Re Eileen Mary Johnstone Ex Parte: Robert Molesworth Hobill Cole v John Laurence Sullivan and Dawn Sullivan [1984] FCA 229; 1982 Bankruptcy 3 FCR 32 (17 August 1984)

FEDERAL COURT OF AUSTRALIA

Re: EILEEN MARY JOHNSTONE
Ex Parte: ROBERT MOLESWORTH HOBILL COLE
And: JOHN LAURENCE SULLIVAN and DAWN SULLIVAN
No. 348 of 1982
Bankruptcy
3 FCR 32

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
GENERAL DIVISION
Smithers J.(1)

CATCHWORDS

Bankruptcy - Application by trustee to have a transfer of property by the bankrupt to purchasers declared void pursuant to ss. 120 and 121 of the Act - whether the disposition of property was made in good faith - whether the disposition of property was made to purchasers for valuable consideration.

Bankruptcy Act 1966 ss. 120 and 121.

Bankruptcy - Application by trustee for declaration that transfer of property void - Whether disposition in good faith - Whether disposition to purchasers for valuable consideration - Bankruptcy Act 1966 (Cth), ss 120, 121. Where a transfer to trustees of a settlement of land for full consideration was accompanied by an implied promise of the transferor not to require payment of any part of the consideration.

Held: (1) When the whole transaction was looked at it lacked the commercial quality essential to the notion in s. 120(1) of the Bankruptcy Act 1966 (Cth) of a disposition to a purchaser for valuable consideration.

(2) The effect of s. 120(1) cannot be avoided by dividing the disposition into its constituent elements. It is the reality of the transaction to which regard is to be had.

HEARING

Melbourne, 1984, April 13; August 17. 17:8:1984
APPLICATION.

Application by a trustee in bankruptcy pursuant to ss 120 and 121 of the Bankruptcy Act 1966.

A. Vassie, for the plaintiff.

W.T. Houghton, for the defendant.
Cur. adv. vult.

Solicitors for the plaintiff: D. Madden & Co.

Solicitors for the defendant: Pavey, Whiting & Byrne.
G.F.V.

ORDER

1. The transfer dated 17 July 1980 by Mrs. Johnstone to the Sullivans of all that piece of land being part of Crown Allotment 4 Section A, Parish of Wangoom, County of Villiers and being the whole of the land more particularly described in Certificate of Title Volume 8598 Folio 755 is and was a disposition of property made within two years before the commencement of the bankruptcy of Mrs. Johnstone not to a purchaser for valuable consideration pursuant to s.120 of the Bankruptcy Act 1966 and is void as against the trustee.

2. The Sullivans pay the Trustee's costs of and incidental to this application.

3. All parties have liberty to apply.

Orders accordingly.

DECISION

This is an application by Robert Molesworth Hobill Cole (the trustee) for orders pursuant to ss. 120 and 121 of the Bankruptcy Act 1966 (the Act) arising out of a transaction between Eileen Mary Johnstone (Mrs. Johnstone) and John Laurence Sullivan and Dawn Sullivan (the Sullivans) in 1980 resulting in property known as 214 Moore Street, Warrnambool (the property) being transferred to the Sullivans as trustees of the N.B. Ryan settlement.

The orders sought by the trustee are:-

1. A declaration that the transfer dated the 17th day of July
1980 by Mrs. Johnstone to the Sullivans of all that piece of land
being part of Crown Allotment 4 Section A Parish of Wangoom, County
of Villiers and being the whole of the land more particularly
described in Certificate of Title Volume 859B Folio 755 is and was
a disposition of property made within 2 years before the
commencement of the bankruptcy of Mrs. Johnstone and made without
good faith and valuable consideration and that pursuant to Section
120 of the Bankruptcy Act 1966 the said transfer is void as against
the trustee.

2. Alternatively, an order that pursuant to Section 120 of the
Bankruptcy Act 1966 the said transfer be set aside.

3. Further or alternatively, a declaration that the said transfer
is and was a disposition of property made with intent to defraud
creditors pursuant to Section 121 of the Bankruptcy Act 1966 and is
void as against the trustee.

4. Further or alternatively, an order that pursuant to Section
121 of the Bankruptcy Act 1966 the said transfer be set aside.

5. An order that the Sullivans pay the trustee's costs of and
incidental to this application.

6. Such further or other order or relief as this Honourable Court
deems fit."

The parts of s. 120 of the Act relied upon by the trustee are:-

"120(1) (Settlement not a marriage settlement) A settlement of
property, whether made before or after the commencement of this
Act, not being -

(a) a settlement made before and in consideration of
marriage, or made in favour of a purchaser or
encumbrancer in good faith and for valuable
consideration; or
(b) a settlement made on or for the spouse or children
of the settlor of property that has accrued to the
settlor after marriage in right of the spouse of
the settlor,

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.

. . .

120(8) (Interpretation of "settlement property') In this section,
"settlement of property" includes any disposition of property.

Transitional provisions

Act No. 12 of 1980 s.56(2) provides -

"(2) Notwithstanding the amendments of section 120 of the
Principal Act made by sub-section (1) of this section, the
provisions of that section of the Principal Act continue to apply,
after the commencement of this section, in relation to a settlor
who became a bankrupt before the commencement of this section as if
those amendments had not been made."

Section 121 of the Act reads:-

"121(1) (Fraudulent dispositions void) 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 goods faith, is, if the person making the
disposition subsequently becomes a bankrupt, void as against the
trustee in the bankruptcy.

121(2) (Purchaser in good faith, etc., not prejudiced) 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 property.

121(3) (Interpretation of "disposition of property") In this
section, "disposition of property" includes a mortgage of property
or a charge on or in respect of property.

Mrs. Johnstone's Notice of Intention to oppose relied on the following

grounds:-

1. The Transfer was not made by Mrs. Johnstone with any intent to
defraud creditors;

2. The Sullivans acted in good faith;

3. The Sullivans were purchasers of the land for valuable
consideration.

Until about 1976 Mrs. Johnstone had been happily married and lived with her

husband and seven children, four of whom were adopted, on a farm outside Warrnambool. At that stage one Heather Jean Bradley (Mrs. Bradley) came to live on the farm property. Mrs. Johnstone's husband formed a relationship with her. As a result of the discovery of this relationship by Mrs. Johnstone the marriage deteriorated.

On 6 July 1977 Mrs. Johnstone made a will in favour of her seven children, as she did not feel that it was appropriate to make a will in her husband's favour. In September 1977, as a result of a depressed state resulting from her marital difficulties she took an overdose of medication.

Subsequently Mrs. Johnstone and her husband agreed to sell the farm property jointly owned by them and on 10 November 1978 it was sold by auction. Mrs. Johnstone later discovered that her husband was the nominee of the successful bidder. This came as a surprise to her and certainly created a suspicion that her husband did act ruthlessly to get what he wanted. She believes her husband obtained the property improperly at an undervalue although there is no proof of this.

The net proceeds from the farm sale were equally divided pursuant to an agreement arrived at between the parties which was then ratified by the Family Court. From the proceeds of the sale of the farm property and as a result of the property settlement between the parties, Mrs. Johnstone received $77,879.33. With these proceeds she purchased, in January 1979, the property which is the subject of this dispute, for $47,000. Shortly prior to this time there was somewhat of a reconciliation between Mrs. Johnstone and her husband. He had taken to staying with her regularly. However, on 8 January 1979 on a visit to the farm she found that Mrs. Bradley was still staying there and on that occasion Mrs. Johnstone assaulted Mrs. Bradley. As a result of this incident criminal charges were brought against Mrs. Johnstone which were heard in the County Court sittings at Warrnambool in late May 1979. She was acquitted after a trial lasting some days. On 18 May 1979 Mrs. Johnstone was served with a writ issued out of the Supreme Court of Victoria by Mrs. Bradley claiming damages for assault. That case came on for hearing in Melbourne on 18 May 1981 and judgment was entered in favour of Mrs. Bradley for $60,826 with $9,249.25 costs.

For reasons discussed below Mrs. Johnstone decided in July 1980 to create a trust in favour of her children of the property she had purchased, reserving to herself a right of occupancy therein during her lifetime. The legal steps necessary to achieve this objective were designed by Mrs. Johnstone's solicitor.

The first step in the procedure was the creation of the trust which was achieved by a deed of settlement made by Noreen Ryan (Mrs. Ryan) in favour of Mrs. Johnstone's children. Provision was made therein for other property to be brought into the trust. The Sullivans were appointed trustees of the settlement. It was intended that as such trustees they should acquire and bring into the settlement the property, subject to a right of in Mrs. Johnstone to occupy it during her life on certain terms.

The second step was the making of a contract of sale under which Mrs. Johnstone as vendor agreed to sell to the Sullivans as purchasers "as trustees of the N.B. Ryan Settlement" the property. Relevant provisions were:-

(a) that the purchasers should take a transfer from the
vendor of the land sold on 31 July 1980;

(b) that the vendor should retain the right to occupy the
land during her lifetime, paying all rates and taxes assessed
thereon and keeping the house thereon insured against fire, storm
and tempest and in a good and habitable state of repair;

(c) that the sale included furniture and chattels valued at
$2,000;

(d) the purchase price should be $51,000 payable as to $100
on the signing of the contract and the residue by payments of $900
on 31 July 1980 and of $1,000 on 31 July on each subsequent year
until payment in full;

(e) that subject to provision (a) above the purchaser should

be entitled to possession on 31 July 1980.

The third step was to produce a transfer of the property registerable under the Transfer of Land Act 1958 (Victoria) under which Mrs. Johnstone transferred to the Sullivans as joint tenants "in consideration of the sum of $49,000 paid to me by" the Sullivans.

The settlement was dated 14 July 1980. The contract was dated 13 July 1980. The transfer was dated 17 July 1980. I would infer that all three documents were signed at the home of Mrs. Ryan on 13 or 14 July 1980.

The question is whether for the purposes of the disposition effected by the registration of the transfer, the Sullivans are properly to be considered to be purchasers in good faith for valuable consideration within the meaning of s. 120(1) of the Act.

Good Faith

The question of good faith relates to the good faith of the purchasers, in this case the Sullivans. It is not necessary that both the Sullivans and Mrs. Johnstone should have acted in good faith: Re Saebar (1972) Qld. R. 107; In re Windle (supra); Re Henry Willem Louwen ex parte John Edward Walker (unreported decision of Mr. Justice Franki on 28 April 1983 N.S.W. 113 of 1981).

It appears from a review of the authorities, that good faith in the context of s. 120(1)(a) of the Act requires an absence of knowledge or notice by the purchaser that:

(a) the bankrupt is unable to pay his/her debts or is financially unsound, and that

(b) by taking the property the purchaser is defeating or delaying creditors;

see Re Louwen (supra) Re Windle (supra); Re Saebar (supra); see also Re Hyams; Official Receiver v. Hyams (1970) 19 FLR 232. The onus is upon the trustee to prove both lack of good faith and lack of valuable consideration.

What is attacked is the transfer from Mrs. Johnstone to the Sullivans of the land, dated 17 July 1980. The three documents brought into being in July 1980 were designed to give effect to a desire on the part of, inter alia, the Sullivans to protect Mrs. Johnstone and her children from possible action by her ex-husband to take the property from her. They believed that the husband had an intense hostility to Mrs. Johnstone and resented her having received part of the value of the farm. They regarded the circumstances of the purchase of the farm as a trick and feared further tricks on his part. The means by which they contemplated he might regain the property from Mrs. Johnstone was not clear, but I believe the fear of his so doing was real and genuine. The motive and purpose of the creation of the trust was therefore quite rational, honest and bona fide. There was, in the plan, no element of intention to defeat any creditors or potential creditors. On the evidence the Sullivans and Mrs. Ryan were unaware, at the relevant time, that Mrs. Bradley had sued Mrs. Johnstone for damages for civil assault. Neither the Sullivans nor Mrs. Johnstone had any fear that Mrs. Bradley would become a creditor. As far as Mrs. Johnstone was concerned she had been acquitted on criminal charges of assault and it was believed by her that Mrs. Bradley would fail in her civil claim. There is no evidence that at the time the series of transactions took place the bankrupt was in financial difficulties. Whilst there are peculiar aspects to the transactions, not the least being that no monies were ever paid and there was no intention by the Sullivans to pay any monies, that does not constitute a lack of good faith, as understood within the meaning of s. 120(1)(a) of the Act.

Purchaser for valuable consideration

The remaining question is whether it is shown by the trustee that the transfer was a settlement of property other than a settlement made in favour of a purchase for valuable consideration. It is difficult, if not impossible, to treat separately the questions of whether one is a purchaser and whether valuable consideration was provided. It appears to me that, for the purpose of s. 120(1), unless there is valuable consideration the recipient of the property is not a purchaser. This proposition is supported by a preponderance of the authorities.

Reference may be made to Hance v. Harding (1888) 20 QBD 732, re Parry, ex p. Salaman (1904) 1 KB 169, and re Windle, ex p. Trustees of the property of the bankrupt v. The Bankrupt (1975) 1 WLR 1628. A transaction will normally be considered as being made without consideration where it lacks commerical quality. Also, it appears from authority that a purchaser for valuable consideration is one who is so in the commercial sense the word and not merely in a nominal or conveyancing sense.

Thus per Sweeney J. In re Florance, ex parte Andrews NSW No. 95 of 1980 (unreported):-

"In my opinion . . . section 120(1) should be construed as requiring a purchaser to provide a quid pro quo in the commercial sense.

He referred, inter alia, to Hance v. Harding (supra); Re Windle (supra) and Re Abbott (1982) 3 All ER 181. In Hance v. Harding the situation was that in pursuance of an arrangement between the settlor and his father, the former assigned a life insurance policy to trustees on trust for the benefit of his children, the settlor's father concurrently conveying leasehold property to the trustees on similar trusts. The settlor became bankrupt within 2 years from the date of settlement. At p. 738 Lord Esher, M.R. said,

"It is said that there is a decision in the Court of Appeal by which of course we are bound, if in point, to the effect that he is not such a purchaser, and that the term "purchaser" in the section must be limited to a purchaser in the mercantile sense of the term, viz. a person who has bought something by contract of purchase and sale. I do not think that the case of Ex parte Hillman, In re Pumfrey 10 Ch.D.622, goes that length. In that case the trustees of the settlement, who were alleged to be purchasers, had not given something to procure something for other persons. Though they might in conveyancing law language be called "purchasers", they had not given anything at all. I think the case only goes the length of saying that such purchasers as those were not purchasers within the section, and that in order to make a purchaser within the section there must be valuable consideration given. I think there was such consideration here, for the father gave something in order to induce the son to give something."

Sir James Hannen said at p. 739:

"Therefore the transaction is perfectly valid, unless it comes within the terms of s. 91 of the Bankruptcy Act, 1869. The question whether it does so appears to depend on the meaning of the word "purchaser" as used in that section. In Ex parte Hillman, In re Pumfrey 10 Ch.D. 622, Jessel, M.R., was dealing with a case in which the conveyance was purely voluntary, without any consideration moving from or to either of the parties: and with reference to that case his language must be interpreted as meaning that the word "purchaser" must not be treated as a conveyancing term, but must be considered as applying to cases where there is a quid pro quo. Here there was an ample quid pro quo."

On the face of the transfer there appears to be ample consideration, namely payment of $49,000 but, of course, no such sum had been paid. The transfer was the last step in the procedure designed by Mrs. Johnstone's solicitors to confer the property upon the Sullivans. By virtue of the contract, the latter were, in a conveyancing sense at least, purchasers of the property. By that contract they undertook to pay $51,000 for the interest in the property acquired by them. That was the fee simple but subject to Mrs. Johnstone's right of occupation.

Counsel for Mrs. Johnstone argued that $51,000 was a fair value for the property and that the value was based on the advice of a real estate agent. He said that when one recognized what a vendor selling land but retaining a right of occupancy of it for life was disposing of, and what a purchaser of that land was getting, it was not surprising that the amount was payable by $1,000 yearly instalments. I accept both these propositions.

It is clear, however, that the intention of the parties in relation to the whole series of transactions was that there would be a gift of the property, subject to Mrs. Johnstone's life occupancy, for the benefit of the children. Accordingly, it is said, the contract was a sham and was not intended to create legal relations according to its terms.

It is my view that Mrs. Johnstone and the Sullivans must have realised that one of the documents constituted a contract of sale by Mrs. Johnstone to the Sullivans providing for payment by them of a price to Mrs. Johnstone, and providing for Mrs. Johnstone's right of occupancy. I believe that when the various documents were signed it was intended that the terms thereof were to be effective and binding in law according to their terms. It was essential to Mrs. Johnstone that her right of occupancy as provided in the contract be legally enforceable. But as between the Sullivans and Mrs. Johnstone there was an understanding that Mrs. Johnstone would preserve the Sullivans free from actual liability for any purchase money, whatever the documents might say.

The solicitor must have understood this also. His method of achieving the result was to introduce into the transfer a statement that the price payable under the contract had been paid. This was a false statement but as between the parties and all other persons it served as evidence that Mrs. Johnstone was dealing with the Sullivans for the purpose of both of the contract of sale and of the transfer on the basis that there was no outstanding liability in the Sullivans, or that there was a complete release of liability to her for the purchase money. Of course, a transferor who, without actually receiving payment, signs a transfer whereby he acknowledges receipt of the consideration, is not precluded from recovering the purchase price from the transferee; see Re Studley (1906) 1 Ch 67 at 79; Burchell v. Thompson (1920) 2 KB 80 at 86; and Peterson v. Moloney [1951] HCA 57; (1951) 84 CLR 91 at 100. But in this case Mrs. Johnstone could not have done so, because the implied agreement was that whatever obligations were undertaken by virtue of the solicitor's documents any obligation to pay money to Mrs. Johnstone would be released by her.

It is said by counsel for Mrs. Johnstone that, looking at the matter in its worst light, even if the Sullivans never intended to pay any money under the contract they were under a legal liability to do so and that that liability constituted valuable consideration.

In determining, for the purposes of s. 120(1) of the Act whether there is valuable consideration it is the reality of the transaction to which regard is to be had. One inference arising from the circumstances might be that the agreement between the parties was that whatever documents were signed for the purpose of creating the trust, they should be considered as not creating legal rights and duties or at least that the contract should be so considered. On this basis the contract would be but a sham. To my mind the correct inference is that the contract was intended to be legally effective to ensure those rights but that Mrs. Johnstone was to release the Sullivans from the obligation to pay the purchase price.

In these circumstances it might be thought necessary to determine where the beneficial interest, as distinct from the legal estate, was when the contract had been signed and Mrs. Johnstone was deemed to have released the Sullivans from liability to pay the purchase money. Such a release of the Sullivans from liability to pay the purchase price was effective as between the parties because at all times it was Mrs. Johnstone's intention to honour it. The purpose of the transaction was achieved. The Sullivans undertook duties as trustees, Mrs. Johnstone retained her right of occupancy and in accordance with the overall intention of the parties, the Sullivans were free of personal liability. In these circumstances it may be that the beneficial interest in the land subject to Mrs. Johnstone's rights of occupancy passed to the Sullivans no later than when the implied release took effect. In that case it would be a question whether in respect of that part of the transaction constituted by the registration of the transfer to the Sullivans, they may be regarded as purchasers for valuable consideration. I do not think so. It would be true that at the time of the transfer the only interest remaining in Mrs. Johnstone was the bare legal estate and that that interest was valueless. Compare DKLR Holding Co. (No.2) Pty. Ltd. v. Commissioner of Stamp Duties (NSW) [1982] HCA 14; (1982) 149 CLR 431 CLR 431 per Gibbs CJ at 443 and Brennan J. at 477. However, there is no scope for the notion of consideration where what is being dealt with is without value. Section 120(1) strikes at a disposition of property. In the circumstances specified therein the disposition is void against the trustee in bankruptcy. In this case there was a disposition of the legal and equitable interests of the property to the Sullivans. Every act performed by the parties was part of the process to effectuate the vesting of the legal and equitable interest in the property in the Sullivans. And the agreement collateral to the legal interests effected by the documents under which Mr. Johnstone released or agreed to release the Sullivans from liability to her to pay the purchase money provided was as much a part of the transaction disposing of the property as were the written documents. Each such act including the agreement constituted part of the transaction of disposition. When then the whole transaction is looked at it is clear it lacks the commercial quality essential to the notion of a disposition to a purchaser for valuable consideration.

To divide the transaction into its constitutent parts and to say for example that the legal estate was transferred for a consideration equal to its value, namely nil, would frustrate the purpose of s. 120(1). If the transfer were to stand and the release of the Sullivans from liability to pay the purchase money were to stand the result would be that a disposition of the entire legal and equitable interest in the property would pass to a person not being a purchaser for valuable consideration.

It is a disposition of that nature which is the subject of the section 120(1) and the effect of the section cannot be avoided by dividing the disposition into its constituent elements.

In the result the trustee must succeed. Accordingly, I declare that the transfer of the property dated 17 July 1980 was a disposition of property made to transferees who were not a purchasers thereof for valuable consideration and is void as against the trustee. The trustee's costs must be paid by the Sullivans. Liberty to apply should be granted.