FEDERAL COURT OF AUSTRALIA

Frost v Sheahan as Trustee of the Bankrupt Estate of Allen Gordon Frost [2012] FCAFC 46

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The Appellants pay the costs of the Respondent.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT

1        The first appellant, Mr Allen Gordon Frost, is an accountant. He was declared bankrupt on 4 September 2000. The second appellant, Mr Paul Anthony Richardson, is a solicitor who acted for Mr Frost. The respondent, Mr John Sheahan, is the trustee of Mr Frost’s bankrupt estate.

2        The reasons for decision of the primary judge record that the two principal issues dividing the parties were whether:

(i)    a property at 225 Angas Street, Adelaide, registered in the name of Ambrose Baker and Partners (Holdings) Pty Ltd, was held on trust; and

(ii)    two mortgages granted by Mr Frost (and his former wife) to Mr Richardson should have been declared void pursuant to s 121 of the Bankruptcy Act 1966 (Cth).

3        On 13 April 2011 the primary judge published his reasons for decision in respect to these two matters: Sheahan v Frost [2011] FCA 356. He concluded that the Angas Street property was not held on trust and that the two mortgages were void. Pursuant to leave which had been granted, further submissions were thereafter made. Reasons in respect to a second judgment were published on 21 June 2011: Sheahan v Frost (No 2) [2011] FCA 686. Orders were also made on 21 June 2011. It was common ground between the parties that the two sets of reasons for decision published by the primary judge were to be read together such that the two sets of reasons exposed the basis upon which His Honour proceeded.

4        A Notice of Appeal was filed on 12 July 2011. The Appellants thereafter filed an Interlocutory Application on 31 October 2011.

THE INTERLOCUTORY APPLICATION

5        The Interlocutory Application sought leave to amend the Notice of Appeal and to rely upon additional evidence.

6        The principal objective sought to be achieved by the proposed amendments to the Notice of Appeal was to canvass and resolve whether the Appellants were denied procedural fairness by reason of the primary judge going beyond the issues which had been previously identified at directions hearings.

7        With respect to Mr Frost’s appeal, in summary form, the fundamental concern arose (in the submission advanced by senior counsel on his behalf) because the case he came to meet accepted that the Angas Street property was held on trust. It was not a case as to whether the property was held beneficially by Ambrose Baker and Partners (Holdings) Pty Ltd. The only issue was whether there had been compliance with s 29(1)(b) of the Law of Property Act 1936 (SA).

8        On the approach of Mr Frost on appeal, the findings of the primary judge, as to the property not being held on trust on any basis other than non-compliance with s 29(1)(b), were findings in respect to which he had been denied any opportunity to be heard.

9        With respect to Mr Richardson’s appeal, again in summary form, his fundamental concern arose because on his behalf it was said that the case he came to meet raised no question as to there being no consideration or inadequate consideration for the mortgages,

and that the only issue was whether “past consideration” was “consideration” within the meaning of and for the purposes of s 121(4) of the Bankruptcy Act.

10        On the approach of Mr Richardson on appeal, findings as made by the primary judge, with respect to the mortgages being void, were matters in respect to which Mr Richardson had been denied an opportunity to be heard.

11        Senior counsel for the respondent did not object to these additional issues being raised on appeal. Leave to raise these additional grounds was granted.

12        Questions as to whether the Angas Street Property was held on trust, whether the two mortgages were void, and the procedural manner in which these issues were approached by the primary judge, are now to be resolved on appeal. The resolution of the former questions involves a consideration of the extent to which an appellate court should review findings of fact; the resolution of the procedural fairness questions involves a consideration of the manner in which and the extent to which the issues were formulated and approached by the parties.

AN APPEAL — OVERTURNING FACTUAL FINDINGS ON APPEAL

13        An appeal, it should be recalled at the outset, is not a common law procedure but rather is a creature of statute: Fox v Percy (2003) 214 CLR 118 at 124. In Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission, (2000) 203 CLR 194 Gleeson CJ, Gaudron and Hayne JJ usefully summarised the different kinds of appeals as follows:

[12] It is common and often convenient to describe an appeal to a court or tribunal whose function is simply to determine whether the decision in question was right or wrong on the evidence and the law as it stood when that decision was given as an appeal in the strict sense. An appeal to this Court under s 73 of the Constitution is an appeal of that kind. In the case of an appeal in the strict sense, an appellate court or tribunal cannot receive further evidence and its powers are limited to setting aside the decision under appeal and, if it be appropriate, to substituting the decision that should have been made at first instance.

[13] If an appellate tribunal can receive further evidence and its powers are not restricted to making the decision that should have been made at first instance, the appeal is usually and conveniently described as an appeal by way of rehearing. Although further evidence may be admitted on an appeal of that kind, the appeal is usually conducted by reference to the evidence given at first instance and is to be contrasted with an appeal by way of hearing de novo. In the case of a hearing de novo, the matter is heard afresh and a decision is given on the evidence presented at that hearing.

[14] Ordinarily, if there has been no further evidence admitted and if there has been no relevant change in the law, a court or tribunal entertaining an appeal by way of rehearing can exercise its appellate powers only if satisfied that there was error on the part of the primary decision-maker. That is because statutory provisions conferring appellate powers, even in the case of an appeal by way of rehearing, are construed on the basis that, unless there is something to indicate otherwise, the power is to be exercised for the correction of error. However, the conferral of a right of appeal by way of a hearing de novo is construed as a proceeding in which the appellate body is required to exercise its powers whether or not there was error at first instance. [Footnotes omitted.]

14        The statutory right of appeal conferred by s 24 of the Federal Court of Australia Act 1976 (Cth) is an appeal in the nature of a re-hearing: see Knight v Beyond Properties Pty Ltd (2007) 242 ALR 586 at [20] per French, Tamberlin and Rares JJ; Poulet Frais Pty Ltd v Silver Fox Company Pty Ltd (2005) 220 ALR 211 at 220 to 221 per Branson, Nicholson and Jacobson JJ.

15        The appeal conferred by s 24 nevertheless remains a vehicle for the correction of error: Dovuro Pty Ltd v Wilkins (2000) 105 FCR 476 at 487 per Branson J. In Poulet Frais Pty Ltd, their Honours there referred to earlier decisions and continued on to observe that these decisions:

    [45] … recognise that an appeal by way of rehearing is not simply a rehearing of, or second go at, the trial. The appellate court does not consider the matter de novo but, exceptional cases aside, sits to correct error made at first instance. …

16        When addressing the conclusions of the primary judge as to whether the conduct there in issue was misleading or deceptive, their Honours went on to observe:

    [46] The proper approach in the context of a case concerning an alleged contravention of s 52 of the TPA can, in our view, be restated in the following way. Where the determination of whether particular conduct was misleading or deceptive is not straight forward, but rather involves elements of degree, opinion or judgment, a simple preference in the appellate court for a view different from that taken by the trial judge may not carry with it the conclusion of error. The appeal court might conclude either that there could not be said to be only one possible correct determination or that the trial judge had a particular advantage, not shared by the appellate court, in assessing critical matters of nuance and judgment. In such a case, in determining whether or not the trial judge fell into appealable error, the appeal court should not proceed as though on a hearing de novo in which the views of the trial judge carry no weight. Rather the appeal court must give appropriate weight to the views of the trial judge and set aside his or her finding only if persuaded that the finding is wrong. However, if an appellate court is persuaded that particular conduct, found by the trial judge to be misleading or deceptive, was not in fact misleading or deceptive, it thereby identifies error in the decision of the primary judge. Similarly where an appellate court is persuaded that conduct which the trial judge did not consider misleading or deceptive is in fact misleading or deceptive.

17        This approach has, not surprisingly, been subsequently applied: CPI Group Ltd v Stora Enso Australia Pty Ltd [2007] FCAFC 160 at [64] per Branson, Stone and Edmonds JJ. See also Pingel v Toowoomba Newspapers Pty Ltd [2010] QCA 175 at [156] per Applegarth J (diss). To not recognise the appellate role of the Court in correcting error would have the consequence that “the main arena for the settlement of disputes would move from the court of first instance to the appellate court, tending to reduce the proceedings in the former court to little more than a preliminary skirmish”: Coulton v Holcombe (1986) 162 CLR 1 at 7 per Gibbs CJ, Wilson, Brennan and Dawson JJ. See also: Sobey v Nicol and Davies (2007) 245 ALR 369 at [72] per Branson, Lindgren and Besanko JJ.

18        Error may, obviously enough, be found in either the legal or factual conclusions made by a primary judge. An appeal pursuant to s 24 lies to correct either source of error: Saints Gallery Pty Ltd v Plummer (1988) 80 ALR 525. Morling, Pincus and Burchett JJ there concluded that the primary judge was not justified in holding that s 52 of the Trade Practices Act 1974 (Cth) had been breached. When addressing alleged factual error, their Honours said (at 531):

[Counsel for the respondent] also pointed to the difficulty of upsetting factual conclusions on appeal. We are conscious of the respect which needs to be paid even to ultimate as opposed to primary factual views of a trial judge, but also keep in mind the remarks of the majority of the High Court in Warren v Coombes (1979) 142 CLR 531 at 552, 553; 23 ALR 405 at 423:

“… we can see no justification for holding that an appellate court, which, after having carefully considered the judgment of the trial judge, has decided that he was wrong in drawing inferences from established facts, should nevertheless uphold his erroneous decision. … The duty of the appellate court is to decide the case – the facts as well as the law – for itself. In so doing it must recognise the advantages enjoyed by the judge who conducted the trial. …The interest of the community in the speedy termination of litigation might, no doubt, be an argument in favour of the complete abolition of appeals, although that would be far too high a price to pay merely for finality. However, if the law confers a right of appeal, the appeal should be a reality, not an illusion; if the judges of an appellate court hold the decision of the trial judge to be wrong, they should correct it”.

19        The advantages enjoyed by a primary judge must, however, be necessarily taken into account when considering whether factual conclusions expose error.

20        Findings based upon the credibility of witnesses have attracted separate attention: See, for example, Fox v Percy at [23]. It was there held that a finding of fact by a trial judge based on the credibility of a witness may only be set aside upon appeal where incontrovertible facts or uncontested testimony demonstrates that the judge’s conclusions are erroneous or where it is concluded that the decision at the trial was glaringly improbable or contrary to compelling inferences in the case. Gleeson CJ, Gummow and Kirby JJ there observed that

“In every appeal by way of rehearing, a judgment of the appellate court is required both on the facts and the law. It is not forbidden (nor in the face of the statutory requirement could it be) by ritual incantation about witness credibility, nor by judicial reference to the desirability of finality in litigation or reminders of the general advantages of the trial over the appellate process”:

Fox v Percy at [29]. See also: Eric Preston Pty Ltd v Euroz Securities Ltd (2011) 274 ALR 705 at [150], per Jacobson, Foster and Barker JJ; Construction, Forestry, Mining and Energy Union v Alfred (2011) 203 IR 78 at [90] to [99].

21        Previously, in Devries v Australian National Railways Commission (1993) 177 CLR 472 at 479 Brennan, Gaudron and McHugh JJ had expressed the circumstances in which a finding of fact based upon the credibility of witnesses may be set aside on appeal as follows:

More than once in recent years, this court has pointed out that a finding of fact by a trial judge, based on the credibility of a witness, is not to be set aside because an appellate court thinks that the probabilities of the case are against — even strongly against — that finding of fact. If the trial judge’s finding depends to any substantial degree on the credibility of the witness, the finding must stand unless it can be shown that the trial judge ‘has failed to use or has palpably misused his advantage’ or has acted on evidence which was ‘inconsistent with facts incontrovertibly established by the evidence’ or which was ‘glaringly improbable’.

22        See also Walsh v Law Society of New South Wales (1999) 198 CLR 73 at 92 per McHugh, Kirby and Callinan JJ. Although the reliability of findings of fact based upon a trial judge’s assessment of the appearance and demeanour of a witness have been questioned (see, for example, Gillies, P and Galitsky, S, “Is the Judge Sovereign in Fact?” (2006) 28 Australian Bar Review 192), it would be wrong to deny to a trial judge the experience that he accumulates both prior to and subsequent to his appointment. Writing extra-judicially, Justice David Ipp wrote:

Nevertheless, even though the traditional approach is by no means infallible, my observation after more than 40 years experience in the field, is that the time spent over many years observing evidence being led, and witnesses being questioned, is of great assistance to a trier of fact. One cannot help but develop antennae sensitive to deliberate untruths. Although truthful but inaccurate evidence remains extremely difficult to detect, it is beneficial to be aware of this painful fact from one’s own practice of the law. [Justice David Ipp, “Problems with Fact-Finding” (2006) 80 ALJ 667 at 669]

23        Devries, it will be recalled, was one of the three decisions referred to by Gleeson CJ, Gummow and Kirby JJ as being “a reminder of the limits under which appellate judges typically operate when compared with trial judges”: Fox v Percy at [26]. See also Shepherd v R [2011] NSWCCA 245 at [48] per Tobias AJA, Johnson and Hall JJ; Attorney-General (Qld) v Lawrence [2011] QCA 347 at [29] per Muir JA (Fraser and White JJA agreeing).

24        “Consistent with the principles of appellate review”, however, findings of fact “cannot be set aside on appeal merely by identifying evidence which, if accepted, was capable of supporting contrary findings”: Yousif v Commonwealth Bank of Australia (2010) 193 IR 212 at 221 per Kenny, Tracey and Jagot JJ.

25        In the context of the present appeal, some of the grounds of appeal turn upon the construction and application of statutory provisions to findings of fact which are for those purposes accepted by the Appellants; other grounds of appeal seek to directly challenge factual conclusions reached by the primary judge. These grounds are to be resolved in a context where the primary judge reached the findings that he did by reference to:

    adverse findings as to the credit of Mr Frost, and adverse findings as to the reliability of the evidence of Mr Richardson, and an acceptance of the reliability of the evidence of Ms Frost; and

    the absence of documents which it was considered should have been made available. In this respect it may be noted at the outset that an explanation was proffered by Mr Frost that the missing documents had been stolen from a motor vehicle.

26        Each of the two principal issues that continue to divide the parties should be separately considered.

THE ANGAS STREET PROPERTY

27        The Angas Street property was purchased in August 1992 and registered in the name of Ambrose Baker and Partners (Holdings) Pty Ltd.

28        The corporate entity which later became known as Ambrose Baker and Partners (Holdings) Pty Ltd was first registered in June 1986 under the name of Mangana Pty Ltd. The two shares in Ambrose Baker and Partners (Holdings) Pty Ltd were held by Mr and Ms Frost.

29        As pointed out by the primary judge, significance was to be attached to whether the Angas Street property was held on trust: Sheahan v Frost [2011] FCA 356 at [147]-[170]. If the property was held on trust, Mr Frost was an eligible beneficiary and questions would arise as to the manner in which the trust property was to be appropriated; if the property was not held on trust, the proceeds of the winding up of Ambrose Baker and Partners (Holdings) Pty Ltd would be distributed between Mr Sheahan (as trustee in bankruptcy of Mr Frost’s share) and Mr Frost (consequent upon a consent agreement with Ms Frost in earlier proceedings conducted in the Family Court).

30        The primary submission advanced on behalf of Mr Frost on appeal as to there being a denial of procedural fairness is rejected. Notwithstanding the submission advanced by senior counsel on behalf of Mr Frost, it is concluded that the finding made by the primary judge in respect to the Angas Street property being held free of any trust was a finding in respect to matters of which Mr Frost had been properly put on notice. Indeed, it is difficult to resist any conclusion other than that the parties (and especially Mr Frost) well knew that a question to be resolved was whether or not the property was held on trust.

31        The application as first filed, for example, sought a declaration that the Angas Street property was held by Ambrose Baker and Partners (Holdings) Pty Ltd “as registered proprietor in its own corporate right”. The same claim for declaratory relief was repeated in the amended application. The notice stating grounds of opposition to application stated that the respondents “intend to oppose the application” by contending that:

The Respondents say that Ambrose Baker & Partners (Holdings) Pty Ltd holds the property at 252 Angas Street Adelaide in the State of South Australia in its capacity as trustee of the Frost Family Trust and accordingly the applicant should transfer to the First Respondent for the sum of $1.00 the share in that company that vested in him as trustee of the bankrupt estate of the First Respondent.

32        Mr Frost was thereby contending that the Angas Street property was not held by the company “in its own corporate right” but in a capacity as trustee and that he was thereby entitled to a transfer of the property “for the sum of $1.00”. Moreover, counsel appearing for Mr Sheahan before the primary judge clearly raised the question as to the manner in which the Angas Street property was held when he said inter alia:

Same with the Angas Street property. If we’re not successful and your Honour determines that it is held by a trust, then we don’t need to bother with issues of receivership or liquidation …

33        Any submission that Mr Frost was denied procedural fairness in respect to the making of a finding as to whether the property was held on trust or not is, with respect to senior counsel for Mr Frost, without substance.

34        The primary submission advanced on behalf of Mr Frost asserting a denial of procedural fairness is thus rejected.

35        The alternative submission advanced on behalf of Mr Frost was that the primary judge erred in concluding that the Angas Street property was not held on trust.

36        In resolving this alternative submission, the primary judge placed considerable reliance upon such documentary evidence as was available and less weight upon the evidence of Mr Frost. In doing so, His Honour repeatedly was critical of the evidence of Mr Frost and preferred the evidence of Ms Frost. In Sheahan v Frost [2011] FCA 356 at [107] His Honour was also critical of the evidence of Mr Richardson and concluded that he could “not place much weight on [his] evidence where it [was] unsupported by independent documentation or other independently established acts”.

37        The conclusion of the primary judge that the Angas Street property was not held on trust was a finding of fact clearly open to him on the evidence. Some evidence was consistent with the property being held on trust; other evidence supported the opposite conclusion. The mere fact, however, that an appellant can point to some evidence which may support a finding of fact different to that reached by the primary judge does not establish appellable error.

38        Whilst recognising the difficulties confronting any appellant who seeks to disturb findings of fact made by a primary judge – including findings of fact which involve an assessment of the credibility of witnesses – the appellants nevertheless contended that appellable error was exposed in a number of respects.

39        Part of the evidence relied upon by Mr Frost in seeking to upset the factual conclusions of the primary judge included annual returns for Ambrose Baker and Partners (Holdings) Pty Ltd in which the “principal activities” of the company were stated as “trustee” and a bank account in the name of the company “as trustee for the Frost Family Trust”. Although such evidence may have established that the company was a “trustee”, it fell short of stating that the Angas Street property was a trust asset. Other evidence, it was suggested on behalf of Mr Frost, filled that gap. Thus, for example, reliance was placed on an affidavit in which Mr Frost swore that the “family [trust] presently owns the property at 252 Angas Street, Adelaide”.

40        In assessing the entirety of the evidence, the primary judge was ultimately influenced by three factors: the absence of documents recording that the property was held on trust; the presence of documents inconsistent with the property being held on trust; and his assessment of Mr Frost as a witness. The primary judge thus concluded in His Honour’s first judgment as follows:

[50] The FFT was also established in 1986, with Ecrosay as the trustee. Mr and Ms Frost were its directors. Because the partnership with Mr Viney lasted only a few months, he says the FFT never became active. However, he continued to work as a sole practitioner accountant. He says he had resigned as a director of Ecrosay in September 1986, and had sold that company “many years before” in 1986 to a client. He also prepared and had executed documents appointing Ms Frost as a director, but they were never lodged. On Mr Frost’s own evidence, the FFT was left without a trustee almost from the time it was established. None of those steps are confirmed by documents which should exist: there are no minutes or records of Ecrosay or ABPH and no details of the change of directors or shareholders. Nor are there any financial statements of FFT, Ecrosay, or ABPH in relation to the period from 1986 to about 1990.

[51] The next series of steps is difficult to fully understand or accept. On 1 February 1990, Mr Frost says ABPH was appointed trustee of the FFT, through a Deed of Retirement and Appointment of Trustee. In anticipation of that change, he procured the transfer of the share in ABPH allotted to Mr Viney to Ms Frost. The relevant document has not been produced. He says the solicitor who prepared it has lost the file. Some such document was available to Mr Richardson in 1998 but the copy he had access to, has also not been produced.

[52] In about April 1991, Mr Frost says he signed a contract to purchase the Angas Street property as “appointor for The Frost Family Trust”. The purchase price of $185,000 was paid by funds advanced by AIC, secured by the primary AIC mortgage and the secondary AIC mortgage. The contract has not been produced. I do not place much weight upon its absence, except as to the alleged date of the making of the contract. It seems unlikely that the contract was entered into in April 1991. ABPH did not become the registered owner of the Angas Street property until 9 August 1992, when no doubt the funds under the AIC primary mortgage would have become available.

[53] Mr Frost says his fee income as an accountant was largely paid to the FFT by way of rent and under a management fee agreement, and that the FFT paid outgoings on the Angas Street property, accounting practice expenses, and housekeeping to Ms Frost. No management fee agreement has been produced.

…

[55] There are other documents Mr Frost has provided but which are inconsistent with his present claims. In the Supreme Court proceedings, he filed an affidavit on 24 July 1998 deposing to his assets and liabilities, and income. It includes his 1995/96 income tax return showing income from his accounting practice of $29,914 and no deductions (the affidavit refers to $30,000 rent paid to ABPH but that does not appear in the income tax return). A statement to the Australian Taxation Office for the 1995/96 tax year then shows a much higher practice income, and rent expenses of $30,000. The document is undated. The 1996/97 income tax return is similar. Consistent with Mr Frost’s contentions as to the status and equitable ownership of the Angas Street property, is that the property and the debt owed by ABPH to AIC are not listed in that affidavit as Mr Frost’s personal assets and liabilities. Mr Frost’s affidavit also states the FFT as established in 1990, that its then trustee ABPH (under the name ACN 008 102 734 Pty Ltd) holds the Angas Street property on trust, and that the accountancy practice pays rent to the trustee.

[56] A further affidavit of 12 August 1998 was filed in the Supreme Court proceedings. It enclosed the profit and loss statements of the accounting practice for the financial years of 1995, 1996 and 1997. The statements referred to above are straightforward: essentially fees, less rent, wages and general expenses. There is no reference to a service company. There are no accounts of any service company, whether as trustee or otherwise and neither for any of the trustee of the FFT, or of the FFT itself. Despite Mr Frost’s statement that an arrangement was in place to provide payment to a service company to provide staff and office services, there is no evidence of this contained in the statements. The 1997 statement has the same general detail and attracts the same comment. It has no payment for rent, but an expense of $46,450 for “Professional Publication”. I accept Mr Frost’s evidence that that particular item should relate to rent. The money payable to AIC, each year, on the information provided by Mr Frost, was about $20,350 so there should have been a substantial income of the FFT each year to be accounted for by its Trustee. There are no contemporaneous income tax returns of ABPH as Trustee, nor other supporting financial returns of ABPH. That same affidavit also enclosed Mr Frost’s statement of affairs in his bankruptcy. It too referred to the landlord as ABPH (under the changed name) and a rental payment of $3000 per month, and to the FFT. It is undated and unsigned. The rental specified does not accord with the annual figure of $46,450. Nor does it accord with the only recurrent monthly payment of $1685 appearing in the bank statements.

[57] There is also a statement of assets provided in 1997 to the ANZ Bank by Mr Frost. At the time, Mr Frost was applying to the bank for funds to support the acquisition of a property at Cullen Bay, Darwin. Within that documentation he included the value of and borrowings in relation to the Angas Street property as categorised as his personal assets and liabilities. He thought that was appropriate to show his “net worth”. Clearly, it was inaccurate to do so. I place some weight on that document as illustrating Mr Frost’s looseness of expression about the real state of affairs, and of any arrangements he thought he had put in place or intended to put in place. I do not treat that document as itself constituting an admission by Mr Frost that the Angas Street property was his personal asset.

41        The primary judge went on to observe (at [59]) that in one respect “… Mr Frost showed a degree of cunning in his preparedness to change the trustee of the FFT or its name in an endeavour to avoid such a liability”.

42        His Honour went on to conclude:

[154] In my view the absence of critical documentation and the questionable reliability of Mr Frost’s evidence, supports the conclusion that ABPH did not acquire the Angas Street property as trustee for the FFT.

43        An appeal is not the occasion for an appellate court to merely repeat selected passages from the judgment under appeal. In the present appeal, however, it is respectfully considered that the detailed account of the evidence by the primary judge exposes a careful and considered analysis of the evidence. That account exposes no appellable error.

44        Mr Frost’s challenge to the decision of the primary judge in respect to the Angas Street property is thus rejected.

THE TWO MORTGAGES

45        The two mortgages in issue were mortgages executed by Mr Frost and his former wife in respect to a property they had previously purchased as joint tenants. The property was described as the Mayflower Crescent property. The mortgages were granted in January 1999 and February 2000.

46        Ms Frost left the Mayflower Crescent property in February 2003. Mr and Ms Frost were divorced in February 2004.

47        The primary judge concluded that the two mortgages were void by reason of s 121 of the Bankruptcy Act. That section provided at the relevant time as follows:

Transfers that are void

(1)    A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:

(a)    the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and

(b)    the transferor’s main purpose in making the transfer was:

(i)    to prevent the transferred property from becoming divisible among the transferor’s creditors; or

(ii)    to hinder or delay the process of making property available for division among the transferor’s creditors.

Showing the transferor’s main purpose in making a transfer

(2)    The transferor’s main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.

Other ways of showing the transferor’s main purpose in making a transfer

(3)    Subsection (2) does not limit the ways of establishing the transferor’s main purpose in making a transfer.

Transfer not void if transferee acted in good faith

(4)    Despite subsection (1), a transfer of property is not void against the trustee if:

(a)    the consideration that the transferee gave for the transfer was at least as valuable as the market value of the property; and

(b)    the transferee did not know that the transferor’s main purpose in making the transfer was the purpose described in paragraph (1)(b); and

(c)    the transferee could not reasonably have inferred that, at the time of the transfer, the transferor was, or was about to become, insolvent.

Refund of consideration

(5)    The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.

What is not consideration

(6)    For the purposes of subsections (4) and (5), the following have no value as consideration:

(a)    the fact that the transferee is related to the transferor;

(b)    if the transferee is the spouse or de facto spouse of the transferor—the transferee making a deed in favour of the transferor;

(c)    the transferee’s promise to marry, or to become the de facto spouse of, the transferor;

(d)    the transferee’s love or affection for the transferor.

Exemption of transfers of property under debt agreements

(7)    This section does not apply to a transfer of property under a debt agreement.

Protection of successors in title

(8)    This section does not affect the rights of a person who acquired property from the transferee in good faith and for at least the market value of the property.

Meaning of transfer of property and market value

(9)    For the purposes of this section:

(a)    transfer of property includes a payment of money; and

(b)    a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person; and

(c)    the market value of property transferred is its market value at the time of the transfer.

48        Notwithstanding the submissions advanced by senior counsel on behalf of Mr Richardson, it is respectfully concluded that Mr Richardson was well and truly on notice that the issues to be resolved were those in fact dealt with in the reasons for decision of the primary judge. The question of whether the two mortgages fell within s 121 and were therefore void, and the consequences of such findings, were squarely raised with him.

49        Although there may well have been a late abandonment of reliance upon s 120 of the Bankruptcy Act, reliance upon s 121 was made in the original application dated 30 November 2009 and again in the amended application dated 5 February 2010. Equally of importance is the fact that the notice stating grounds of opposition to application stated in relevant part as follows:

If the applicant is entitled to relief pursuant to Section 120 or Section 121 of the Act, which is denied, then the applicant must, by operation of Section 120(4) or Section 121(5) of the Act, refund to the Second Respondent the sum of $362,106.16 being the consideration given by the Second Respondent and interest thereon.

50        The claim that a payment of $362,106.16 should be made pursuant to s 121(5) must necessarily take issue with the declaratory relief sought by Mr Sheahan that the mortgages were “void” pursuant to s 121(1). The claim to payment must also accept that Mr Richardson was “the transferee” and that the two mortgages were in fact a “transfer” for the purposes of s 121(5). Moreover, at the outset of the hearing before the primary judge, then counsel for Mr Richardson submitted (in part) as follows:

… As far as the section 121 point is concerned, that – it’s not just the question of whether or not they should be avoided, pursuant to the operation of section 121, it’s the consequence of avoidance that we have flagged in our notice of opposition and that is very much a live issue. We say that Mr Richardson gave full value for the mortgages and that therefore, he should – if the mortgages were void because he had reason or knew of insolvency, or there was, in fact, insolvency from which one would infer the necessary element for the purpose of the section, then it follows, as night follows day, that the same amount of money must be paid to Mr Richardson as represents the value of the work he did after receiving the mortgages or in consideration for the mortgages.

51        Given this identification of the issues, it is difficult to see how senior counsel for Mr Richardson could realistically contend that there had been any lack of certainty in the issues to be addressed. His submission as to there being a denial of procedural fairness is, accordingly, rejected.

52        The remaining challenges on the part of Mr Richardson to the primary judge’s conclusions in respect to the two mortgages presented, with respect, an element of uncertainty.

53        The notice of appeal, prior to its amendment, relevantly contained the following grounds of appeal, namely:

The Learned Trial Judge erred:

1.1    In finding that Ambrose Baker & Partners (Holdings) Pty Ltd held the property comprised and described in Certificate of Title Register Book Volume 1822 Folio 199 being the land situated at 252 Angas Street Adelaide in the State of South Australia, as registered proprietor of the fee simple in its own right as not as a trustee.

1.2    In finding that Mortgage No 8645792 dated 27th January 1999 and Mortgage No 8843522 dated 1st February 2000 both registered on Certificate of Title Register Book Volume 5579 Folio 181 granted to Paul Anthony Richardson (the Richardson Mortgages) in respect of land situate at 29 Mayflower Crescent Hallett Cove in the State of South Australia were void against John Sheahan in his capacity as trustee of the bankrupt estate of Allen Gordon Frost pursuant to the provisions of section 121 of the Bankruptcy Act 1966 (Cth).

1.3    In finding (paragraph 23) that the Second Respondent did not pay to the First Respondent or Mrs Frost any consideration for the grant of either of the two Richardson Mortgages.

54        The notice of appeal (as amended) deleted ground 1.3, retained the former ground 1.1 and 1.2 and also included the following proposed new grounds, namely (without alteration):

4A.    The learned Judge erred in finding that there was no consideration for the grant of the Richardson mortgages.

4B.    The Leaned Judge erred as a matter of law in finding that the grant of the mortgages constituted a transfer of property for the purposes of section 121 of the Bankruptcy Act 1966 (Cth).

55        Reliance upon ground 4A was abandoned during the course of the hearing of the appeal. The following additional grounds were also pressed (again, without alteration):

4.    The learned Judge erred in refusing to accept the tender of affidavit of Paul Richardson referred to in paragraphs [6] and [7] of his reasons of 21st June 2011. The learned Judge ought to have allowed the evidence, not as a reopening of the appellant’s case as to whether the mortgages were enforceable, but as part of the second stage as to what orders ought be made consequent on a finding that the mortgages were void, being in particular the question of what payment should be made pursuant to section 121(5) of the Bankruptcy. Alternatively the learned Judge ought to have made an order that there be an inquiry as to the appropriate amount of consideration to be paid by the trustee pursuant to section 121(5) of the Bankruptcy Act.

5.    The learned Judge erred as a matter of procedural fairness, or alternatively in law by acting in the absence of proper evidence, in making the finding referred to in paragraph [19] of his reasons of 21st June 2011 that the amount of legal costs were offset by the value of serviced offices provided to Mr Richardson from 1997.

56        Notwithstanding these uncertainties and the various ways in which the grounds of appeal had been formulated, the appeal proceeded upon the basis that the remaining challenges to the conclusions of the primary judge in respect to the two mortgages focused upon:

    whether consideration was in fact provided by Mr Richardson in return for the mortgages; and

    whether a mortgage constitutes a “transfer of property” within the meaning of and for the purposes of s 121(1) of the Bankruptcy Act. This was not an argument relied upon before the primary judge.

57        Neither of these remaining challenges, it is respectfully concluded, should be accepted.

58        The conclusion that the mortgages were a “sham” and that no consideration was in fact provided by Mr Richardson was essentially a finding of fact as made by the primary judge. Senior counsel on behalf of Mr Richardson again accepted the difficulties of challenging this finding of fact on appeal. But he did contend that the challenges advanced should nevertheless prevail.

59        At the forefront of his written submissions, senior counsel placed reliance upon the legal work that had been performed by Mr Richardson for Mr Frost. It was this work which it was submitted provided the consideration given in return for the mortgages. This work, senior counsel submitted, was evidenced by an affidavit sworn by Mr Richardson on 6 May 2010 and included:

    work undertaken in respect to litigation being conducted in the Supreme Court of South Australia, including a proceeding seeking to “freeze” the assets of Mr Frost;

    work undertaken in attending a hearing before the Tax Agents Board; and

    work undertaken in respect to an application for Special Leave to Appeal to the High Court of Australia.

60        In support of a submission that valuable consideration was indeed given by Mr Richardson, reliance was also placed (inter alia) upon:

    the terms of the mortgages, reciting that legal work had in fact been performed; and

    a file note to Mr Frost from Mr Richardson dated 28 July 1998.

61        That file note stated in part (without alteration) as follows:

After speaking with JC, it is clear that you can dispose of assets to pay my account or I can put a security over your assets to security my fees.

I will work out a bill in due course and put a mortgage over your half of your house for the work done. You will need to speak to Robyn about this as she also has to agree. If more work is done then I will put yet another mortgage over the house.

If you agree with the above, then initial this note and I will place it on the file. If you wish to speak with JC about the above. Without the security I will be unable to do further work. As long as the above and any further security we agree is put into place then I will continue to work.

62        Evidence was also given as to Mr Richardson conducting his practice from the Angas Street property.

63        The conclusions of the primary judge in respect to the two mortgages are obviously addressed in his initial reasons for decision. His Honour also referred to his conclusions, however, in his second judgment. Given the acceptance by the parties – and, in particular, by Mr Richardson – that the two judgments of the primary judge could be read together, reference for present purposes need only be made to those reasons set forth in the second judgment. His Honour there reviewed the entirety of the evidence and concluded (in part) as follows:

[19] At the time of the first Richardson mortgage, Mr Richardson had provided extensive legal services to Mr Frost. But I find that there was no amount owing by Mr Frost to Mr Richardson in respect of those services because, having regard to the arrangement between them, the value of the provision of serviced offices by Mr Frost to Mr Richardson was of such a value as to set off or amount to payment of those costs. In the primary reasons, I expressed the view that it was difficult to quantify the value of the serviced offices. That remains the case. However, doing the best I can, I consider that those costs were offset by the value of the serviced offices provided to Mr Richardson from 1997 in any event. I have adopted a quite conservative estimate of the value of those serviced offices for that purpose. I have also assumed that the value of the legal work then done by Mr Richardson for Mr Frost was approximately $30,000. In respect of the balance of the costs incurred by Mr Richardson in relation to the Supreme Court proceedings, that is the costs to be incurred after the first Richardson mortgage, I will make more explicit what I thought was implicit in the primary reasons for decision. In my view, neither Mr Frost nor Mr Richardson intended that it was a condition of Mr Richardson continuing to provide legal services to Mr Frost that the first Richardson mortgage should be given. I am satisfied, and I find, that it was clearly understood between them that Mr Richardson would continue to provide legal services to Mr Frost in relation to the ongoing conduct of the Supreme Court proceedings whether or not the first Richardson mortgage was given. I find that the first Richardson mortgage was given by Mr Frost to Mr Richardson for the purpose expressed in s 121(1)(b) to the knowledge of Mr Richardson. I have made in the primary judgment findings about the reliability of the evidence of Mr Frost and Mr Richardson. I do not accept their evidence that either of the two Richardson mortgages was granted because Mr Richardson was owed legal costs by Mr Frost, nor that but for the grant of those mortgages, he would no longer continue to provide legal services to Mr Frost or would forbear from taking action to recover any legal costs outstanding. To recapitulate what was said in the primary judgment, in reaching that conclusion I have taken into account my overall views as to the reliability of their evidence, the nature of the relationship between them, the ongoing arrangement to provide serviced offices (as the evidence now shows, an arrangement that has lasted for many years), Mr Richardson’s knowledge from the time he first commenced acting for Mr Frost that Mr Frost could not pay his legal fees, the file notes of Mr Richardson of 27 January 1998 and 31 January 2000, Mr Richardson’s understanding that there was little or no equity in the Mayflower Crescent property in any event, the unsolicited discharges of the mortgages, and the fact that they were given to Ms Frost, the failure of Mr Richardson at any time before those proceedings to either submit a bill of costs to Mr Frost or to attempt to recover any costs from him, including following the settlement of Mr Frost’s claim against his former solicitors and following the matrimonial settlement, and features of the terms of the first Richardson mortgage.

[20] I find that Mr Richardson was aware of Mr Frost’s view, and shared it, that the purpose of the mortgage was to make it difficult for other creditors of Mr Frost to recover from him. Mr Richardson’s subsequent conduct in relation to recovering his fees from Mr Frost, his conduct in relation to preparing the discharges of the two Richardson mortgages and having them given to Ms Frost tends to confirm that.

[21] In other words, put bluntly, the effect of my findings more cautiously expressed in the primary judgment and as expanded upon above is that the first Richardson mortgage was a sham.

64        His Honour also addressed questions of credibility relevant to his findings in respect to the two mortgages. Thus, and by way of example only, when addressing whether Mr Richardson had at one point in time decided “to either be paid for the work done or alternatively to call in the two mortgages and thus be paid”, the primary judge referred to two discharges of mortgages given to Mr Frost by Mr Richardson in 2002 so that they could in turn be passed on to Ms Frost: Sheahan v Frost [2011] FCA 356 at [81] to [83]. His Honour there refers to inconsistencies in Mr Frost’s evidence. His Honour immediately thereafter refers to the theft of Mr Frost’s briefcase from his unlocked car whilst it was outside the Angas Street property. It was in that context that the primary judge observed:

[85] Mr Frost gave his evidence in an unpersuasive manner. He positively avoided any eye contact with counsel for Mr Sheahan and sometimes answered questions in an apparently deliberatively unresponsive manner. I discerned very clear animosity on Mr Frost’s part to both Mr Sheahan and to the plaintiffs in the Supreme Court proceedings.

[86] There are other matters which cause me to doubt the reliability of Mr Frost’s evidence on critical issues. Most obviously, there is the clear lack of documentation which should have existed and which should still exist and be recoverable (even in part) from other sources …

65        His Honour went on to conclude that he was “not prepared to act on Mr Frost’s evidence where it conflicts with other evidence, unless confirmed by documentary or other cogent evidence”.

66        The primary judge was presented with evidence which supported a contrary conclusion to that in fact reached, and a conclusion that consideration was indeed given by Mr Richardson. However, there was also evidence which supported the conclusion ultimately arrived at. His Honour, inter alia, carefully considered the evidence – including the evidence as to the legal work said to be undertaken by Mr Richardson, and the provision by Mr Frost of accommodation from which Mr Richardson could conduct his practice. His Honour formed a conclusion as to the “purpose” for which the mortgages were given as that term is employed in s 121(1)(b) of the Bankruptcy Act.

67        Each of the findings of fact which led to the conclusion of the primary judge that the mortgages were a “sham”, as expressed in paragraph [21] of His Honour’s second judgment, were findings of fact open to him on the evidence. Moreover, in making each of those findings of fact no appellable error is discernible. Again it is to be recalled that the mere existence of evidence supporting a contrary conclusion to that reached by a primary judge does not in itself establish appellable error. The need to establish error remains. And Mr Richardson has been unable to expose any error in the present conclusions of the primary judge. To the not inconsiderable extent to which the primary judge relied upon his assessment as to the credibility of Mr Frost in reaching his findings of fact, His Honour’s reasons go well beyond a mere statement as to his reluctance to accept the “reliability” of Mr Frost’s evidence; those reasons set forth instances where Mr Frost’s evidence cannot be accepted because of inconsistency in the accounts provided by Mr Frost and contain observations as to why the primary judge regarded Mr Frost’s evidence as “unpersuasive”.

68        Nor is the argument to be accepted that a mortgage does not constitute a “transfer of property” for the purposes of s 121(1). In rejecting this final argument, it should be noted that the tension between a claimed entitlement to payment of $362,106.16 pursuant to s 121(5), and the submission that the two mortgages did not fall within s 121(1), was not fully explained. But that matters not.

69        A mortgage, it is concluded, is a “transfer of property” for the purposes of s 121(1). The primary judge, in reaching the same conclusion, relied upon Pastro v Official Trustee in Bankruptcy [2000] FCA 744. His Honour was correct in doing so. As was pointed out at first instance in Pastro, the “live issues” were whether there was an intent to defraud creditors and whether there was an absence of “good faith”: Official Trustee v Pastro [1999] FCA 1631 at [51]. The mortgages in that case were declared void. The appeal was dismissed by Ryan, Branson and Lehane JJ. Notwithstanding the absence of argument as to whether a mortgage was a “transfer of property”, all of the judges involved proceeded upon that basis. They were correct to have done so. The provisions there in issue, of course, were those which followed the 1996 amendments. On any view, however, a mortgage creates an interest in property and it is that interest which is transferred.

70        The primary judge, it should be noted, did not set forth in his reasons for either decision the text of s 121(9). That, obviously enough, was because the “transfer of property” argument was not an argument advanced before His Honour for resolution. His Honour’s sole reliance upon the decision in Pastro was thus appropriate. Now that the argument is advanced as a Ground of Appeal, His Honour’s conclusion is only further supported by Peldan v Anderson (2006) 227 CLR 471. Gummow A-CJ, Kirby, Hayne, Callinan and Crennan JJ there said:

[26] As remarked earlier in these reasons, provisions in the terms of s 121(9) appeared at the same time as s 120(7) and s 122(8) of the Bankruptcy Act. It is to be expected that the subsection has the same meaning in each provision. In the Explanatory Memorandum to the House of Representatives upon the Bill for the 1996 Act, it was said at [84.10] of the inclusion of the provision in the undervalued transactions provision (s 120) that: “where a person creates an interest in property, for example by allowing a mortgage or charge to be created over it, the person will be taken to have transferred property, for the purposes of the section.” Other examples were given, including the conferral of a trademark or patent licence. Further instances would include the grant of a lease over freehold property and a declaration of a trust over property vested in the “transferor”. In all of these cases, the same act both creates the property in question and vests it in the other person.

71        See also: Sutherland v Brien (1999) 149 FLR 321 at 325 to 326 per Austin J.

72        Mr Richardson’s challenge to the decision of the primary judge is thus rejected. It is unnecessary to address a Notice of Contention as filed on 1 August 2011 on behalf of the respondent.

CONCLUSIONS

73        The appeal of Messrs Frost and Richardson is to be dismissed.

74        The appeal of both Messrs Frost and Richardson amounts to no more, with respect, than a thinly disguised attempt to invite this Court to reach a contrary factual conclusion to that reached by the primary judge. In the absence of any discernible error committed by the primary judge, senior counsel for Messrs Frost and Richardson impermissibly sought to re-canvass the evidence that was before the primary judge with a view to persuading this Court not that His Honour’s decision was vitiated by legal or factual error, but simply, that different factual conclusions should be reached.

75        Even in the absence of His Honour’s reliance upon his own assessment as to the credibility of witnesses, His Honour’s factual conclusions based upon the balance of the evidence are difficult to impugn. When the primary judge’s assessments of credibility are also taken into account, any attempts on the part of Messrs Frost and Richardson to challenge those conclusions becomes insurmountable. It would be a mistake to attempt any review of the primary judge’s factual conclusions divorced from his assessment as to the credibility of witnesses. Those assessments of credibility formed an important part of His Honour’s reasoning process and the conclusions reached. But such a review provides a useful background against which the influence of credibility findings can be tested. Such a review serves to assist in reaching a conclusion as to whether findings of fact which may otherwise not have been open to the primary judge only became supportable when assessments as to credibility were overlaid. In this proceeding the findings of fact made by the primary judge, it is concluded, are supported by his assessment of the entirety of the evidence and only further supported by his adverse assessments as to the credibility of Messrs Frost and Richardson.

76        There is no reason why costs should not follow the event such that the appellants are to pay the costs of the respondent. Had the appeal on the part of Mr Richardson been successful, separate consideration would need to have been given to the extent of any costs order that may have been made in his favour given the fact that he was apparently also the solicitor on the record. A litigant in person, it will be recalled, is not entitled to his costs to the extent that they are referable to his own time (Neeson v Chief Executive Officer of Centrelink [2006] FCA 1107 at [24], 154 FCR 489 at 501) but is entitled to his disbursements (Australian Super Pty Ltd v Woodward [2009] FCAFC 168 at [59] to [61], 262 ALR 402 at 414 per Finkelstein, Greenwood and Logan JJ). Notwithstanding conflicting authorities, it has been held in this Court that costs may be awarded to a solicitor acting for himself: A & D Douglas Pty Ltd v Lawyers Private Mortgages Pty Ltd [2006] FCA 690 at [10] per Dowsett J; Re New Tel Ltd (in liq) (No 4) [2008] FCA 1085. But Mr Richardson’s lack of success renders it unnecessary to consider further the issue of any costs to which he may have been entitled.

ORDERS

    The Orders of the Court are:

1.    The appeal be dismissed.

2.    The Appellants pay the costs of the Respondent.

Associate:

Dated:    28 March 2012