Fletcher & Anor v Landgridge & Ors [2002] FMCA 139 (26 July 2002)

Last Updated: 1 August 2002

FEDERAL MAGISTRATES COURT OF AUSTRALIA

FLETCHER & ANOR v LANDGRIDGE & ORS

[2002] FMCA 139

BANKRUPTCY - Antecedent transactions - family trust operating business - bill of sale granted over business assets - whether full consideration given for the bill of sale - whether granting of the bill of sale was a transaction to defeat creditors.

Bankruptcy Act 1966 (Cth), ss.116,120, 121

Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360

Pridmore v Magenta Nominees Pty Ltd [1999] FCA 152

Re McLernon; ex parte SWF Hoists and Industrial Equipment Pty Ltd v Prebble [1995] FCA 1408; (1995) 130 ALR 609

Sutherland v Brien [1999] NSWSC 155; (1999) 149 FLR 321

Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319

First Applicant: Second Applicant:

WILLIAM JOHN FLETCHER NEVILLE JOHN POCOCK as trustees for the bankrupt estate of Leslie William Ingram

First Respondent:

Second Respondent:

Third Respondent:

Fourth Respondent:

ANTHONY JOHN LANDGRIDGE VERA EVELYN LANDGRIDGE RAYMOND HENRY POWER ALAN RAYMOND POWER trading as "Pacific Factors"

File No:

BZ168 of 2001

Delivered on:

26 July 2002

Delivered at:

Sydney, via telephone to Brisbane

Hearing Date:

8 July 2002

Judgment of:

Driver FM

REPRESENTATION

Counsel for the Applicants:

Mr van der Walt

Solicitors for the Applicants:

Forbes Dowling Lawyers

Counsel for the Respondents:

Mr Colson

Solicitors for the Respondent:

Baker Johnson Lawyers

ORDERS

(1) The application is dismissed.

(2) There is no order as to costs.

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE

BZ168 of 2001

WILLIAM JOHN FLETCHER

First Applicant

NEVILLE JOHN POCOCK

Second Applicant

as trustees for the bankrupt estate of Leslie William Ingram

And

ANTHONY JOHN LANDGRIDGE

First Respondent

VERA EVELYN LANDGRIDGE

Second Respondent

RAYMOND HENRY POWER

Third Respondent

ALAN RAYMOND POWER

Fourth Respondent

trading as "Pacific Factors"

REASONS FOR JUDGMENT

Introduction

1. The applicants are the trustees of the bankrupt estate of Leslie William Ingram. The respondents are partners in the business "Pacific Factors" which is a debt factoring business. The application is brought pursuant to ss. 120 and 121 of the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act"). The purpose of the application is to declare void as against the applicants a transfer of property under a bill of sale granted on 3 April 1998 by the bankrupt and his partner Lorraine Sandra Pearce-Ingram and to obtain an order for payment of $19,626.53 to the applicants. The application also seeks interest and costs.

2. The basic facts in these proceedings are not in dispute. The dispute between the parties centres on the legal consequences of the granting of the bill of sale and whether, in particular, the consequence of the granting of that bill of sale is that the respondents became secured creditors in respect of the assets of the business conducted by the bankrupt and his partner through a family trust, in priority to other creditors.

Background

3. The respondents conducted the business known as "Pacific Factors" which specialised in the factoring of debts in the motor vehicle repair industry. The bankrupt and his partner were engaged in the motor vehicle repair business.

4. In around 1993 the respondents commenced factoring debts with the bankrupt and his partner in their capacity as trustees for the Ingram and Pearce Family Trust which traded as S L Bodyworks.

5. The Ingram and Pearce Family Trust came into existence on 1 April 1994 pursuant to a deed of settlement. All of the assets and undertaking of the panel beating business operated by the bankrupt and his partner were held by the trustees upon the trusts created by the trust deed.

6. On 3 April 1998 the bankrupt and his partner executed a bill of sale in favour of the respondents in respect of all of the assets of the panel beating business. At the time of the trial of this matter it was not disputed that the bill of sale was entered into by the bankrupt and his partner in their capacity as trustees of the family trust.

7. On 11 November 1998 (ie less than five years after the establishment of the Ingram and Pearce Family Trust and the transfer of the assets of the business to that trust) the applicants became trustees of the bankrupt estate of Leslie William Ingram pursuant to a sequestration order made on that day. The making of this sequestration order followed the presentation of a creditor's petition in the Federal Court on 14 October 1998. The petition was served on the bankrupt on 20 October 1998.

8. On 9 August 1999 in the course of the administration of the bankruptcy the business of S L Bodyworks was sold to a company called Brisden Investments Pty Ltd for the sum of $25,500. Upon that sale, the bill of sale was discharged by payment of the sum of $19,873.39 to the respondents.

9. The residue of $4,986.61 was paid to the applicants.

10. The applicants now seek to declare void the bill of sale and to recover the sum paid to the respondents on the basis that the transfer of property under the bill of sale was either an undervalued transaction or a transfer to defeat creditors.

Consideration and findings

11. In order to succeed in their claim the applicants must prove, for the purposes of s.120 of the Bankruptcy Act, that within five years of the commencement of the bankruptcy the bankrupt transferred property to the respondents and that they gave no consideration, or less than full consideration, for it. If that is proved then the transfers will be void as against the trustees unless the respondents can prove that the transfers took place more than two years before the commencement of the bankruptcy and that at that time the bankrupt was solvent. In relation to s.121 the applicants must prove that the property transferred was likely to become part of the bankrupt's estate and that the bankrupt's main purpose in making the transfers was to prevent the property becoming divisible amongst his creditors, or to hinder or delay the process of making that property available for division among creditors.

12. Section 121(2) provides that the transferor's purpose can be established if it can be inferred from all the circumstances that at the time of the relevant transfer the transferor was, or was about to become, insolvent. The purpose can be proved in other ways but an element of subjectivity is involved in establishing what the intention of the bankrupt was at the material time. It is open to a transferee to resist a claim under s.121 if the transferee can establish that valuable consideration was given and that the transferee did not know of the illegitimate purpose of the transferor and did not know that the transferor was or was about to become insolvent.

13. The present application faces difficulties. The first is that the applicants have chosen not to challenge the original transfer of property by the bankrupt and his partner to the family trust, notwithstanding that that transfer was made within five years of the bankruptcy. This matter has proceeded on the basis that property was validly transferred to the family trust and that at the time of the granting of the bill of sale the business was carried on by the bankrupt and his partner in their capacity as trustees of the family trust.

14. The second difficulty confronting the applicants is that the respondents, while they maintain that they are entitled to rely upon the bill of sale granted in their favour, did not themselves take action to call on the bill of sale prior to bankruptcy. The evidence discloses that the assets of the panel beating business were disposed of pursuant to an agreement or understanding between the applicants and the respondents and that the sale was effected by solicitors who purported to act both for the applicants and the respondents. The solicitors purported to act for the applicants for the purposes of the sale of business assets and for the respondents for the purposes of the discharge of the bill of sale.

15. In their report to creditors dated 29 March 1999 the applicants noted that there was a substantial deficiency of liabilities over assets held by the applicants as trustees in bankruptcy and that the respondents were secured creditors owed $19,626.53 in respect of funds advanced to the business of the family trust. The applicants advised creditors that any amount realised was unlikely to exceed the amount owed to the secured creditors under the bill of sale and that accordingly there was unlikely to be any distribution of funds to unsecured creditors, although the applicants noted that they were investigating the prospects of setting aside the bill of sale.

16. The evidence discloses that the respondents assisted the applicants by finding a purchaser willing to purchase the assets of the business for a sum in excess of the amount purportedly due to the respondents and purportedly secured by the bill of sale. The parties agreed to sell the assets of the business to that purchaser, to pay out the amount due to the respondents and to discharge the bill of sale in consideration of that payment. In the circumstances, there would have been an issue of estoppel arising against the applicants if that had been pleaded. No issue of estoppel was, however, pleaded and I ruled that it was too late on the trial of this matter for the respondents to set up an estoppel.

17. The basis on which the applicants purported to sell the assets of the business is not clear. It was submitted to me by Mr van der Walt, for the applicants, that although the solicitors engaged by the applicants and the respondents purported to act for the applicants on the sale of the business assets, the applicants had no power to sell those assets because they were trust property. It is not disputed that pursuant to s.116(2)(a) of the Bankruptcy Act the assets of the business were not property vesting in the trustees in bankruptcy because they were assets of the family trust. Mr van der Walt submitted to me that the applicants were acting as agents of the respondents in that sale, or alternatively, the sale was somehow ratified by the respondents. The applicants claim an equitable lien over the trust property and it may be that the sale was effected in pursuance of that equitable lien. Whatever was the basis for the applicants' action in selling the property, it is apparent that this was effected pursuant to an agreement or understanding between the parties.

18. The nub of the applicants' case is that although the trust property does not vest in the applicants as trustees in bankruptcy the trustees of the family trust were personally liable for debts incurred in the panel beating business as if they were carrying on business on their own account: Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319 at 324 per Latham CJ and at 335 per Dixon J. In the circumstances, the applicants assert that the bankrupt, as a trustee of the family trust, was entitled to be indemnified from trust property for liabilities incurred on behalf of the trust and that this right of indemnity vested in the applicants as trustees in bankruptcy on their appointment following the sequestration order.

19. The applicants assert that the existence of this indemnity creates in the trustee a beneficial or proprietary interest in the trust property which is protected by an equitable lien over the trust property: Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360 at 367. The applicants assert that the existence of the trustees' proprietary or beneficial interest in the trust property entitles a trade creditor to be subrogated to the trustees' right of indemnity and in this way that a trade creditor can gain access to trust property to satisfy his debt. The right of indemnity is said to be an equitable right and is part of the "property of the bankrupt" which vests in the trustees in bankruptcy pursuant to s.58(1) of the Bankruptcy Act (see Pridmore v Magenta Nominees Pty Ltd [1999] FCA 152 at paragraphs 51-63 per Nicholson J). Accordingly, the applicants assert that on bankruptcy the trustee in bankruptcy is vested with the bankrupt's right to indemnification out of the trust property for the benefit of creditors: Re McLernon; ex parte SWF Hoists and Industrial Equipment Pty Ltd v Prebble [1995] FCA 1408; (1995) 130 ALR 609 at pp 623 - 625.

20. Thus, the applicants assert that where trust property has passed into the hands of a debtor in circumstances which constitute an undervalued transaction or a transaction to defeat creditors, the trustee in bankruptcy may commence an action to recover those moneys pursuant to s.120 and/or s.121 of the Bankruptcy Act. The applicants assert that the granting of the bill of sale involved a transfer of property as an absolute assignment of the property mortgaged by the bill of sale, subject to a right of redemption. They further assert that there was no or insufficient consideration for the transfer and, in the alternative, that this was a transaction to defeat creditors.

21. The respondents, by way of defence, first assert that there was no transfer of property under the bill of sale for the purposes of the Bankruptcy Act because there was no transfer of property by a person who later became bankrupt, as the bankrupt never held any legal or beneficial interest in the property the subject of the bill of sale. The respondents assert that what the bankrupt held was a joint legal interest impressed with a trust in favour of a beneficiary.

22. That argument appears at odds with the authority in the decisions of Re McLernon and Octavo Investments but Mr Colson, for the respondents, submitted that those decisions are no longer good authority following amendments to the Bankruptcy Act in 1996, which made material changes to the definition of "property" in s.5 of the Bankruptcy Act. That submission also appears to be contrary to authority: Sutherland v Brien [1999] NSWSC 155; (1999) 149 FLR 321. I prefer the applicants' submissions on this issue and adopt them. I find that the granting of the bill of sale did constitute a transfer of property for the purposes of ss.120 and 121 of the Bankruptcy Act. However, for reasons which follow, I am satisfied that the applicants are unable to make out a case for relief under ss. 120 and 121 of the Bankruptcy Act.

23. I am satisfied that the claim under s.120 fails for the reason that good consideration was given to the transfer effected by the bill of sale. This is apparent from the affidavit of Anthony John Landgridge, filed in court on 8 July 2002, in particular paragraph 9 of that affidavit. I accept Mr Landgridge's evidence that the consideration for the granting of a bill of sale was the extension of the credit facility enjoyed by the bankrupt and his partner from $10,000 to $30,000 and the granting of substantial further advances between 3 April 1998 and 26 June 1998. Although there was not a significant difference in the indebtedness of the family trust to the respondents between those dates the amount of indebtedness did increase between the two dates and the credit facility was extended by a sum of $20,000. The requirement of security for the extension of the credit facility was consistent with the ordinary commercial terms under which the respondents operated. The value of that consideration was not less than the indebtedness of the bankrupt and the family trust to the respondents at the time of bankruptcy, that sum being $19,873.39 and, therefore, even if the bill of sale were declared void, the applicants would be liable to pay to the respondents the full amount of that debt, being an amount no greater than the value of the consideration given: s.120(4).

24. The application under s.121 of the Bankruptcy Act also fails. That is because the applicant has been unable to advance any persuasive evidence that the purpose of the granting of the bill of sale was to defeat creditors. On the contrary, I accept from the affidavit of Mr Landgridge, filed in court on 8 July 2002, that the purpose of the granting of the bill of sale was to secure the ongoing commercial relationship between the operators of the panel beating business and the respondents. In addition, there is no evidence to persuade me that at the time that the bill of sale was granted, the respondents knew or should have known that the bankrupt was insolvent. Indeed, there is no persuasive evidence before me that as a matter of fact the bankrupt was insolvent at that time. The simple proximity in time between the granting of the bill of sale and the making of the sequestration order does not in itself establish that insolvency.

25. Accordingly, I will dismiss the application.

26. I heard the parties as to costs at the trial of this matter. I have decided not to make any order as to costs. Although the respondents have been wholly successful and the applicants wholly unsuccessful the respondents failed to comply with orders made by the Court for the filing of affidavit material and written submissions. The key affidavit by Mr Landgridge and the respondents' written submissions were filed in court on 8 July 2002. If that material had been filed in accordance with the orders of the Court the trial may not have been necessary. The effect of the late filing of this material was to take the applicants by surprise at the trial and in consequence they suffered prejudice. It is to avoid that prejudice that procedural orders made by the Court in preparation for the hearing should be complied with and it is appropriate that the Court express its disapproval of the failure by the respondents to comply in a timely fashion with those orders, by declining to make a costs order.

I certify that the preceding twenty-six (26) paragraphs are a true copy of the reasons for judgment of Driver FM

Associate:

Date: 26 July 2002