CATCHWORDS

BANKRUPTCY - settlement - meaning of - whether settlor's potential tax liabilities to be considered in ascertainment of 'all his debts' at the time of settlement - whether settlor's potential liability for damages in action to be considered in ascertainment of 'all his debts' at the time of settlement

Bankruptcy Act (UK) 1883 s 47

Bankruptcy Act 1966 s 120

Insolvency Act 1890 (Vic) s 72

Jack v Smail [1905] 2 CLR 684

Commissioner of Stamp Duties v Joliffe [1920] 28 CLR 178

Williams v Lloyd [1933] 50 CLR 34

Kauter v Hilton [1953] 90 CLR 86

Barton v Official Receiver [1986] 161 CLR 75

Official Trustee in Bankruptcy v Arcadiou [1985] 8 FCR 4

Re Kastropil ex parte Official Trustee [1989] 33 FCR 135

Newcastle Club Limited v Commissioner of Taxation [1994] 53 FCR 1

Australian Elizabethan Theatre Trust v Commonwealth Bank of Australia [1991] 30 FCR 491

Re Barton ex parte Official Receiver v Barton [1983] 52 ALR 95

Re Ward ex parte Official Trustee in Bankruptcy v Dabnas Pty Ltd (1984) 55 ALR 395

Barton v Official Receiver [1984] 58 ALR 328

Re La Rosa & Anor ex parte Norgad v Rocom Pty Ltd [1990] 93 ALR 571

Re Brown ex parte Official Receiver v Perpetual Trustee Co Ltd [1950] 15 ABC 74

Re Saebar ex parte Official Receiver v Saebar [1971] 18 FLR 317

Re Hyams ex parte Official Receiver v Hyams [1970] 19 FLR 232

Quigley v Cockburn [1992] 10 ACSR 382

Re Pheon [1987] 47 SASR 427

Re Player ex parte Harvey [1885] 15 QBD 682

Re Wise; ex parte Mercer [1886] 17 QBD 290

Re Vansittart ex parte Brown [1893] 1 QB 181

Re Tankard ex parte The Official Receiver [1899] 2 QB 57

Re Bronson; ex parte Moore [1914] 3 KB 1086

Re La Rosa & Anor ex parte Norgad v Rocom Pty Ltd, unreported, Federal Court, 16 August 1990

Re Lao ex parte Dixon unreported, Federal Court, 12 August 1994

Pattison v Hobbins & Hobbins, unreported, Supreme Court of Victoria, 23 January 1989

RE RAYMOND FRANK FINNEY Ex parte OFFICIAL TRUSTEE IN BANKRUPTCY -v- RAYMOND FRANK FINNEY & ANOR

No. NB 932 of 1994

EINFELD J

SYDNEY

28 FEBRUARY 1997

IN THE FEDERAL COURT OF AUSTRALIA )

NEW SOUTH WALES DISTRICT REGISTRY ) No. NB 932 of 1994

GENERAL DIVISION )

Re:RAYMOND FRANK FINNEY

Bankrupt

Ex parte:OFFICIAL TRUSTEE IN BANKRUPTCY

Applicant

RAYMOND FRANK FINNEY

First Respondent

SCOTT RAYMOND FINNEY

Second Respondent

MINUTE OF DECLARATION AND ORDERS

1.Declare, in accordance with section 120(2)(a), that the payment by the bankrupt of $250,000 to the second respondent on 3 February 1989 was void as against the applicant

2.Order that the second respondent pay to the applicant the sum of $250,000 plus interest at the rate provided for in section 51A of the Federal Court Act

3.Order that the costs of the applicant be paid by the respondents

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

EINFELD J

SYDNEY

28 FEBRUARY 1997

IN THE FEDERAL COURT OF AUSTRALIA )

NEW SOUTH WALES DISTRICT REGISTRY ) No. NB 932 of 1994

GENERAL DIVISION )

Re:RAYMOND FRANK FINNEY

Bankrupt

Ex parte:OFFICIAL TRUSTEE IN BANKRUPTCY

Applicant

RAYMOND FRANK FINNEY

First Respondent

SCOTT RAYMOND FINNEY

Second Respondent

REASONS FOR JUDGMENT

EINFELD J SYDNEY 28 FEBRUARY 1997

1.Introduction

The first respondent, Raymond Frank Finney, was made bankrupt on 26 April 1994 on the petition of the Commissioner of Taxation presented on 7 May 1993. By application to the Court dated 31 January 1996 the applicant as trustee of the bankrupt estate (the trustee) sought a declaration that a payment of $250,000 by the bankrupt on 3 February 1989 to his son Scott Raymond Finney, the second respondent, for payment to Westpac Banking Corporation (Westpac) constituted a settlement of property within the meaning of section 120(2) of the Bankruptcy Act 1966, and consequently is void as against the trustee. In the alternative, a declaration was sought that a property known as 12 Lynwood Place, Castle Hill, Folio Identifier 5/710189 (the property) stands charged in favour of the trustee with the sum of $250,000 plus interest. The trustee also sought an order that Scott Finney pay to the trustee the sum of $250,000 plus interest.

2.Factual background

In July 1986 the bankrupt and his wife Enid Finney discussed with their son Scott the possibility of their assisting with the purchase of real estate if he chose to purchase at some time in the future. At the time of the conversation, the bankrupt and his wife were the sole directors and shareholders of a company called Aerosol Packers Ltd (Aerosol) having purchased the interests of the other shareholders in that company at some point in 1982. Wages or salary from Aerosol were the bankrupt's predominant source of income in subsequent years although from approximately 1985 to 1993 he and his wife also derived rental income from several tenanted properties. Throughout this period all income earned by the couple was deposited into an account at the Commonwealth Bank, Blacktown Branch (the Commonwealth Bank account) in the name of the bankrupt.

In early October 1987 Scott Finney approached his parents and indicated to them that he was interested in purchasing the property. After some negotiations, the purchase price was agreed at $360,000. On 25 October the bankrupt paid to the selling agent a holding deposit of $3,600 from the Commonwealth Bank account, and later he paid the balance of the deposit of $32,400 from the same account. On 1 December 1987 the bankrupt paid a further $11,691.50 from the Commonwealth Bank account for the stamp duty on the purchase.

The bankrupt then consulted his solicitor and accountant for advice as to the best option for paying the balance of the purchase price, and was advised to delay the sale of any investment properties and of Aerosol, and to tell Scott Finney to obtain some temporary financing. The family then attended at Westpac's Blacktown Branch in December 1987 where the bank agreed to grant approval of a loan to Scott of $250,000 for two years. There is disagreement between the parties as to the precise details of the conditions of the approval given by Westpac some of which bear not insignificantly on the determination of this case.

On 4 February 1988 Scott Finney granted to Westpac a mortgage registered number X447337 in respect of the property, and settlement took place on 17 February when a transfer was executed in favour of Westpac. On that day Westpac paid $250,000 less interest and fees in advance, on a commercial bill basis, into an account with Westpac in the name of Scott Finney (no. 371833). Scott paid $250,000 out of this account on 17 February to finance the property purchase.

On 17 October 1988 the bankrupt and his wife sold their shares in Aerosol. On 2 November 1988 the bankrupt transferred $250,000 from the Commonwealth Bank account to a National Mutual Royal Savings Bank account (no. 007-0289238) which was in the bankrupt's name only. The money was transferred to this account in order to earn interest for three months while the family decided whether to pay out Scott Finney's mortgage early. In fact by February 1989 the facility had another year to go but it became convenient for the bankrupt to pay it out rather than roll it over.

On 3 February 1989 the bankrupt transferred $250,000 from his National Mutual Royal Savings Bank account to his son for the purpose of Scott's discharging Westpac's mortgage over the property. The discharge was given on 6 March 1989. It is the thereby unencumbered property which is the subject of this action.

3.Legislative framework

Section 120 of the Bankruptcy Act relevantly provides:

(1)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 bankruptcy.

(2)A settlement of property, whether made before or after the commencement of this Act, not being a settlement referred to in paragraph (1)(a) or (b) or a settlement that is void as against the trustee by reason of the operation of that sub-section, is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 5 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy, unless the parties claiming under the settlement prove -

(a)that the settlor was, at the time of making the settlement, able to pay all his debts without the aid of the property comprised in the settlement; and

(b)that the settlor's interest in the property passed to the trustee of the settlement or to the donee under the settlement on its execution.

...

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

Section 5(1) of the Act defines "property" as:

Real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.

The date of a bankruptcy is defined in section 5 of the Act as:

... the date on which a sequestration order was made against his estate or, if he became a bankrupt by virtue of the presentation of a debtor's petition, the date on which he became a bankrupt by force of sections 55, 56 or 57 as the case requires .....

Section 115 of the Act provides that the bankruptcy of a person relates back to the commission of the earliest act of bankruptcy within a period of six months before the presentation of a petition by virtue of which the person became bankrupt. Section 5 provides that a bankruptcy commences on that date. In the circumstances of this case, the relevant period to which section 120(2) will apply is the 5 years prior to 12 November 1992 which, according to the bankrupt, is the date of the earliest act of bankruptcy within six months prior to the creditor's petition. The payment by the bankrupt on 3 February 1989 of $250,000 to Scott Finney for passing on to Westpac therefore falls within section 120(2).

The onus of proving the elements of the transaction which allegedly constitutes a settlement falls upon the trustee: Re Trautwein [1944] 14 ABC 61. However, it is incumbent upon the respondents in resisting the application of the trustee to prove that at the time of the settlement, the bankrupt was able to pay his debts without the aid of the money comprised in the settlement.

4.Settlement under section 120(2)

The question of what constitutes a settlement for the purposes of the Bankruptcy Act is one which has vexed the courts for many years, and continues to do so.

4.1 Settlement of property

In Re Player ex parte Harvey [1885] 15 QBD 682 the Court was concerned with whether a gift of money by a bankrupt to his son for the purpose of enabling the son to commence business on his own was a 'settlement of property' for the purposes of section 47 of the Bankruptcy Act (UK) 1883. In that Act, section 47(3) defined 'settlement' as including 'any conveyance or transfer of property'. Expressing the unanimous view of a three Judge court, Lowe J stated at 686-7:

One must look at the whole of the language of the section in applying that definition, and consider what is meant by "settlement". Although "settlement" by the third sub-section "shall for the purposes of this section include any conveyance or transfer of property", yet I think the view of my brother Mathew is well founded, and that a settlement in the ordinary sense of the word is intended. The transaction must be in the nature of a settlement, though it may be effected by a conveyance or transfer. The end and purpose of the thing must be a settlement, that is, a disposition of property to be held for the enjoyment of some other person. Thus a purchase by the father of shares, which are registered in the son's name, and upon which the son receives the dividends, is within the statute. But where the gift is of money to be expended at once, the transaction is not, in my opinion, within Section 47 of the Act of 1883.

A similar view was expressed in Re Vansittart ex parte Brown [1893] 1 QB 181, where the Court was concerned with an application under the same provision to avoid a gift of valuable jewellery by the bankrupt to his wife which vested within two years of his bankruptcy. Vaughan Williams J stated at 184:

It is difficult to account for the use of the word "settlement" in substitution for the words "transfer or conveyance" unless the legislature intended to indicate that the transaction to fall within the statute must manifest a contemplation by the "donor" of the permanency of the subject matter of transfer as the property of the "transferee" ... Taking this view, I am afraid that a present of diamonds by a man to his wife is a present which I ought to hold as a settlement on his wife. It seems to me that to use the words of Cave J, the purpose of the transaction was the preservation of the thing, whatever its form, for the enjoyment of another person ... I should have held just the same if he had given her money to buy herself a present. It will be observed that in the case of In Re Player, where the transfer of the shares was held to fall within the section, the actual gift was of money to buy shares". [emphasis added]

In Re Tankard ex parte The Official Receiver [1899] 2 QB 57 the Court was concerned with whether gifts of personal property made by a bankrupt within two years of his bankruptcy constituted settlements within the meaning of section 47 of the Bankruptcy Act (UK) 1883. Justice Wright said at 59:

I think that I am bound by the authority of In Re Player and In Re Vansittart to hold that [section 47] applies only to such conveyances or transfers as are in the nature of settlements, in the sense of being dispositions of property by a person to be held and preserved for the enjoyment of some other person. The retention of the property in some sense must according to those cases be contemplated, and not its immediate alienation or consumption. [emphasis added]

These authorities were approved by the High Court of Australia in Jack v Smail [1905] 2 CLR 684 where the Court considered whether monies saved by a wife out of an allowance made to her by the bankrupt husband for housekeeping purposes, and deposited by her from time to time in a separate bank account in her own name, constituted a settlement of property. The Court held that the monies saved by the wife were not a settlement of property within section 72 of the Insolvency Act 1890 (Vic), the provisions of which were identical to section 47 of the English legislation.

The High Court considered the matter again in Williams v Lloyd [1933] 50 CLR 341 where the bankrupt opened a deposit account in the name of his wife and daughter and transferred to it the sum of £1,000 from his own account. The money remained in the account until after the bankruptcy. Dixon J said at 375:

... in the present case I think the proper inference is that the sum of £1,000 was put by the bankrupt in the joint names of his wife and daughter as a provision to be retained by them in some form or other, and not to be spent at once. The money remained in this account until after the bankruptcy. No part was spent before the bankruptcy; so that the donees remained accountable for the whole.

Starke J concurred 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, ie., 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". [emphasis added]

[The quotation was from a number of authorities including Re Player, Re Vansittart and Re Tankard.]

All these decisions were concerned with bankruptcy legislation which defined 'settlement' as including 'any conveyance or transfer of property'. Subsequently, however, this legislation was replaced by the Bankruptcy Act 1966, section 120 of which differed in one relevant respect from its predecessor by defining a settlement of property as including 'any disposition of property' as opposed to 'any conveyance or transfer of property'. The question in this case is whether the new definition of settlement has any bearing on the previously formulated legal principles.

The first reported decision on the new provision is Re Barton ex parte Official Receiver v Barton [1983] 52 ALR 95 which concerned a bankrupt making a payment of $170,000 to the respondent within two years of his sequestration. Justice McGregor followed the earlier authorities in relation to what constituted a settlement within section 120 of the Act and cited Williams v Lloyd, Re Vansittart, and Re Player. He held that as there was clearly a settlement of the property in accordance with the traditional principles, it was unnecessary to consider whether section 120(8) altered the law in this area.

In Re Ward ex parte Official Trustee in Bankruptcy v Dabnas Pty Ltd [1984] 55 ALR 395, Justice Wilcox considered whether section 120(8) of the Act required 'settlement' to have a connotation of 'permanent benefit', and stated at 401:

The substitution in section 120(8) of a new and wider definition of "settlement" offers to Australian courts the opportunity to re-think the desirability of adhering to the traditional tests. No longer does the definition have the connotation of permanent benefit suggested by "conveyance or transfer" of property. Rather it refers to "disposition" of property. It ought to be enough that the relevant transaction is a deliberate disposition of a capital fund. It ought to be immaterial whether the settlor contemplates that the capital fund will be held indefinitely in specie, converted to some other form of capital or spent by the settlee. [emphasis added]

In Barton on appeal to a Full Court of this Court, reported at [1984] 58 ALR 328, Sweeney J was of the view that the approach of Justice Wilcox was correct, although on the facts of that case it was not necessary for him to decide whether a wider interpretation was justified. At 335 he said:

In Re Ward ... Wilcox J considered the English and Australian authorities on the meaning of "settlement" and drew attention to the fact that "settlement" is no longer defined as including a "conveyance or transfer of property" but as including "any disposition of property". His Honour expressed the view that it ought to be enough to constitute a settlement that the relevant transaction is a deliberate disposition of a capital fund, ..... In the case before us, it is unnecessary to decide whether a wider interpretation is justified, but if the question were to arise, there is clearly, if I may say so with respect, a great deal to be said in favour of that interpretation.

Justice Fisher held similarly at 335, while Justice Lockhart adhered to the traditional formulation of settlement at 343:

In my opinion for there to be a "settlement of property" within the meaning of section 120 there must be a settlement in the ordinary sense of the word, a transaction in the nature of a settlement, though it may be effected by any disposition. The retention of the property in some sense must be contemplated and not its immediate dispersion.

On appeal to the High Court, reported at [1986] 161 CLR 75, the Court found that as there was no contemplation of the immediate dissipation or consumption of the money, the traditional principles as to what constituted a 'settlement' were satisfied.

There have been numerous decisions which have supported the obiter remarks of Justice Wilcox in Re Ward including Official Trustee in Bankruptcy v Arcadiou [1985] 8 FCR 4 where Woodward and Northrop JJ stated at 10:

The relevant provisions of section 94(1) of that Act were identical with the provisions of section 120 (1)(a) of the present Bankruptcy Act, but in the earlier Act, under section 94(5), for the purposes of section 94, a settlement included 'any conveyance or transfer of property'..... These latter words have a wider connotation than the former.

See also Re Pheon [1987] 47 SASR 427; Quigley v Cockburn [1992] 10 ACSR 382; Pattison v Hobbins & Hobbins [unreported, 23 January 1989, Victorian Supreme Court] where it was held that the forgiveness of a debt was a settlement of property within the meaning of section 120 of the Act although it did not confer a permanent benefit.

On the other hand, there have been a number of judgments which have declined to follow the judgment of Justice Wilcox in Re Ward. One was Re Kastropil ex parte Official Trustee [1989] 33 FCR 135 when Justice French stated at 142:

While the point was not argued before the court, and Re Ward was not mentioned ... the permanency test remains entrenched in the concept of settlement until the High Court comes to a different view or the legislature otherwise provides.

Justice French adhered to this opinion in Re La Rosa & Anor ex parte Norgad v Rocom Pty Ltd [1990] 93 ALR 571, a view which was upheld by a Full Federal Court in Re La Rosa & Anor ex parte Norgad v Rocom Pty Ltd (Northrop, Davies and Lee JJ, unreported, 16 August 1990).

The trustee submitted that the requirement of permanency for a 'settlement' within section 120 of the Act is no longer a relevant consideration, and that the wider test propounded by Justice Wilcox in Re Ward and supported by subsequent authorities, should be preferred. If on the other hand the Court held that the traditional test is still applicable, the trustee claimed that it has been satisfied in this case because there has not been an immediate alienation or consumption.

The Finneys submitted that in the circumstances the provision of monies by the bankrupt to a third party other than at his direction or request was not a settlement within established legal principles. In support of this submission, they cited Re Branson ex parte Moore [1914] 3 KB 1086 in which the bankrupt had provided an expensive clock to the landlord of a hotel on the proviso that this would lead to a reduction of rent to the lessee of the hotel, the bankrupt's nephew. It was held by the Court that the mere intention to benefit another party was insufficient to constitute a settlement and that the property of the gift had to pass to the donee. Swinfen Eady LJ stated at 1093:

They were provided by the uncle [the bankrupt] at his own expense and put up on the house. Of course it was for the benefit of the nephew that the uncle was doing it, but there never was a gift of the things as chattels to the nephew that he might do with them as he liked. Counsel for the trustee relied rather upon the fact that the nephew in his examination in the bankruptcy said "my uncle made me a present of the clock". It was said that that was a clear admission that the uncle made him a present of it as a chattel, but that is not inconsistent with the rest of the nephew's examination. In a sense the uncle did make him a present of it, because the nephew never paid anything whatever ... In my view there never was a transfer or gift of this property to the nephew, the uncle provided it for the house, and the property was never in the nephew. Upon that ground alone, ... in my view the facts are sufficient to shew that there was never any settlement of the property upon the nephew within the meaning of the section. [emphasis added]

It was submitted that, likewise, the bankrupt had an intention to benefit his son by providing monies for payment to Westpac for consideration by Westpac.

I am unable to agree. Firstly, the money was given to Scott who did assume property in it even if only momentarily. Secondly, whilst it is certainly true that the mere intention to benefit another party is not sufficient, in this instance there was more than mere intention, for Scott Finney benefited in actuality from the provision of the monies in that the mortgage over his property was discharged.

The permanency test lays down no clear line between those transactions which are a settlement and those which are not. It will often be a question of relativity and judgment as to whether a gift retains some permanency or was dissipated. In the present circumstances the transfer of $250,000 by the bankrupt by way of a gift to Scott Finney to enable him to discharge a mortgage did not result in an immediate alienation or consumption. But as Starke J stated in Williams v Lloyd, it is enough that it is contemplated that the property will be retained "either in its original form or in such a form that it can be traced". In this instance, although the property in question has not been retained in its original form, it can obviously be traced to the discharge of Scott Finney's mortgage. It would be strange, and seemingly inconsistent with the objects of the Act, if a bankrupt could escape the consequences of section 120(2) by making a gift of money to a third party for the purpose of enabling that third party to extinguish a debt. If the monies had been utilised by Scott Finney to purchase a home, there would clearly be a settlement within the meaning of the section. There is simply no reason as a matter of logic why the position should be different where Scott Finney has used the monies to increase his financial interest in his home.

As the traditional test is satisfied, it is unnecessary for me to consider whether the wider test propounded by Justice Wilcox in Re Ward is correct. In my opinion, there is a great deal to be said for a reconsideration of the traditional tests in light of the new wording of the Act. It ought to be enough, it seems, that the relevant transaction be a deliberate disposition of a capital fund, even if it is converted to some other form of capital or used by the settlee for other purposes.

4.2Trust

The respondents also submitted that the money provided by the bankrupt to his son to discharge the mortgage to Westpac was by way of a trust. The first requirement of a trust was stated by Knox CJ and Duffy J in Commissioner of Stamp Duties v Joliffe [1920] 28 CLR 178 at 181 to be:

In our opinion the law is accurately stated in Lewin on Trusts, 11th Edition, at page 85: "It is obviously essential to the creation of a trust, that there should be the intention of creating a trust, and therefore if upon a consideration of all the circumstances the Court is of the opinion that the settlor did not mean to create a trust, the Court will not impute a trust where none in fact was contemplated".

The effect of this decision was discussed in Kauter v Hilton [1953] 90 CLR 86 where Dixon CJ, Williams and Fullagar JJ were of the opinion at 100 that:

... the mere opening of an account under the section by one person in trust for another is not necessarily sufficient to make that person a trustee for the other person. All the relevant circumstances must be examined in order to determine whether the depositor really intended to create a trust. Even where it is held that a trust is intended it is still material to ascertain its terms.

In Australian Elizabethan Theatre Trust v Commonwealth Bank of Australia [1991] 30 FCR 491, Gummow J was of the opinion at 502-505:

The question as to the existence of any express trust will always have to be answered by reference to intention ... Ordinarily, the relevant intention is that of the alleged settlor ... The relevant intention is to be inferred from the language employed by the parties in question and to that end the court may look also to the nature of the transaction and the relevant circumstances attending the relationship between them. ... The fundamental issue is whether the donations in question in this proceeding were received by the AETT, and banked by it, impressed with any of the equitable proprietary obligations contended for by the counsel for the three organisations. As I have indicated, each case is to be determined in accordance with the language used as interpreted in the light of the circumstances. It is well settled that formal words are not necessary for the creation of a trust. But if the statement of "preference" by the donors upon the AETT standard form or its adaptations were but a statement of the donor's motive or expectation, then the AETT bore no legal or equitable obligation to fulfil that expectation.

In Newcastle Club Limited v Commissioner of Taxation [1994] 53 FCR 1, Justice Hill considered the case where a payment had been made for the benefit of third parties and said at 6 - 7:

First the payment might merely be a loan to the payee to fund some benefit to a third person, secondly the payment may constitute a trust for the benefit of the third person or, as in the Australian Elizabethan Theatre Trust case, the payment might represent a gift for the benefit of the payee albeit expressed in precatory terms ..... Proof of the intention to create a trust may be facilitated both by proof that the funds in question are kept separate from other funds of the payee, for example, by placing them in a separate bank account ... and by the fact that they are accounted for separately. No separate bank account was maintained by the Club to receive the so-called trust moneys. Whilst this is a significant factor, it will not necessarily be determinative ... The greatest difficulty with the submission that a trust has been created in the present case is that it is impossible to ascertain what the terms of the trust are.

The essential elements of a trust include, therefore, a requirement of certainty that the trustee is under a personal obligation to deal with the trust property for the benefit of the beneficiaries, and an obligation annexed to the trust property. The obligation attaches to the trustee in person; but it is also annexed to the property so that the equitable interest resembles a right in rem. It is not sufficient that the trustee should be under a personal obligation to hold the property for the benefit of another, unless that obligation is annexed to the property.

The evidence in these proceedings does not establish that the monies provided to Scott Finney by his father were pursuant to a trust. Firstly, the National Mutual Royal Bank account from which the monies were paid was established in about 1976, some 10 years prior to Raymond and Enid Finney's discussion about assisting their son in relation to the purchase of property or a business. The bank account was in the name of Raymond Finney, but it was conducted by Raymond and Enid Finney jointly, each using the account to pay their day to day expenses and depositing monies they earned from rental properties and their business. It is clear that Raymond and Enid Finney did not consult their son when they made withdrawals from the account, nor was he a signatory to the account, as became clear from the evidence of the bankrupt himself:

Now, in relation to withdrawals that you and your wife made from that account that we have been speaking of I take it that you did not consult Scott whenever you and your wife made a withdrawal of money from that account did you? -- No, not from - no, not at all.

And he was not an account holder? -- No.

And he was not a signatory to any of the cheques was he? -- No. [T27]

It cannot be said that the respondents have satisfied the essential preconditions of a trust. No personal obligation was annexed to the property alleged to constitute the trust fund. A mere desire on the part of Raymond and Enid Finney to make the funds available to Scott Finney is insufficient to establish a trust. It is most unlikely, and was not suggested by any of the witnesses, that Scott Finney would be able to require his parents to make the funds available to him, which he would have been entitled to do if a personal obligation was annexed to the property. Furthermore, the nature of the trust property is uncertain. It was put in evidence that Raymond and Enid Finney had discussed with Scott Finney as early as 1986 a desire on their part to make funds available to him for a worthwhile purpose. Yet no amount certain was agreed upon nor set aside, and it was not known when the funds would be required, nor for what purpose and from where the funds would be obtained. In these circumstances, I am unable to agree that the bankrupt meant to create a trust, and this Court ought not impute a trust when none in fact was contemplated.

4.3Guarantee

The respondents also sought to establish that Raymond and Enid Finney had offered a guarantee for the commercial bill funds provided by Westpac to their son. In support of this contention, both respondents gave evidence that they attended the meeting with the manager of the Blacktown branch of Westpac, Mr Ireland, when the Westpac loan was arranged. At this meeting the bankrupt recalled a conversation to the following effect taking place (affidavit 18 June 1996):

I said:Scott has bought a house at Castle Hill and my wife and I are paying for it. We've paid about$110,000 so far and an extra $250,000 is needed. Henry Grech of Grech & Bannerman suggested that we might discuss it with you, can you assist?

Mr Ireland replied:Over what period of time will the funds be required?

I replied:For about a year.

He said:I don't think there will be a problem with the loan if you and your wife are prepared to guarantee it. Otherwise he doesn't have the ability to service the loan or the assets to back it.

I replied:We can guarantee the loan.

He said:We should be able to arrange it on roll-over bills. I will let you know.

Shortly afterwards Westpac confirmed approval of a loan facility for a two year period by letter dated 18 December 1987 to Scott Finney which stated in part:

Security: Registered Mortgage by yourself over 12 Lynwood Place, Castle Hill plus a joint and several guarantee by parents. [Annexure A to affidavit of Raymond Finney dated 18 June 1996]

The bankrupt could not recall whether he or his wife signed a formal written guarantee for Westpac for the rollover funds to be made available to Scott Finney. No such guarantee was produced to the Court, nor was Mr Ireland called as a witness in this regard.

The respondents' contention was that despite no demand having been made by Westpac on the bankrupt to pay his son's debt, it would have been within the power of Westpac to do so as a guarantee had been offered prior to the provision of the funds. This submission is not tenable. The funds were actually paid by the bankrupt to his son, not to Westpac at all. That would not have occurred if Westpac had had a guarantee to enforce. It was also conceded by the bankrupt during cross examination that neither he nor his wife had discussions with Westpac regarding the provision of a guarantee after the initial meeting took place [T34], including no discussions about a guarantee after Scott received the letter of 18 December 1987. Further cross-examination revealed that the provision of funds in February 1989 was for the purpose of convenience, and not because of a demand by Westpac:

In February 1989 you made the funds available to him? -- That's right.

It was done at that time because it was convenient for you to do so, was it not? -- That's right.

Because you had intended to make these funds available to him, based on what you had told him before that is what you proposed to do? -- That's right.

Now, your payment of those funds to him in February of 1989 was a year before, as you understood it, the facility was due to expire, was it not? -- Yes.

I think you have already said in your evidence that that was a convenient time for you to make the funds available to your son? -- That's right.

Indeed, it was probably more convenient by reason of the fact that the bill was due to be rolled over in February of 1989, was it not? -- That's right.

So it was also commercially convenient for you to make the funds available on the date the bill was to be rolled over? -- Right.

You never paid those funds by reason of some demand that was made upon you by Westpac, did you? -- Only that the indication was there that, as you were saying, because no doubt of the bills being rolled over at that time, it would be a convenient time to bring that to an end, yes.

It was, I think, as you have said, a matter of convenience rather than a demand or a requirement being made by the bank upon you? -- I think we had expressed to the bank that we would just like to take those funds out, or Scott expressed it that way, for one year and that's what we had in mind, was to tidy it up about that time.

Yes, well, just answer my question, please. The payment made by you in February 1989 was not by reason of any demand made by the bank upon you? -- I'm not sure on that.

You are not sure because you cannot recall? -- Yes, I can't recall.

Scott never told you, did he, that the bank was about to make a demand on repayment of the facility unless it was paid out in February 1989? -- He, from memory, I think he did indicate that there was - he had got something from the bank indicating, you know, did we want to pay that out then or what did we want to do, or did we want to roll the bills over again.

Have you ever taken out bill facilities before? -- No.

Are you aware that the bill is rolled over from time to time? -- Yes.

You knew, did you not, that as the facility was available until February 1990 Scott could have rolled over for another 12 months? -- It wasn't something that we were concerned about because we wanted to tidy that property transaction up in early February 1989.

You just wanted to get rid of the bill facility and make these funds available to your son? -- That's right.

It is the case, is it not, that you could have requested the bank to roll over the bill facility for another 12 months? -- Yes.

You chose not to do so? -- That's right. [T35-36]

As this cross-examination shows, it cannot be the case that Raymond and Enid Finney gave a guarantee in respect of Scott's obligations to Westpac, or that the payment of the $250,000 in February 1989 was pursuant to such a guarantee. Furthermore, neither in his public examination nor in his earlier affidavits, did the bankrupt refer to any dealings with Westpac. Indeed, in his public examination on 7 June 1995 he denied without qualification involving himself in any discussions or negotiations with Westpac concerning the loan:

Now, in relation to the financing for that property, do you have any knowledge of how your son came to acquire money to buy it? -- Yes, I think my wife and myself made funds available, or part thereof for that. It might have just been the deposit, I'm not really sure on the detail.

What about the balance of the purchase moneys? -- I know he took out a loan with the Westpac Bank.

Did you involve yourself in any discussions or negotiations with the Bank concerning the loan? -- No.

None at all? -- Not that I can recall, No. (Annexure to affidavit of R.J. Cruickshanks 31/01/96 at 12)

Rather than an offer of a guarantee, it is more likely that the bank initially requested from Scott Finney a guarantee from his parents, but it was not pursued because the security of the property was more than sufficient for the bank to make the facility available in February 1988 without a guarantee having to be put in place.

It follows that the respondents cannot succeed in establishing that the payment made in February 1989 was pursuant to a guarantee. In fact, no demand was ever made by the bank upon either Scott Finney or his father to pay out the bill facility, because it was not due to expire until February 1990. The only conclusion possible on the evidence is that the facility was paid out by the bankrupt in February 1989 because at that time funds were available and it was desired to save the costs and interest involved in rolling over the loan for a further period.

5. The solvency of Raymond Finney

Section 120(2)(a) provides that if the bankrupt can prove that at the time of making the settlement he was able to pay all his debts without the aid of the money comprised in the settlement, then the settlement is not void as against the trustee in bankruptcy.

5.1 Tax debts

The trustee submitted that on the available evidence, as at 3 February 1989 the bankrupt was not in a position to pay all his debts without the aid of the $250,000 made available to Scott Finney. Reliance was placed upon the evidence of Raymond Thomas Love of the Australian Taxation Office who testified that in October 1992 the bankrupt was required to pay the Commissioner of Taxation additional income tax for the years ended 30 June 1984 to 30 June 1988 in the sum of $1,364,357. In addition, the bankrupt was liable pursuant to section 223(1) of the Income Tax Assessment Act as in force in 1989 for penalties equating to 200% of the additional income tax assessed. Consequently he was liable for additional tax by way of penalty in the sum of $2,728,714, giving a total contingent liability of $4,093,071. In evidence Mr Love stated that the total penalties for which the bankrupt became liable was reduced to $1,453,370 and therefore that his liability was for a total of $2,817,727 comprised of unpaid tax and penalties.

The penalty imposed upon the bankrupt comprised a flat rate penalty amounting to 45% of the tax avoided for each financial year and an additional penalty of 14.026% per annum on the tax avoided. In evidence Mr Love explained that the figure of 14.026% was not imposed as interest on the tax owed, but as partial remission of the statutory penalty:

But is it not true that then there is an interest component levied on the amount avoided from the date it was avoided? -- From the date it was avoided, that's correct, yes.

That rate has been set? -- That's the method yes.

It was set by the Commissioner in Mr Finney's circumstances at 14.026 per cent? -- Well, it's like saying instead of- if the penalty is $200,000 we won't impose a full 200 per cent, we'll impose say $100,000, you could use what you considered to be a reasonable figure but this is merely a method they had of reducing or remitting that statutory penalty.

If you could just direct your attention to the 14.026 per cent? -- Yes.

That is an interest component levied on the outstanding tax, is it not? -- Well, it's referred to as an interest component but as I keep on saying it's merely a method that the department has of reducing that 200 per cent penalty. [T17-18]

The trustee submitted that, as at 3 February 1989, the bankrupt had a contingent liability to the Commissioner of Taxation in the sum of $4,093,071, which was in the discretion of the Commissioner reduced to $2,817,727, and that this amount ought to be taken into account in assessing whether he could pay 'all his debts' on the date of settlement.

In Lao ex parte Dixon [unreported, Federal Court, 12 August 1994] Justice Davies held that in assessing whether a settlor can pay 'all his debts', a court should take into account contingent liabilities including liability for tax, notwithstanding no assessment having been made and the tax not having been quantified as at the date of settlement. His Honour said at 7:

... the liability to tax arose by reference to the events in and the taxation laws applying in the relevant years of income. In such event, the liability, though not due and owing because no assessment had issued, may nevertheless be treated as a contingent liability and therefore as a relevant debt.

I can see no valid reason for applying a different rule in this instance.

5.2 The additional penalties

The respondents submitted that there is no reason in logic why the assessed penalties in respect of the bankrupt's income tax ought to be treated as a contingent liability. Yet it is clear law that a prospective liability for a debt should only be disregarded if it is purely speculative and without any real likelihood of being imposed. The test is an objective one, as noted by Hoare J in Re Saebar ex parte Official Receiver v Saebar [1971] 18 FLR 317 at 322:

I do not think there is anything in that case to indicate that the subjective belief of the settlor has any real relevance in determining whether a prospective liability should be taken into account when determining the solvency of the settlor. It would seem that the correct approach is to consider the whole of the circumstances and if the liability can be regarded as purely speculative and without any real likelihood of liability being established then the liability can be ignored: Re Wise; Ex parte Mercer [1886] 17 QBD 290. However if there is a real likelihood of the prospective liability becoming in due course an actual one then that liability must be taken into account.

And by Gibbs J in Re Hyams ex parte Official Receiver v Hyams [1970] 19 FLR 232 at 258:

Similarly, it seems to me that in inquiring what were all the settlor's debts for the purpose of s 94(1)(ii) it is necessary to have regard to contingent liabilities if the evidence shows that there was a reasonable possibility that the settlor would have to meet them. In the same way, regard may be had to a liability for tax which had arisen at the date of the settlement although no assessment had then been made and the tax had accordingly not been quantified: Re Brown; Official Receiver v Perpetual Trustee Co Ltd [1950] 15 ABC 74.

No submission was put and no evidence was called to establish that, at the time of settlement, the possibility of an assessment of tax or of an amended assessment was entirely unrealistic or fanciful and not a matter to be taken into account. In the absence of evidence establishing the circumstances of the bankrupt's taxation affairs, and going to the unlikelihood or improbability of assessments ensuing, the bankrupt has failed to establish that this debt was not owed by him to the Commissioner of Taxation.

5.3 Other debts owed by the bankrupt

In November 1988 proceedings were commenced by M.C. Sales Pty Ltd against Raymond and Enid Finney in respect of the sale of their shares in Aerosol to M.C. Sales in October 1988. The bankrupt was aware of the plaintiff's claim and stated that he was originally sued for around $2 million which increased as the proceedings continued to approximately $4 million [T41-42]. He took the proceedings very seriously and engaged solicitors to defend the claim. However, in June 1990 Raymond and Enid Finney settled the proceedings by way of a payment of $3 million which was financed by the sale and mortgage of property owned by them.

In cross examination the bankrupt attempted to deny that he regarded the plaintiff as having good prospects of success in those proceedings. However, he eventually agreed to this proposition:

Yes, I understand that, what I am saying to you is that you would not have paid $3 million to settle the proceedings unless you regarded there being a real risk of you losing? --- That is probably right, but our advice was that ---

I am not worried about your advice Mr Finney? --- No.

What I am suggesting to you is that you would not have paid such a substantial sum of money unless you realised the plaintiff had good prospects of success? --- Right [T43]

As at 3 February 1989, there was certainly a reasonable possibility of the bankrupt having to meet a significant damages claim, or at the very least a sizeable amount of costs, arising out of the Supreme Court proceedings. This potential liability could not be regarded as being purely speculative and without any real likelihood of being established. It should undoubtedly be considered on an assessment of his solvency, with the amount of the eventual settlement being certainly instructive if not definitive.

5.4 The bankrupt's income and assets

The bankrupt submitted that at the time of the alleged settlement, he had assets jointly with his wife of approximately $4.6 million, and a personal income of approximately $260,000 per annum. The only evidence in respect of these matters was that given in the affidavits and evidence of himself and his wife. As evidence it was tenuous to say the least. Neither Raymond nor Enid Finney are valuers nor was their evidence the best evidence available. The bankrupt's estimate of the value of the properties owned jointly by himself and his wife were allegedly based on information from real estate valuers, but none of these valuations or other documents relating to the valuation of assets were discovered. The motor vehicles and household contents were not the subject of expert valuation, only the bankrupt's opinion based on his understanding of the current market valuations. For these reasons, the trustee submitted that the Court should not accept the evidence of value given by the Finneys.

In the absence of any other evidence, I must approach the estimates and valuations of the bankrupt with considerable reluctance and some scepticism. His calculation of the values discloses his asset position on 3 February 1989 as being $2,325,082. This calculation assumes a one half interest in the motor vehicles which he accepted was the correct position [T38], and revised balances in the bank accounts rather than the erroneous amounts disclosed in the affidavit material [T36-37]. His valuations were:

Real Estate:

19 Fairway Dr. Kellyville, NSW $ 800,000

31 Chiltan Cres. Castle Hill, NSW $ 350,000

Unit 10a Aegean Apts. Laycock St,

Surfers Paradise, QLD $ 250,000

10 Garling Road, Blacktown, NSW $1,500,000

12 Garling Road, Blacktown, NSW $1,500,000

Other Assets:

1986 Mercedes 560SL Sports $ 65,000

1988 Range Rover $ 20,000

Household furniture and effects $ 50,000

Cash in Bank - Commonwealth $ 53,506

Cash in Bank - National Mutual Royal Bank $ 61,658

Total value of assets as at 03/02/89 $4,650,164

Half share thereof 03/02/89 $2,367,582

5.5Enid Finney's assets

The respondents contended that as the bankrupt was a joint owner with his wife of most of the assets, she would have agreed to mortgage or sell her share of the property if necessary to meet his debts [T49]. In evidence Enid Finney confirmed that she would have willingly made her share of the property available to discharge her husband's debts if necessary, even though this would have been significantly to her own disadvantage [T69-70].

In Re Hyams Gibbs J considered similar facts and said at 259:

It was further submitted on behalf of the respondent that in deciding whether the bankrupt was able to pay all his debts, regard ought to be had to the fact that the bankrupt had available to him his wife's property which she would readily have given to him if he had requested it. The principle upon which the respondent relied in making this submission was that stated by Barwick CJ in Rees v Bank of New South Wales: 'It is quite true that a trader, to remain solvent, does not need to have ready cash by him to cover his commitments as they fall for payment, and that in determining whether he can pay his debts as they become due regard must be had to his realizable assets'....

These cases do not assist the respondent. They refer to the realization of the debtor's own assets, and not to the property of other persons which, out of affection or charity, may be made available to the debtor. In any case I am not satisfied that the respondent's [the wife's] property was available to enable the bankrupt to pay his debts at the material date. It was easy for the respondent to say, after the event, that if the bankrupt had requested her to give him money to pay his debts she would have done so.

In this instance the fact that Enid Finney may have been prepared, solely on the basis of love and affection, to have made her assets available to her husband to assist him in the payment of his debts is irrelevant. For the purposes of section 120, the Court is only entitled to take into account the asset position of the settlor, not his family or other persons.

6. Section 120(1)(a) and (b)

The respondents alleged also that section 120(2) cast upon the trustee the onus of excluding paragraphs (a) and (b) of section 120(1) and that this onus was not discharged. It is not necessary to respond to this argument other than to say that the affidavit of Robert Cruickshanks, Deputy Official Receiver, sworn on 30 January 1996 and filed in support of this application, which has annexed to it portions of the bankrupt's public examination, makes perfectly clear that neither of the paragraphs is applicable. There is no material to the contrary in any of the respondents' affidavits which affected to show that the payment of the $250,000 was made in any of the circumstances or for any of the purposes referred to in the two paragraphs.

There was also a letter authored by Scott Finney dated 20 October 1955 to the solicitors for the trustee which provided details of financial dealings between himself and his parents:

3.Details of property purchase at 12 Lynwood Place Castle Hill NSW

This property purchased by me with funds given to me as a gift by R & E Finney. Property purchased in February 1988.

I understand all details concerning this transaction have been made available to the Trustee. (Annexure I, Affidavit Robert Cruickshanks sworn 30 January 1996)

No mention was made in this letter of any conditions on the gift or that it was in consideration of marriage or made in any of the other circumstances in section 120(1)(a) or (b).

7.Conclusion

There is, in my view, little doubt that the $250,000 paid by the bankrupt to his son on 3 February 1989 to discharge Scott's then debt to Westpac was a settlement of property within the meaning of section 120(2) of the Bankruptcy Act 1966. It is my further opinion that the bankrupt did not have the capacity at the time to pay all his debts without the aid of the $250,000 comprising settlement. Consequently, his settlement of $250,000 on his son to discharge his indebtedness to Westpac is void as against the trustee. I order Scott Finney to pay to the trustee within 28 days or such further time as the trustee allows the sum of $250,000 with interest under section 51A of the Federal Court Act. The respondents will pay the trustee's costs of the application.

For the applicant Mr S White instructed by Friedman Reeves Solicitors

For the respondentsMr T Stuart instructed by David Cass Solicitor

Date of hearing 18 June 1996

Written submissions 22 July 1996

completed

Date of judgment 28 February 1997