Worrell (Trustee) v Kerr-Jones

REASONS FOR JUDGMENT 1 This is an appeal from a decision of a Federal Magistrate dismissing an application by the Trustee of the bankrupt estate of John Anthony Jones, pursuant to s 122 of the Bankruptcy Act 1966 (Cth) ("the Act"), for a declaration that a payment of $95,000 by the bankrupt to his former wife, Alison Robin Kerr-Jones ("the respondent"), made from the bankrupt's superannuation fund prior to the commencement of his bankruptcy is void as against the Trustee. The Trustee also seeks an order that the respondent pay $95,000 to him, together with interest and costs. 2 The facts are taken from the reasons for judgment of the Federal Magistrate. The respondent and the bankrupt married on 26 August 1989. The respondent says the marriage broke down and separation under the one roof occurred on 26 December 1994. On 17 July 1996 the respondent purchased a house at 29 Wharf Road, Bli Bli. At that time the respondent and the bankrupt were negotiating a property settlement. 3 On 18 July 1996 the respondent says she accepted an offer by her husband to pay her $95,000 from an MLC Superannuation entitlement. On the same day, the respondent and the bankrupt signed Minutes of Consent orders, which were subsequently filed in the Maroochydore Magistrates Court. 4 On 23 July 1996, Mr Kileen SM made an order in terms of the Minutes of Consent, which relevantly provided that, by way of settlement of property and spouse maintenance, inter alia: "1. The Husband does acknowledge an indebtedness to the wife in the sum of $145,000 being 50% of a loans made by the husband to Mooloolaba Diary Log Project which loans were secured by mortgages over the former matrimonial home which is presently being sold to discharge these loans in part. 2. The Husband pay to the wife the sum of $95,000 by way of settlement of property within twenty days of the date of this order." 5 In a letter dated 23 July 1996 the bankrupt wrote to the Client Administration Manager at MLC Limited. The terms of that letter are important to the resolution of the appeal. The body of the letter reads: "Dear Sir RE: MLC VARIABLE INCOME PLAN NO. [as specified] I wish to make a withdrawal from the above variable income plan for the amount of $95,000 (net) ninety five thousand dollars. It would be appreciated if this amount could be deposited direct into the account of A.R. Kerr-Jones at the St George Bank, Maroochydore Queensland. The account number is [being a specified account]. I understand that you will deduct transaction fees from the balance of the account. …" This letter was received by MLC Limited on 29 July 1996. A payment of $95,000 was deposited to the respondent's St George bank account on 7 August 1996. These funds, together with finance obtained by the respondent from St George Bank, were used to complete the purchase of the Bli Bli home. 6 On 27 September 1996 the bankrupt presented a Debtors Petition and the Trustee was appointed on 2 December 1996. On 18 December 1996 a decree nisi of dissolution of marriage was made in the Family Court. Some considerable time later, the respondent received a letter from the Trustee dated 20 August 1998, which raised concerns about the payment of $95,000 and requested further information. 7 The Trustee filed his application in the Federal Court on 11 May 2000. The matter was heard in the Federal Magistrates Court. Although the bankrupt became bankrupt on 27 September 1996, by operation of the Bankruptcy Legislation Amendment Act 1996 (Cth) Schedule 1, Item 458, the current s 122 applies. Section 122 of the Act provides: "(1) A transfer of property by a person who is insolvent (the debtor) in favour of a creditor is void against the trustee in the debtor's bankruptcy if the transfer: (a) had the effect of giving the creditor a preference, priority or advantage over other creditors; and (b) was made in the period that relates to the debtor, as indicated in the following table. (5) If a transfer of property is set aside by the trustee in a bankruptcy as a result of this section, the creditor to whom the property was transferred may prove in the bankruptcy as if the transfer had not been made. (8) For the purposes of this section: (a) transfer of property includes a payment of money; …" 8 The five elements set out in subs 122(1) which must be established for a transaction to be void are: (a) there must be a transfer of property (which is defined to include the payment of money by s 122(8)(a)); (b) the transfer must be by a person who was insolvent; (c) the transfer must be in favour of a creditor; (d) the transfer must have the effect of giving the creditor a preference, priority or advantage over other creditors; and (e) the transfer must be made (in the circumstances of this case) in the period beginning six months before the presentation of the petition and ending immediately before the date of the bankruptcy of the debtor. The Magistrate found: "I am satisfied the funds were available to the Bankrupt and his property and at his express direction were paid to the Respondent. This represents, in my view, 'a transfer of property by a person' for the purposes of s122." 9 The appellant challenges this finding, and relies on a passage by the Full Court of the Supreme Court of Victoria (Murphy, Southwell and Phillips JJ) in Ramsay v National Australia Bank Limited [1989] VR 59 at 63, where the Court said: "We have seen no authority for the proposition that a payment out of his own moneys by B to C, pursuant to a contractual obligation to discharge A's debt to C, an obligation imposed upon B by a contract between A and B, can be said to be a payment by A to C." 10 In the circumstances of this case A is the bankrupt, B is MLC and C is the respondent. This passage was referred to by Dawson, Gaudron and Gummow JJ in Sheahan v Carrier Air Conditioning Pty Ltd (1996-1997) 189 CLR 407 at 438. In that case, their Honours concluded that there had been no payment, within the meaning of the preference provisions, made by TOC Pty Ltd to Carrier Air Conditioning Pty Ltd and Air Con Serve Pty Ltd. Their Honours held that the payments were not made from moneys belonging to TOC Pty Ltd, nor in any relevant sense were they made by an agent of TOC Pty Ltd. 11 In this particular case, the payment by MLC Limited to the respondent's bank account at the direction of the bankrupt, pursuant to the letter of 23 July 1996, is not, in my opinion, a payment by MLC Limited "out of [its] own moneys". Nor is there a contractual obligation imposed upon MLC Limited to discharge the bankrupt's debt to the respondent: its contractual obligation is merely to pay funds to, or at the direction of, the member of the plan. 12 In G & M Aldridge Pty Ltd v Walsh (2001) 203 CLR 662, the High Court was concerned primarily with the significance of a floating charge that had crystallised before the transactions which the liquidator sought to impugn. The High Court (Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ) noted, at 670, that an issue decided by the Court of Appeal was not being pursued in the High Court. That issue concerned the capacity in which Construction Engineering Pty Ltd, the project manager appointed by Thompson Land Ltd, the company in liquidation, held a sum of approximately $400,000. The High Court noted: "The Court of Appeal decided that, in the circumstances, the payments made by Construction Engineering Pty Ltd, as agent for and at the direction of TLL, of moneys it was holding on behalf of TLL, amounted to payments by TLL. Since that matter has not been pursued in this Court, it is unnecessary to go into the reasoning of the Court of Appeal on the question." 13 The Full Court of the Supreme Court of Victoria in Ramsey (supra) stated at 61: "In Re Stevens (1929) 1 A.B.C. 90, a debtor (D) was insolvent; the respondent creditor arranged sale of D's business to O for Ł475. Part of the purchase money (Ł400) was given by O to the respondent. It was held that it was a payment made by D. It is to be noted that the money (Ł400) was owed to D. The ratio was that the bankrupt had: 'parted with his assets, and the payment which he himself should have received he has authorised to be made to the creditor, and it is just the same as if he had received payment himself and had himself handed such payment to (the respondent)' (at p.93). In Re Lynch (1937) 9 A.B.C. 210, B was the guarantor of A who was indebted to X. With A's consent, X retained some moneys of A which came into X's hands. Within six months A became bankrupt: it was held that there was 'a payment' which was void as against the trustee in bankruptcy. In Re Smith (1933) 6 A.B.C. 49 a bankrupt had sold one of his assets and given the purchaser an order to pay the money to a creditor. It was conceded that this was 'a payment'. In Re Ruwaldt (1931) 3 A.B.C. 245 a bankrupt wheat farmer sold his crop through a pool corporation, and directed the latter to pay the proceeds to the bankrupt's bank to reduce the bankrupt's overdraft. It was conceded by the bank and accepted by the court that this was a 'payment' within the meaning of similar legislation to that which is now under consideration." 14 It is clear in this case that the funds in the superannuation account could have been withdrawn by the bankrupt, as the letter of 23 July 1996 evidences. Those funds were, at the bankrupt's express direction, paid by MLC Limited not to the bankrupt but to the respondent. The Magistrate was correct to conclude that there was a transfer of property by the bankrupt for the purposes of s 122 of the Act. 15 It is also relevant to have regard to subs 116(2)(d)(iii), 116(2)(d)(iv) and 116(2)(g). Subsection 116(2)(d) relevantly provides that, subject to a matter not presently relevant to this appeal, property divisible amongst the creditors of the bankrupt does not include: "(iii) the interest of the bankrupt in: (A) a regulated superannuation fund (within the meaning of the Superannuation Industry (Supervision) Act 1993); … (iv) a payment to the bankrupt from such a fund received on or after the date of the bankruptcy, if the payment is not a pension within the meaning of the Superannuation Industry (Supervision) Act 1993;" 16 The Magistrate found that no part of the payment was an interest in a superannuation fund at the commencement of the bankruptcy, holding that it had been removed from the fund at that time. The Magistrate also found that the payment of the $95,000 occurred on 7 August 1996, which was before the date of bankruptcy which commenced on 27 September 1996. It follows that the payment was not a payment from a superannuation fund received on or after the date of the bankruptcy. These findings are not challenged on the appeal, with the consequence that the payment is not excluded by virtue of subs 116(2)(d) of the Act from being the property of the bankrupt divisible amongst his creditors. 17 The Magistrate concluded that the transfer did not have the effect of giving the respondent a preference, holding that the payment came from "moneys not otherwise available to creditors, (because of the operation of s 116(2)(d)(iii))". In my opinion, the Magistrate was in error in his view of the operation of subs 116(2)(d)(iii). It is true that the source of the payment to the respondent was the superannuation fund. It is true also that the interest of the bankrupt in a regulated superannuation fund is not part of the property of the bankrupt divisible amongst the creditor. It does not follow, however, that the payment at the bankrupt's direction to a creditor of the bankrupt from such a fund before the date of bankruptcy is of "moneys not otherwise available to creditors". 18 The Magistrate followed the view of Brennan CJ in Sheahan (supra), where his Honour was considering the question of whether payments made by a receiver to an unsecured creditor of a company out of funds held under a charge were a voidable preference as against the liquidator of the company. Brennan CJ said, at 424-425: "The Bank's secured debt exceeded the moneys in the hands of the receiver. There were no funds available to satisfy, even in part, the debts of the unsecured creditors. The question arises: is it sufficient to constitute a preference that an unsecured creditor is paid part of his debt and other unsecured creditors receive none when the other unsecured creditors' position is not adversely affected by the payment? The purpose of s122(1) is to recoup the moneys of a bankrupt that have been paid preferentially in order to replenish the pool of assets which the creditors - that is, the general creditors - are entitled to share rateably. The language of s122(1) - 'preference, priority or advantage' - shows that the section is concerned with the effect of payments made to a creditor payee who is in competition with other creditors for a share in the bankrupt's estate. The only preference with which s122(1) is concerned is a preference as between the payee and the other general creditors who would otherwise be entitled to share in the money paid. If a fund in the hands of a debtor's agent is charged with the payment of a secured debt that would exhaust the fund, so that no part of the fund is available for distribution among the general creditors, and a payment to a general creditor is made out of the fund with the consent of the chargee, that creditor gains no preference at the expense of the other general creditors. The effect of such a payment is not to prefer the payee among the general creditors but to prefer the payee to the secured creditor who would otherwise have been entitled to the money paid. And, as the secured creditor has consented to the payment, no recoupment of the money paid is possible." 19 While the Magistrate, correctly in my view, did not agree that the payment by MLC Limited from the MLC Plan directly to the respondent was analogous to the payment by the receiver (from the funds the subject of a charge) to the creditor in Sheahan, the Magistrate concluded that, while the payment was a payment by the bankrupt, the payment did not result in a voidable preference to the respondent over the other creditors. 20 The Full High Court in Aldridge v Walsh (supra) disagreed with the approach of Brennan CJ in Sheahan. The Court said, at [22]: "The premise for the conclusion by Brennan CJ in Sheahan, that the payment in issue was made by the company, should not be accepted. Further, even if, as is the case in the present matters, a payment is made by the company, the question is not whether the payment was 'at the expense of other general creditors'(Sheahan (1997) 189 CLR 407 at 424). The question is whether the payment gave the recipient a preference, priority or advantage." 21 Their Honours continued, at [28]: "If, as here, the unsecured creditors retain the payments, they are preferred to others. It is no answer to the conclusion that there is a preference in such a case to say that the Bank might have acted differently. Nor is it an answer to say that there might be, or even will be, no assets that will be available for distribution between remaining unsecured creditors. It is no answer because, first, they are preferred in the obvious sense that their debts are wholly or partly met by the debtor (Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110 at 136). …" (Emphasis added.) And later, at [31]: "As between the twelve contractors (including the appellants) and the other unsecured creditors, the twelve contractors obtained a preference, priority or advantage in that the amount of approximately $400,000, and the units in the M & T Property Fund, became available to them and not to unsecured creditors generally." 22 In this case, the respondent received an advantage over the other creditors of the bankrupt, in that she was paid her debt in full and they received nothing. 23 It is true to say that if the funds in question had remained in the MLC Five-Star Variable Income Plan, they would not have been available to the Trustee (or to the creditors), because subs 112(2)(d) would have operated to exclude the funds from the "property of the bankrupt" available for distribution to creditors. The fact is that the funds did not remain in the MLC Five-Star Variable Income Plan: prior to his bankruptcy the bankrupt directed the withdrawal of those funds and the payment of them to the respondent. 24 For the above reasons, the appeal should be allowed and the order of the Federal Magistrate dismissing the application be set aside, as well as the order as to costs of 5 March 2002. The Court makes the following declaration and orders: (1) The Court declares that the payment of $95,000 (ninety-five thousand dollars) made to the respondent, Alison Robin Kerr-Jones, on 7 August 1996 for and on behalf of the bankrupt, John Anthony Jones, is void as against Ivor Worrell, the Trustee of the bankrupt estate of John Anthony Jones, pursuant to s 122 of the Bankruptcy Act 1966 (Cth). (2) The Court orders that the respondent pay the sum of $95,000 (ninety-five thousand dollars) to Ivor Worrell as Trustee of the bankrupt estate of John Anthony Jones. 25 In respect of interest, s 51A of the Federal Court of Australia Act 1976 (Cth) allows the Court or a judge, upon application, to order interest at such rate as the Court or Judge thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date on which judgment is entered. In my opinion the cause of action arose on the date of bankruptcy, 27 September 1996. Subsequent to that date there was a denial, on 7 September 1998, on behalf of the respondent of liability in respect of the payment as a voidable preference. The Trustee filed his application on 11 May 2000. 26 The rate of default judgment pursuant to O 35 r 8 of the Federal Court Rules is 10.5% and has been since 26 September 1997. This default rate of interest is considerably higher than a commercial rate of interest over any relevant period. 27 Having regard to the history of the matter, I propose to award interest from 11 May 2000, the date of the application, to 6 September 2002, the date of judgment, at a rate of 9% per annum. The appellant should have his costs of the appeal and of the costs before the Federal Magistrate, to be taxed if not agreed. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Spender.