Re John Gerald Hallam Ex Parte: the Bankrupt [1986] FCA 8 (24 January 1986)

FEDERAL COURT OF AUSTRALIA

Re: JOHN GERALD HALLAM
EX PARTE: THE BANKRUPT
No. QLD E323 of 1984
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND
Pincus J.

CATCHWORDS

Bankruptcy - application for discharge - trust formed shortly before bankruptcy - purpose to keep assets from creditors - relevance on application for discharge.

Bankruptcy Act 1966, s.150

HEARING

BRISBANE
24:1:1986

ORDER

THE COURT ORDERS THAT:

The application be dismissed.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

This is an application by Mr. J. G. Hallam, a bankrupt, for an order of discharge under s.150 of the Bankruptcy Act 1966. According to the evidence and report of the official receiver, there will be a deficiency in the estate of a little over $30,000. No dividend will be paid.

2. The applicant was in business from 1971 as a bathroom renovator, first alone, and subsequently in partnership with his wife. In 1981 the applicant suffered from a serious illness which rendered him unable to work for about six months, after which he was still significantly handicapped in his work. He also lost money, according to his evidence, because of the necessity to remedy work done by an unsatisfactory sub-contractor. His explanation for the financial difficulties he encountered is credible and the official receiver reports that his conduct, before and after bankruptcy, was satisfactory. The applicant has been bankrupt for nearly 20 months, his bankruptcy having taken place on 31 May 1984. In the circumstances, there would seem to be a reasonable case for an order of discharge, but for one aspect of the matter which requires consideration. This is that, at a time when his financial troubles had manifested themselves, he formed a trust, presumably in anticipation of bankruptcy. The report referred to above, as to this matter, reads in part:

"The bankrupt stated that in July 1983 he and his
wife formed the Hallam Family Trust, and a trustee
company, Kewville Pty. Ltd.... The trustee company
purchased a house property for approximately
$47,000 at 136 Patricks Road Arana Hills which was
previously owned by the bankrupt and his wife. He
said the trustee company sold the property in
March 1984 for approximately $60,000. There was a
surplus of $10,000."

3. The applicant has given evidence that the assets of the trustee company now consist of some $20,000, made up of a savings account, some chattels and a sum due by Aspen Furniture Pty. Ltd. ($8,400). In addition, the trustee company receives $470 per month under two lease purchase agreements. It employs the applicant who receives "drawings for wages which range between $150 and $250 per week". His wife is also employed by the trustee company.

4. In circumstances of this sort, trusts are established, usually, either to minimise taxation or, rather less commonly, to put property beyond the reach of creditors. It seems to me reasonable to infer that the trust with which I am concerned was established for the latter reason. At that time, the partnership which had until then been carrying on the business was in financial trouble, having liabilities of about $40,000.

5. The principal transaction which set up the trust was a transfer of the family home mentioned above. That was effected, apparently, at a valuation and one Gloria Jean Hogan lent monies to enable the purchase to be effected. The trust continued in the same line of business as that carried on by the partnership and, according to the applicant, the trust business was managed by his brother and sister-in-law, Murray Hallam and Gail Hallam.

6. It appears that no application has been made under s.120 of the Bankruptcy Act with a view to setting aside the transfer of the house, nor has it been suggested that the transfer was a fraudulent disposition falling within s.121. Nevertheless, it seems to me that the adoption of the plan, as I find it to have been, to mitigate the consequences of the bankruptcy which then seemed likely to occur must be relevant in exercising the discretion I have under s.150. This is not a case in which the applicant has simply accepted what might be called the ordinary consequences of his having become insolvent. Taking the course mentioned was, so far as the evidence shows, not necessarily illegal, but it presumably lessened the creditors' prospects of getting anything from the estate; at least, I infer that it was intended to do so. The official receiver notes that the family home was sold shortly before bankruptcy by the trustee company, producing a surplus of $10,000 which was lent to a business owned by the bankrupt's brother.

7. According to the profit and loss account of the trustee company for the year ended 30 June 1985, its net profit for that year was $2,652, which is not easy to square with a statement made by the applicant that the trust company was operating successfully.

8. In his report on the application for an order of discharge, being that referred to in s.150(3) of the Act, the then official receiver said he did not allege that the financial records were inadequate, nor report any matters under s.150(6). However, in a report signed on the same day, under s.19 of the Act, it was said that the books of account were incomplete and that that should be taken into account under s.150(6). On either view of the matter, it does not seem to me that this aspect can determine the fate of the application. That depends upon the effect, if any, to be given to the formation of the trust.

9. On the whole, it seems to me that the proper course is to refuse the application. I would not accept the view that steps taken in anticipation of bankruptcy to keep property from the reach of creditors become irrelevant for all purposes if not attacked under s.120 or s.121 of the Bankruptcy Act 1966; assuming, as I think I should, that the steps taken were lawful, it appears to me that they nevertheless constitute a sufficient reason for refusing to abbreviate the bankruptcy period. I am by no means satisfied that the creditors have obtained from the estate that which, in the absence of the formation of the trust the year before, the statute would have entitled them to; further, it is not suggested that the applicant's bankrupt state is currently causing him any hardship.

10. The application must be refused.