call between Karen McInnes and the bank manager, Kenneth Smith, at which the bank was informed, apparently for the first time, that the McInneses wished to build a house at Bringa Park for the bankrupt. Although Karen McInnes had no recollection of the communication she did not deny that it occurred (T32) and there appears to be no reason why I should not accept the file note made by Kenneth Smith as accurate (JD123). It records Karen McInnes' or the family's expressed

to build house on * ha block at Stoney Point for Mrs McInnes [the bankrupt}. Get her away from town and closer to daughter ~- look after her

Plans would appear to have been in full swing by 3 July 1989 when Colin and Bruce McInnes had an interview with Kenneth

Smith. Mr Smith's record of the interview (JD124) noted:

The proposal is before us to provide housing finance to construct a home on family farm outside Leeton.

-17 - The loan would appear to have been approved by 21 July 1989 when a memo of a telephone call between Mr Smith and Colin

McInnes records the confirmation of the loan approval (JD126).

It is therefore undeniable that the bankrupt and her family moved very swiftly after the handing down of the arbitrator's award to arrange the finance for the construction. There is no evidence that they informed the bank of the award although it would appear that the bank was on notice of the debt before final approval. On 21 July 1989 Kenneth Smith's memorandum of his conversation with Colin McInnes included the following

6. Caveat on title. Deaton (Drummond St) Said he is a builder. Offered no further comment.

The first indication that the debt to the Deatons was expressly discussed with the bank was in a memorandum of an

interview with Bruce McInnes of 15 January 1990 (JD127) which

i. Apparently an on going Court case with builder Deaton over construction of house 22 Drummond Street Leeton has been determined.

2. A figure of $85,000 has been awarded which includes a settlement amount of $35,000 plus accrued interest and legal fees etc.

• 18 - It would appear therefore that the debt was not specifically

mentioned to the bank until building had been completed and it

The trustee relied primarily on this coincidence of timing, and the ostensible failure to inform the bank of the debt to the Deatons, to raise the inference that the project was

In response, the respondents pointed to a number of factors that they say rebut any adverse inference from these facts. They asserted that neither they nor the bankrupt were aware of the state of the bankrupt's affairs sufficiently to discern the significance of her further indebtedness. Bruce McInnes is a chartered accountant who according to his own evidence

taxation returns. His evidence was that statements of their affairs were only ever prepared for taxation purposes, and even then they were generally up to two years in arrears (affidavit 12 August 1993 p.3, 135-6). He claimed to have been unaware during 1989 of

the details of the bankrupt's indebtedness. However, it would

Not require any detailed knowledge of her affairs to have

• 19 - understood the ramifications of the additional debt to the bank in light of the best possible value of Drummond Street, then assumed to be $160,000, and the existing or impending

The respondents also denied that any of the McInneses knew of the arbitrator's award until later in the year, after the finance for the building was already arranged. Under cross

examination Bruce McInnes gave the following evidence (T43):

And you found out as soon as the arbitrator's award became available that your mother-in-law was to pay $84,000? ~- No, I did not.

When did you become aware? - Some time after. I would say three-quarters of the way through the year when an appeal to the Supreme Court was prepared ...

...It would have been probably late September, early October by my estimate.

although he later conceded that he must have been told of the award before 8 September when the appeal was dismissed in the Supreme Court (T44). Coming from the bankrupt's accountant, let alone her son-in-law, this evidence is very difficult to

Karen McInnes was uncertain when she became aware of the arbitrator's decision (T31), although she "only became aware

of financial problems about December 1989" (affidavit 17

=- 20 - September 1993 p.2), a date she conceded was only a guess on her part (132). It is, in my opinion, unlikely to be true.

Even more unlikely is Colin McInnes' denial that he knew of the arbitrator's decision before September or October (T83). All this evidence amounted to an assertion that the solicitors for the bankrupt received the decision of the arbitrator, failed to inform their client or her husband and family of it, initiated and conducted appellate proceedings and undertook the costs inevitably associated with them, all without instructions, and received the judgment of the Supreme Court on the appeal, and then waited a month before informing their client of the result. Without more, including a later confrontation with the solicitor concerned about such unprofessional and improper conduct, or any evidence of even one communication with the solicitor to support their version of events, this position is inconceivable and untenable. The trustee was similarly unable to provide any evidence of an earlier communication between the McInneses and their solicitors, but this situation may be explained by the fact that . such documents would have been privileged. Nor did either party lead any positive evidence on the practical side of things, such as who was present when the decision was handed down, what the solicitors did when the award came out,

and how they came to lodge the Supreme Court application.

For my part I cannot accept the respondents' position in this

regard, especially the evidence of Colin McInnes and Bruce

• 21 - McInnes which I found unappealing and unconvincing. It is not feasible that the solicitors kept the award to themselves and acted alone in relation to the appeal. Of course it is possible that they contacted the bankrupt only, and that she did not pass on any information to her husband or family, although no evidence was led to suggest that this was the case. I doubt that it was. The solicitors would or should be presumed to have known of her state of health and they must have at some stage been in contact with the husband or members of the family. I have concluded that by the time the agreements with the bank and builder were made, either the bankrupt alone, or the bankrupt and her husband, daughter and son-in-law, or some of them, had become aware of the decision

However, at the time the building and financing transactions were entered in July 1989, legal proceedings were still under way to set aside the arbitrator's decision. When these proceedings were finally dismissed on 8 September 1989, the project had been arranged and the building commenced. There was some evidence that the respondents believed that they were going to win the appeal. Kenneth Smith recorded Bruce

The final comment of their Legal Counsell [sic] was the decision was poorly administered and incorrect or unfair. There was too much cost involved to appeal any further... [ie to appeal the decision of

the Supreme Court not to overturn the arbitrator's award]

On the stand Bruce McInnes confirmed that this was his belief

I'd always been led to believe that given the facts of the case there was no way that Enid could lose the case so I was angry at the time...

No evidence was brought by the trustee to suggest that the appeal to the Supreme Court was hopeless, or that the McInneses may not have had real confidence in its success. Yet on such an issue the trustee had the burden of proof, or at least the responsibility to do more than merely advance a submission. It is my conclusion in the circumstances therefore that although the respondents knew of _ the arbitrator's decision when they arranged the finance for the transaction, they were continuing to contest the matter, apparently with some confidence of success, and did not consider the issue to be settled against them until 8

Thirdly, the respondents asserted a completely different rationale for the transaction. They contended that the reason for moving the bankrupt was her deteriorating health, and a

desire on her part to be close to the rest of her family.

They said that the decision had been made in substance some

• 23 - time before June 1989, although the contract to build and

Colin McInnes gave evidence that he began inquiring about the possibility of building on his son''s land as early as 1987. In his affidavit of 27 June 1994 he stated (p.1):

When my wife was diagnosed as also having [Huntington's] disease I approached Mr Warberton [sic], the builder, to enquire about building a house which was suitable for 4 person confined in a wheel chair. I did this in about mid June 1987. Mr Warburton gave me the plans of some houses he had recently built for me to modify the plans to suit my wife's needs. My intent at that time was to build the house on my son's property.

The respondents did not produce any plans, or evidence of communications with the builder, to support the contention of earlier discussions. Mr Warburton has died and s0 was unavailable to give evidence. If his records were discovered or examined by either party, none have been produced in evidence, although something of such an inquiry might have been expected. Under cross-examination Colin McInnes gave further evidence of his own and and his wife's motivation of

for the move, and the timing of the decision (T82):

Actually we had been talking about it [moving to Bringa Park] since 87; my wife and I had discussions and decided it had to be done. We had had these discussions without talking to my son, but I thought being family that they wouldn't have any objections to it, because where we lived there were spiral staircases and she was constantly falling, not down the spiral staircase, but in other places, and we were frightened she would fall down there. Also at that stage and up until about May or June of ...

(1989 Sandra Smith, the bankrupt's daughter] and her

so there was nobody there to help look after her, so

possible. He also said he had approached real estate agents to put Drummond Street on the market in 1987, although he was similarly unable to corroborate this fact (affidavit 27 June 1994 p.2). The other McInneses agreed that the reason for the move was the health of the bankrupt. Bruce McInnes confirmed that in the family's opinion, once the disease set in, the only options for the bankrupt were to live in a nursing home, to live with her husband and have either live-in or regular

visiting help, or to live near her daughters so that they

It would appear that this issue was fully canvassed by the McInnes family at a meeting around Christmas 1988. One member of the family with a clear memory of the Christmas discussions was Sandra Smith, who also unmistakably considered the decision to be solely related to her mother's health

At about Christmas time in 1988 my step father Colin called a meeting of the family to discuss what should be done as my mother's condition was getting

worse... We talked about mum's disease and we discussed getting a new house which would be specially modified for her... I can recall

discussing that it would be best if the house was built near Karen's home on Bruce's farm as that would be near Karen's home and near the area where I was intending to live.

• 25 - Her husband Michael Smith gave evidence in similar terms (affidavit 5 July 1994 p.1), and the evidence of Bruce McInnes (affidavit 12 August 1993 p.2) and Colin McInnes (affidavit 21 September 1993 p.1) was to the same effect. Karen McInnes said that she was not involved in the decision-making and has very little memory of the Christmas meeting although she was apparently present. However, when she realised that her mother was building a house on her land, she did not object

I desired to have my mother live close to me so that I could attend to her needs and assist her as her health declined as was then expected.

This attempt to distance herself from what simply must have been an important part of her life at the time makes Karen McInnes' evidence particvularly hard to accept. On the other hand, to explain the timing of the move, the respondents point to the fact that in early 1989 Sandra and Michael Smith left Drummond Street, thus increasing significantly the need to find alternative accommodation for the bankrupt near her other daughter.

It is clear that there were genuine concerns for the bankrupt's health, and the evidence satisfies me that it was a major factor in the move. I find also that the possibility of moving her for this reason was seriously considered before June 1989. Indeed the trustee did not truly suggest that this

was not the case. However, in support of the proposition that

• 26 - the existence of another motive for the transaction does not preclude a finding of fraud, the trustee cited Barton v Deputy

Commissioner for Taxation [1974] 131 CLR 370 in which Stephen J said at 375:

two or more intents may not be mutually exclusive, for instance an intent to defeat creditors and an intent to avoid the sanctions of the criminal law. In such a case I see no reason why the existence of the second such intent should prevent a creditor from relying upon s. 40(1)(c).

The section being considered there relevantly provided that a debtor committed an act of bankruptcy if, with intent to defeat or delay creditors, he departed the country. It was significant in the reasoning in that case that the other intent relied upon by the debtor was an intent to escape the

The absence of evidence of any honest reason for his remaining overseas is significant; there was here no question, as there was in so many of the reported cases relating to this particular act of bankruptcy, of the debtor going abroad to seek funds, to attend to an existing business, or to return to his native country. Moreover, when the only alternative inference open is that a debtor is staying abroad to sescape the reach of the criminal law, the reluctance of courts to infer dishonest conduct by a debtor towards his creditors, a reluctance to which Lord

Greene MR refers in In re M Kushler Ltd [1943] 1 Ch 248 at 252, scarcely arises...

In this case the other reason asserted is far from such nefarious conduct. However, the principle gains support from

Nor is it necessary that an intent to defraud creditors be the sole intent of the debtor.

Hence an implication of an intent to defraud can be made even if more honourable reasons provide a second motivation for the impugned transaction. In other words, a transaction motivated by genuine considerations of health that is timed or structured so as to defeat or delay creditors would not escape the operation of section 121. In this case, therefore, although the finding of an alternate valid reason for the transaction assists the respondents somewhat in the process of evaluating the probabilities, it is alone insufficient to save

Perhaps most important for the resolution of the matter is the respondents' assertion of the abandoned agreement to subdivide and convey to the bankrupt the acre (or half hectare) of land upon which the house was to be built for $15,000 plus the costs of subdivision, conveyancing and the like. They said that 'there was no intention to make any disposition upon them, or to reduce the value of assets available to the bankrupt's creditors, since the house was intended to be built on land which would become her property. They said that it was therefore never the intention of the bankrupt to divest herself of the benefit of the money borrowed from the bank, and that there could not thus have existed an intent to

• 28 - There is a great deal of evidence supporting this assertion. Bruce McInnes stated (affidavit 12 August 1993 p.2) that at

Someone then said words to the effect, "They [the bankrupt and Colin McInnes] should (or could) build here [Bringa Park] and sell Enid's house at auction". I recall saying words to the effect, "We could sell an acre to Enid for $15,000.00 but all expenses would have to be paid by Dad and Enid". I also said words to the effect, "There will also have to be an agreement that if the house is sold it will

be to a family member or to someone Karen and I agree to".

This was also the evidence of Karen McInnes (affidavit 17

September 1993 p.2). Colin McInnes stated that they

the subdivision of a portion of land on Bringa Park which to build the house [sic], the payment, to my recollection, of between $15,000.00 and $20,000.00 to my son and daughter-in-law, the payment by my wife and self of all expenses connected with the subdivision and that the house could not be sold to anyone outside the family.

Allegations by the trustee that the notion of a contract for the ale of the land was fabricated for forensic purposes after the event must also confront the evidence in the bank's files that it was told of that intention in 1989. At the end

of his note of the original meeting with Karen McInnes (JD123)

-5 ha off Bruce's Farm... Land Dept Approval forthcoming.

• 29 - In the memorandum of interview with Colin McInnes and Bruce

McInnes on 3 July 1989 a slightly more expansive statement is

The house is to be built on a .5 hectare block, subdivided from B K McInnes's farm... The sub division is in accordance with new M.I.A. land

tenure, though a title deed may not issue for some time.

After a telephone call with Colin McInnes of 21 July 1989, Mr Smith recorded the terms under which he had agreed to approve

4. Contract of Sale required with Bruce selling off .5 ha portion to E.D. McInnes.

The trustee made much of the fact that statements of the agreed area to be conveyed vary between "1 acre" and "0.5 hectare", and that Colin McInnes was uncertain whether the agreed price was $15,000 or $20,000. However, in the circumstance of a family arrangement, there is nothing unusual or inherently unbelievable about such vagueness.

The respondents' assertions of an agreement to sell, and the characterisation of the transaction generally, gain some tangential credence from the fact that Sandra and Michael Smith, in a sequence of events remarkably similar to that contended by the respondents to have occurred in relation to the bankrupt, also built on Bringa Park and purchased the land

upon which their house stood for $20,000. There was no

• 30 - suggestion that that transaction was a sham, or was motivated other than by an effort to ensure the proximity of her daughter to the bankrupt (affidavit of Bruce McInnes 12 August

I conclude that there was an agreement of some kind that, once the house was built, the land upon which it stood would be transferred to the bankrupt for a price. The price and the size of the land were only indicatively and not precisely defined but this is explained by the fact that the transaction

was between members of a family. ABANDONMENT OF THE AGREEMENT

The trustee responded that even if there was once such an agreement, it had been abandoned before July 1989. He pointed to the fact that in January 1990 the respondents purported to repudiate the agreement when it was determined not to go ahead with the transfer to the bankrupt. On 15 January 1990, soon after the bankrupt's house on Bringa Park was completed, Bruce McInnes had another meeting with the bank manager, Kenneth smith. The record of that meeting made by Mr Smith was not disputed by Bruce McInnes, although he could not recall the detail of the discussion (T50). Mr Smith's record was (JD127) [sic]:

Apparently an on going Court case with builder Deaton over construction of house 22 Drummond Street Leeton has been determined.

j.A figure of $85,000 has been awarded which includes a settlement amount of $35,000 plus accrued interest legal fees etc

Bruce holds the opinion the legal system has been manipulated by Deaton's representatives and that a Judge'a determination on the Court ruling can't be obtained and/or won't change the position. Bruce's option and action is now fairly clear in he will put Mrs McInnes into Bankruptcy when receipt of a reply to our memo addressed to Legal Services of 4.1.90.

Furthermore he has requested the Lands Dept to withhold further conveyancing referring title ownership from B & K McInnes [the respondents] to E.D. McInnes [the bankrupt) for obvious reasons. The stage has been reached where his payment of $500.-- sees the process finalized.

As he feels Deaton has been unreal then he will do something similar in return.

Depending on ultimate result the land transfer can be amended to either Alan or Colin McInnes and used as security to NAB. This he has no problems with.

I discussed with Bruce again of our interlocking security from E.D. [the bankrupt] to C.J. & A.C. [Colin McInnes and his son Alan} and that really if the house were to be sold at auction we would apply sale proceeds towards associated debts and I feel nothing left over for Deaton... Bruce simply wishes to ensure our position is secured and there is no further comeback to family

The clear implication from this document is that the respondents, and presumably the bankrupt, deliberately avoided completing the transfer of land to minimise the assets that would be recoverable by the creditors, particularly the Deatons. Indeed this was conceded by Bruce McInnes under

• 32 - Some time in December or early January I think Enid was served with the full effects of the arbitration decision and at that point, yes, I did make the

decision not to go ahead with it [the transfer of the land to the bankrupt].

The trustee argued that the implication should be drawn that the intent to transfer to the bankrupt had never really existed, and that a pretence to the bank was maintained until the house was built. The submission was that there is no objective reason why, in January 1990, it would suddenly have become apparent that Enid McInnes faced bankruptcy when on the trustee's case, all the objective facts were known at the time

On the other hand, there seems no reason to reject the respondents' evidence that until the dismissal of the appeal the bankrupt's precarious financial position had not become clear to them. Between the arbitrator's decision in June and the appeal result in September, I believe that the McInneses intended to continue with the transaction. Thus, for example, they proceeded with a development application for the subdivision of Bringa Park showing the applicant as _ the bankrupt. The application was received by lLeeton Shire Council on 8 August 1989 and formally approved on 25 October

1989, although no actual subdivision has taken place. NECESSARY CONSEQUENCE

As specified by the cases earlier cited, the trustee bears the

onus of showing that at the time of the impugned transaction,

• 33 - there was subtracted from the estate an amount without which the bankrupt's debts could not be paid, and which therefore should properly have been applied to the payment of the bankrupt's debts. A real question arises whether the building project did make it impossible or even unlikely that the bankrupt's debts could be satisfied. This is because one effect of the transaction in question was to increase the bankrupt's secured debt to the bank, and thereby reduce the chance of the Deatons recovering on their unsecured debt. On the other hand, if the title had been transferred as projected, her assets would have increased by the amount of

its value less the price paid for the land and the building.

Assuming in favour of the trustee that the result was to reduce assets available to creditors, the only relevant consideration is what inferences should be drawn about the intention of the parties at the time of the transaction. The trustee led no evidence to suggest that at that time it might reasonably have been expected that the house and the land on which it was built would be worth significantly less than the bankrupt would spend on them. In my opinion, despite the fact that" the presumed actual effect of the transaction was to divert assets from the reach of creditors, this was not the intention at the time the transaction was entered. The borrowed money was not intended to be disposed of to the

respondents, except possibly to help buy the land at value, but to be spent on building a house on land which the bankrupt

• 34 _ expected in the near future to own, and to which creditors

I find, therefore, that at the time of its conception, the bankrupt's building project at Bringa Park was not expected to

significantly reduce the assets available to creditors. CONCLUSION

On the facts presented to me, I find on the balance of probabilities that the McInneses entered into the agreements with the bank and the builder after hearing of the award against the bankrupt. It was a plan they had held for some time, and they executed it whilst under the impression that they had a good chance of successfully appealing the arbitrator's award against the bankrupt. At that stage, they intended that the land upon which the house stood would be conveyed to the bankrupt when it was completed, an intention they conveyed to the bank and expressed in the development application. However, some time after 8 September when the appeal was dismissed, their intentions changed. By this stage the "puilding and financing contracts had been entered and construction had begun. Furthermore, in the financial climate at the time, interest on the debt was rapidly accumulating. It could have been as late as the end of the year when Bruce McInnes finally decided that his mother-in-law should petition for bankruptcy. From then on all the actions of the bankrupt

and the respondents were primarily designed to avoid paying

• 35 - the debt to the Deatons. The effect of this finding of fact will be addressed later.

I therefore conclude that there is insufficient evidence to permit me to infer actual fraud on the part of the bankrupt in relation to the transactions between herself, the bank and the

builder under which the house was built on Bringa Park.

Clearly $99,693 was never settled on the respondents as the builder received the money. What was arguably settled on the respondents was the house. Starke J observed in Williams at 364:

A settlement of property is a conveyance or transfer of property, and "the voluntary settlements to which this section applies are only such conveyances or transfers of property as are in the nature of settlements in the sense of being dispositions of property to be held for the enjoyment of other persons, i.e., where the donor contemplates the retention of the property by the donee, either in its original form or in such a form that it can be traced" (Wace on Bankruptcy (1904), p. 241...).

In Re Pahoff: ex parte Ogilvie [1961] 20 ABC 17 at 19, Clyne J said of section 94 of the Bankruptcy Act 1924:

The word 'settlement' in s 94(1) is not used in a narrow or technical sense, but according to a long line of authority means a disposition of property by the settlor for the benefit of the person on whose behalf the settlement is made and a disposition of such a nature that the retention of the property in

some form is contemplated; not its immediate disposal by consumption.

Although since that case was decided the legislative scheme has been altered, most notably to include section 120(8), it would appear that the permanency or retention requirement has

survived. In Barton v Official Receiver [1986] 161 CLR 75 the High Court noted at 78:

Although made in the form of a loan, no part of the principal was repayable for 20 years and the purpose of the loan was to enable the appellant to buy property in the form of a house and company shares. There being no contemplation of the immediate dissipation or consumption of the money, the established principles governing the making of a

settlement were satisfied: see Williams v Lloyd: In

re Williams.. See also Re Hyams [1971] 19 FLR 232 at 252, and N.A. Kratzman v_Tucker (No. 1) [1966] 123 CLR 257.

In the light of my finding that the respondents and the bankrupt intended at the time of the transaction that the house would belong to the bankrupt, that she would live in it, and that, after the conveyance of the land to her, she would own it, I have concluded, in the context of the clear judicial approach to this section revealed by these authorities, that section 120 does not apply to the transactions by means of which the house was built on the respondents' land. Even at the hearing, Bruce McInnes was of the opinion that his mother- in-law owned the house she had built, notwithstanding that it

was on hig land. He clearly did not intend to gain or believe

• 37 - that he had gained a house, or anything, from the transactions (T64). The building of the house was certainly not intended to confer any lasting benefit on the respondents. As legal owners of the land upon which the house was built, the respondents may have gained legal ownership of the house. if so, this position was an unintentional temporary state of affairs pending the proposed subdivision and transfer which equity would enforce. In my opinion there was no settlement

Although my conclusions so far render it unnecessary, it is instructive to mention what the result would have been had I determined there to have been fraud or a settlement. Pointing to the argument that the estate of the debtor was, by the impugned transaction, diminished by $99,693, the trustee contended that that sum should be awarded to the estate to void the transaction. The respondents replied that the trustee can recover no more than they received -- in this case the ,value of the house structure and materials, or any increase in the value of their property. In this connection the respondents pointed out that, as against them, the

bankrupt is at least entitled to live in the house for the

• 38 - No evidence was led by the trustee to suggest what the value

of the house was. Indeed in written submissions the trustee

The fraudulent disposition was not the erection of a dwelling on the Respondent's [sic] land. The disposition was the payment of money for that purpose. The erection of the dwelling was merely the result of the disposition. The value of the dwelling is immaterial. The trustee is entitled to recover the subject matter of the disposition.

This submission was pressed in oral argument, despite some pressure from me for its reconsideration. It appears to me to distort the operation of the section by asking the Court to order the respondents to compensate the estate for the transaction with the builder to which they were not a party.

If the Court holds that there was a disposition of the kind alleged, then it should attempt to place the debtor's estate in the position in which it was immediately prior to the disposition. This involves

the payment of $99,693.00 by the Respondents to the [trustee].

Thes@ two approaches indicate the difficulty facing a court asked to void a transaction such as this, where true restitutio in integrum is not possible. In this case the issue was not fully argued and it is not necessary to decide it. However, it is my opinion that the Act does not contemplate the respondent to an application compensating the estate for loss, but rather disgorging any gain from the

impugned transaction. So far at least, the respondents have

• 39 - not gained anything. Even on the trustee's own case, any ownership of the house by the respondents would have been subject to a life tenancy or irrevocable licence in favour of the bankrupt and her husband, probably without rent. Its value is therefore either not quantifiable at all or not

I have earlier made the finding that there existed between the respondents and the bankrupt an agreement that when the house was built it would be transferred to the bankrupt. This factor rebutted the implication of fraud, and prevented the transaction being considered a settlement. It was the respondents' position that a binding or enforceable agreement was formed, and that it remains on foot, allowing the trustee to sue for performance of the contract or damages. This argument was pressed notwithstanding that agreements for the sale of land are required to be in writing, on the basis that the part performance of the bankrupt in building the house

would cure this defect and make the agreement enforceable in

I accept the submission of the respondents that the same result is reached even if the agreement did not constitute a binding agreement. If all that existed was a loose intention or understanding, the fact that with the knowledge and

apparent encouragement of the respondents the bankrupt built

• 40 - the house would estop the respondents from denying the

If either of these equitable causes of action has been extinguished by the bankrupt whether by rescission or waiver,

she has deliberately given up a cause of action against the respondents. As Justice Wilcox said in Re Ward: Official Trustee v Dabnas Pty Ltd [1984] 3 FCR 112 at 116:

The assignment or forgiveness of a debt is a "disposition of property". By such a transaction the donor divests himself of a right of property, namely his chose in action for recovery of the debt.

Similar reasoning must apply to the deliberate surrender of

In approaching this issue I have been hampered by the manner in which the trustee addressed it. In written submissions the

The trustee has not instituted proceedings for specific performance of the alleged contract and has saccepted the repudiation of the male Respondent of the alleged contract as evidenced by the bringing of these proceedings. Even if the repudiation by the bankrupt was tainted by fraud (and this is alleged), it was open to the trustee to nevertheless accept the repudiation by the male Respondent which it did by the bringing of these proceedings.

The Applicant [trustee] does not seek to charge the land upon which the dwelling is located because the land cannot be identified and secondly because the Bank's existing mortgage would take priority. As a matter of utility, the only appropriate course is to order the Respondents to disgorge the subject matter of disposition, namely $99,693.00.

• 41 - It is not difficult to see why this approach was adopted. The most that could be said to have been settled on the respondents by this presumed disposition was the value of the agreement. On the evidence before me the most likely form of this agreement was that, for the cost of the necessary council applications and conveyancing costs, and $15,000, the respondents would transfer to the bankrupt the land, an acre in size, upon which the house had been built. It may also have involved restrictions on the bankrupt's power to dispose

I cannot begin to guess at the value of this arrangement in the total absence of any evidence, but it can safely be assumed that it is considerably less than the $99,693 that the trustee is claiming. It is instructive to note that in an effort to settle these proceedings, the respondents offered to complete the agreement as I have described it. This arrangement, had the trustee consented to it, would have had the same effect as any order I could make that the respondents pay to the trustee the value of the agreement.

Both parties appeared to proceed on the assumption that any subdivision in favour of the trustee would be subject to a mortgage in favour of the bank. Although this was the opinion of the bank manager, Kenneth Smith (T21), I was not presented with any real evidence to support this assumption. It appears

to me that even if a subdivision became or had become security

• 42 - for the building loan, that loan was satisfied on the sale of

Having disposed of the application of the trustee under sections 120 and 121 of the Act, it is necessary to deal finally with the respondents' application to set aside the

(1) If the Court, on application by a person to whom a notice has been given under section 139Z2Q or by any other interested person, is satisfied that this Subdivision does not apply to the person on the basis of the alleged facts and circumstances set out in the notice, the Court may make an order setting aside the notice.

If the notice is not set aside and is not complied with, section 139ZT provides that an offence is committed, and

In two recent judgments of this Court, Re Pearson: ex parte

Wansley [1993] 46 FCR 55 at 60 and Re _ Fiorino;: ex parte Woodgate Gummow J unreported 14 April 1994 at page 23, it was

observed that these sections do not appear to permit a notice to be set aside on the basis that the alleged facts are not found to be true, or that additional facts are found that alter the conclusion to be drawn from the alleged facts. It

thus appears to be possible for the Court to dismiss an

• 43 - application under sections 120 and 121, and yet not set aside a notice under section 1392Q, if the notice was in fact properly conceived on the facts set out in it. With great respect I have considerable doubts about this matter but I do not propose to determine it now, since these notices fail in

The notices claim $99,693 on the basis that it is the amount by which the estate was diminished. However, section 1392Q dictates that the amount of the notice shall be "equal to the....value of the property received". There is nothing in the notices to indicate that the respondents received property

I consider the transaction whereby you received the benefit of $99,693.00 being the cost of erecting a dwelling on your property at Leeton paid by the bankrupt is void..

Clearly the amount claimed does not relate to the value of the property received, but solely to the depreciation in the value

of the estate, and the notices must fail for that reason.

The parties did not address the possible implications of section 1392Q(7), which may have had some operation if the offer by the respondents to transfer the house to the trustee had been accepted, provided of course that the trustee paid

for the cost of the land upon which it stood. Joinder

At the conclusion of the hearing, the trustee applied for an

order joining the bankrupt to the proceedings. The trustee

argued on the authority of Re Mannella: ex parte Official Trustee [1989] 21 FCR 50 that the bankrupt is a necessary

party to any application under section 121. The bankrupt was served with the application, and informed of the date of the hearing, although for the reasons previously noted, she did

In Mannella the trustee applied to have the transcript of an examination of the bankrupt put in evidence. Section 69(20) provides that such transcript "may be used in evidence in any proceedings under this Act in which the bankrupt is a party". In that case, as in this, the bankrupt had not been made a

The situation which arose here shows the wisdom of making a bankrupt a respondent in a case such as the present. It is very likely that a trustee who is considering whether he should make an application of this character will consider it wise to apply for the examination of the bankrupt pursuant to s. 69. When such an examination is held, and the trustee decides to make application to the court, he commonly seeks to rely upon the transcript of the examination. Subsection (20) provides a statutory warrant for his doing so, where the bankrupt is a party to the application. It is also quite common ,to find that the bankrupt and the disponee of the 'property make common cause and may be represented by one counsel. In such cases, where the trustee bears the burden of proof that there was actual fraud, that is an actual intention by the bankrupt to defraud creditors, it will be of assistance to the court if the trustee makes him a party so that, if he has an answer to the allegation, he may have an opportunity of presenting it.

In this case the trustee has not sought to tender any such

transcript, and I understand that the bankrupt was not

• 45 - examined for the same reason that she was not able to give evidence before me. It may well be the case that had she been joined before the hearing, she may have presented some evidence, but in view of the fact that members of her family were the respondents to the application, it is difficult to see what separate interest she would have pursued, or what additional evidence she would have presented. In any event she was not joined, and at the conclusion of a hearing, there does not seem to be any benefit in or good reason for joinder. I agree with Justice Sweeney's assessment of the general usefulness of having a bankrupt as a party to such an application, but nothing is to be gained by joining this

In light of the facts found and conclusions reached, I propose to decline the substance of the trustee's application and allow the substance of the respondents' application. The parties are to bring in short minutes of the orders now proposed in the light of these reasons for judgment. It is important that the proposed orders embody a final resolution of the dispute. They will presumably include that paragraphs 1, 2, 3 of the trustee's substantive application, and the application for joinder of the bankrupt, be dismissed and that the notices be set aside. If the orders are agreed including

as to costs, they may be filed in the Registry. If not, the

• 46 - matter should be listed within 14 days by arrangement with my

Counsel and solicitor for the B.J. Skinner instructed by trustee P.J. McNally of Lobban McNally & Harvey

Counsel and solicitor for the A.T. McInnes QC instructed