Official Trustee in Bankruptcy v Racovitis, Dimitrios & Anor [1995] FCA 959

C A T C H W O R D S

BANKRUPTCY - mortgage within relation back period of bankruptcy - whether title of mortgagee void as against trustee in bankruptcy - whether mortgage given "for valuable consideration" - whether forbearance to sue - avoidance of settlement under s.120 Bankruptcy Act (Cth) discussed.

Bankruptcy Act 1966 (Cth) - ss.120(1), 120(7)

Transfer of Land Act 1958 (Vic)

In Re Carter & Kenderdine's Contract [1897] 1 Ch 776

Wigan v English & Scottish Law Life Assurance Association [1909] 1 Ch 291

Re Hyams (1971) 19 FLR 232

In Re Dundas, Moss v Dundas (1933) 6 ABC 265

Lintner Group Limited v Goldberg (1992) 7 ACSR 580

Re Brall. Ex parte Norton [1893] 2 QB 381

Re Vansittart. Ex parte Brown [1893] 2 QB 377

Re Theodore Charles Trautwein; Richardson v Theo William Nugent Trautwein (1944) 14 ABC 61 Re Macdonald. Ex parte McCullum [1920] 1 KB 205

Re Simms. Ex parte Sheffield [1896] 3 Mans 340

Re Parry. Ex parte Salaman [1904] 1 KB 129

Re Barton; Ex parte Official Receiver v Barton (1983) 52 ALR 95

Official Trustee in Bankruptcy v Martin (1990) 24 FCR 504

Re Pope. Ex parte Dicksee [1908] 2 KB 169

Bloomfield v Rummage [1897] 23 VLR 365

Re Johnstone; Ex parte Cole (1984) 3 FCR 32

Re Trimbole; Ex parte Donnelly, (unreported, Beaumont J., 11 July 1986)

Re Douglas; Ex parte Starkey (1987) 15 FCR 475

Glegg v Bromley [1912] 3 KB 474

Re McCauley. Ex parte Official Receiver (1931) 4 ABC 77

N A Kratzmann Pty Limited (In Liq) v Tucker (1966) 123 CLR 257

THE OFFICIAL TRUSTEE IN BANKRUPTCY v DIMITRIOS RACOVITIS and

KATINA RACOVITIS

No VG 566 of 1995

Davies, Lockhart & Spender JJ

28 November 1994

Sydney (heard in Melbourne)

IN THE FEDERAL COURT OF AUSTRALIA )

)

BANKRUPTCY DISTRICT OF THE ) No VG 566 of 1995

)

STATE OF VICTORIA )

)

GENERAL DIVISION )

On appeal from a single judge of the

Federal Court of Australia

BETWEEN: THE OFFICIAL TRUSTEE IN BANKRUPTCY

Appellant

AND: DIMITRIOS RACOVITIS

First Respondent

KATINA RACOVITIS

Second Respondent

Coram: Davies, Lockhart & Spender JJ

Date: 28 November 1995

Place: Sydney (heard in Melbourne)

MINUTES OF ORDER

THE COURT ORDERS THAT:

1. The appeal be dismissed.

2. The appellant pay the respondents' costs of the appeal.

NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

IN THE FEDERAL COURT OF AUSTRALIA )

)

BANKRUPTCY DISTRICT OF THE ) No VG 566 of 1995

)

STATE OF VICTORIA )

)

GENERAL DIVISION )

On appeal from a single judge of the

Federal Court of Australia

BETWEEN: THE OFFICIAL TRUSTEE IN BANKRUPTCY

Appellant

AND: DIMITRIOS RACOVITIS

First Respondent

KATINA RACOVITIS

Second Respondent

Coram: Davies, Lockhart & Spender JJ

Date: 28 November 1995

Place: Sydney (heard in Melbourne)

REASONS FOR JUDGMENT

Davies & Spender JJ: This is an appeal from a judgment of a judge of the Court, Olney J, in which his Honour dismissed an application brought by the Trustee in Bankruptcy of Denise Margaret Racovitis.

The estate of Mrs Racovitis was sequestrated on 4 July 1989. During the 2 years prior to that date, namely on 22 March 1988, Mrs Racovitis had transferred her joint interest in property at 2 Sherwood Drive, Thomastown, to her husband, Con Racovitis. The trial Judge found that that transfer was void as against the trustee by reason of s.120(1) of the Bankruptcy Act 1966 (Cth). In the appeal, there was no dispute as to that finding.

On 22 August 1988, Mr Racovitis had mortgaged the property to Australian Guarantee Corporation Limited ("AGC"). In late December 1988 or early January 1989, the respondents, Dimitrios Racovitis and Katina Racovitis, who were the parents of Con Racovitis, provided two bank cheques totalling $25,508.82 to AGC to pay out the debt. A discharge of mortgage dated 20 January 1989 was executed by AGC and was lodged on 25 January 1989. A mortgage of the property from Con Racovitis to his parents, Dimitrios and Katina Racovitis, as mortgagees, was executed and dated 25 January 1989. The mortgage secured the sum of $37,345.69 then owing by Mr Con Racovitis to his parents.

Section 120(7) of the Bankruptcy Act provides:-

"Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has, in good faith and for valuable consideration, purchased or acquired from the persons entitled to the benefit of the settlement, covenant or contract or from the trustee of the settlement the money or property the subject of the settlement, covenant or contract or an interest in that money or property."

The provisions of s.120 give effect to principles applied under s.47 of the Bankruptcy Act 1883 (UK), under which it was held that a voluntary settlement was not void as against the settlor's trustee in bankruptcy from its date, but was void only against the trustee from the time when his title accrued and that, if before that time, the property had been transferred to a purchaser in good faith and for valuable consideration, the title of the purchaser will be valid as against the trustee. In In Re Carter & Kenderdine's Contract [1897] 1 Ch 776 at 782, Lindley LJ said:-

"It would be a strange mode of legislation to say that you can impeach a settlement from the date of its execution even as against bona fide purchasers for value without notice. Such a legislation would be at variance with the whole spirit of the bankruptcy law ever since we have had one. I have no doubt that Vaughan Williams J. was perfectly correct, and that in a case like this every bona fide purchaser gets a good title."

At 783, A L Smith LJ said:-

"... it never could have been the intention of the Legislature that bona fide purchasers for value should have their title impeached by what they have done in good faith."

At 784, Rigby LJ said:-

"I have not the slightest doubt, in my own mind, that In re Holden (1) 20 Q.B.D. 43 was correctly decided; and it comes to this, that every equity which has been acquired before the act of bankruptcy, which is the beginning of the bankruptcy, is to be respected, and is not in any way hit or interfered with by s.47."

Thus, a question which arose before the trial Judge was whether the mortgage in favour of Mr & Mrs Racovitis Snr was valid as against the trustee, having been entered into by them in good faith and for valuable consideration or was void as against the trustee, not having been so made.

Valuable consideration may be express or it may be implied from the facts. In Wigan v English & Scottish Law Life Assurance Association [1909] 1 Ch 291, Parker J said at 297-8:-

"It appears to me to be reasonably clear that the mere existence of a debt from A. to B. is not sufficient valuable consideration for the giving of a security from A. to B. to secure that debt. If such a security is given, it may of course be given upon some express agreement to give time for the payment of the debt, or to give consideration for the security in some other way, or, if there be no express agreement, the law may very readily imply an agreement to give time."

In Re Hyams (1971), 19 FLR 232, Gibbs J cited from Wigan's case and went on to say at 254:-

"In considering whether an agreement to forbear can be implied, or whether the creditor has in fact forborne from taking action on the strength of the security, it is an important matter that the creditor has requested the giving of the security. If the creditor has requested the security, the inference is that if he had not obtained it he would have taken action which he forbears to take on the strength of the security: Glegg v Bromley [1912] 3 K.B. 474, at p.491. Similarly, the fact that a security was given at the request and demand of the creditor was held in Re Dundas; Moss v. Dundas (1933) 6 A.B.C. 265, at p.267, to support an implication of an agreement to forbear."

The trial Judge accepted that sums totalling $37,345.69 had in total been lent by Mr & Mrs Racovitis Snr to their son. The sequence of events was such that one would imply that the $25,508.82 which was lent at the end of December 1988 or early January 1989 was lent under an agreement that the sum would be used to pay out AGC and that a new mortgage would be executed in favour of Mr & Mrs Racovitis securing all sums payable to them. The two bank cheques totalling $25,508.82 were delivered by Mr Dimitrios Snr to AGC and the new mortgage was dated with the date on which AGC's discharge of mortgage was lodged for registration.

The inference that flows from the sequence of events was in fact deposed to by Mr & Mrs Racovitis Snr. Although their affidavits were unduly brief, Mr Dimitrios Racovitis' affidavit, which was confirmed by affidavits of his wife and his son, deposed inter alia that he "made payment at the request of Con Racovitis, and secured the amounts paid by the relevant mortgage." There was no cross-examination of the deponents, and thus no challenge was made to this rather brief statement.

If there were any doubt about the matter, which we think there is not, the Court would imply consideration from the fact that the mortgage was given and there was a forbearance to sue. In Wigan's case at 303, Parker J said that:-

"... in order to have a consideration for a further security there must be an agreement, express or implied, to give time or some further consideration, or else there must be an actual forbearance which ex post facto may become the consideration to support the deed."

This principle was applied in In Re Dundas, Moss v Dundas (1933) 6 ABC 265 where Northmore J, after referring to the principles enunciated by Parker J in Wigan's case, implied consideration from the fact that the second security was not only given with the knowledge of the wife, but was given at her request and her demand and time was given for the payment of the debt which was due.

In the present case, moreover, the giving of time, or the forbearance to sue, was express for whereas in the absence of any agreement as to time to pay, the debts would have been payable on demand. The mortgage of 25 January 1989 provided that the principal sum of $37,345.69 was to be repaid on 31 January 1991, that is to say, in just over two years time.

The good faith of Mr & Mrs Racovitis Snr was not challenged and the trial Judge was so informed.

On this evidence, his Honour understandably held that Mr & Mrs Racovitis Snr had established that there was good faith on their part and that they had given valuable consideration for the mortgage.

In the appeal, counsel for the Trustee referred to a number of payments which had been made by Mr & Mrs Racovitis Snr to their son and his wife jointly and also to their son and another son, George Racovitis jointly, and to repayments of some of those amounts. Counsel said that $20,000 of an outstanding loan to Con Racovitis and George Racovitis was repaid in late December 1988 and with this sum and other moneys, Mr & Mrs Racovitis were able to make up the $25,508.82. Counsel submitted that the $20,000 was repaid to allow this to occur. Counsel referred to the lack of any detailed evidence in the affidavits before the Court with respect to any conversations or dealings between Mr & Mrs Racovitis Snr and their son or sons. He submitted that any consideration given was trivial or insubstantial.

However, as Mr Dimitrios Racovitis deposed to the moneys which had been lent to his son and deposed that those sums had been secured by the mortgage and as the mortgage transaction was on the face of it an ordinary transaction securing moneys lent, most of the moneys being lent to pay out an existing mortgagee, there was evidence before the Court which, if not challenged, justified the conclusion that the transaction was carried out in good faith and for valuable consideration. No
challenge was made to that evidence. It would appear, indeed, that on the facts of the case, the consideration for the transaction could not have been successfully challenged without also challenging the parties' good faith. Yet, good faith was conceded.

It is unnecessary to discuss the other issues which were briefly touched upon in the course of argument, such as the operation of s.139ZQ of the Bankruptcy Act and the operation of s.120(1) of the Bankruptcy Act in relation to a mortgage under the Transfer of Land Act 1958 (Vic).

In our opinion, the appeal should be dismissed with costs.

I certify that this and the 6 preceding pages

are a true copy of the reasons for judgment herein of

Associate:

Date: 28 November 1995

IN THE FEDERAL COURT OF AUSTRALIA )

)

VICTORIAN DISTRICT REGISTRY ) No. VG 566 of 1995

)

GENERAL DIVISION )

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: THE OFFICIAL TRUSTEE IN BANKRUPTCY

Appellant

AND: DIMITRIOS RACOVITIS

First Respondent

KATINA RACOVITIS

Second Respondent

COURT: Davies, Lockhart and Spender JJ

DATE: 28 November 1995

PLACE: Sydney

REASONS FOR JUDGMENT

LOCKHART J.

This appeal from the judgment of a judge of the Court (Olney J.) concerns s. 120 of the Bankruptcy Act 1966 ('the Act'). His Honour dismissed an application by the appellant, the Official Trustee in Bankruptcy. It sought an order that the first and second respondents, Dimitrios and Katina Racovitis (husband and wife), execute and deliver to the appellant a registrable partial discharge of the mortgage, registered number P515914S ('the mortgage'), of the appellant's half share in a block of land at 2 Sherwood Drive, Thomas Town, Victoria ('the property'), and take all steps necessary to effect the registration of the discharge.

I shall state the relevant undisputed facts.

The property was acquired originally in the joint names of Denise Margaret Racovitis ('the bankrupt'), who was named in the proceeding at first instance as the third respondent, but who took no part in the proceeding and is not a party to the appeal, and her husband, Con Racovitis, who is not and never has been a party to the proceeding. The transfer of the property to them was registered on 27 March 1979.

On 22 March 1988, the bankrupt executed a transfer of her half interest in the property as tenant in common to Con Racovitis. The transfer was registered on 29 March 1988 (number N376401T). The consideration for the transfer was expressed as 'the desire of Con Racovitis and Denise Margaret Racovitis to transfer the property to Con Racovitis'.

On 20 July 1988, Con Racovitis executed a mortgage over the property in favour of Australian Guarantee Corporation Limited ('AGC'), to secure an advance of $25,137.30. That mortgage was registered on 22 August 1988 (number N656381).

On 20 January 1989, a discharge of the AGC mortgage was executed.

On 25 January 1989, Con Racovitis executed a mortgage in favour of the respondents, who are his parents, expressed to
be given 'in consideration of the principal sum lent or agreed to be lent to the mortgagor by the mortgagee'. The principal sum was stated as $37,345.69. It was to be repayable on 31 January 1991, and it was to bear interest at the rate of 16% per annum, payable quarterly. Stamp duty was denoted on the mortgage on 13 February 1989.

On 1 March 1989, the bankrupt committed an act of bankruptcy. A petition for sequestration was presented on 17 March 1989. A sequestration order was made against the estate of the bankrupt on 4 July 1989.

On 9 November 1989, the mortgage by Con Racovitis to his parents was registered (number P515914S), and it remains registered as an encumbrance on the title to the property.

The appellant formed the view that the transaction, whereby the bankrupt divested herself of her half interest in the property in favour of her husband, was void against the appellant by the operation of s. 121 of the Act. Accordingly, on 26 October 1992 the appellant gave notice to Con Racovitis, pursuant to s. 139ZQ of the Act, requiring him to pay the appellant the sum of $95,000. Section 139ZQ empowers the Official Trustee to give written notice to a person who has received money or property as a result of a transaction that is void against the trustee of a bankrupt under Division 3 of the Act, and it requires the person to pay to the trustee an
amount equal to the money, or to the value of the property that was received. No issue arose before the learned primary Judge with respect to that notice, and no related argument was addressed to the Court on appeal.

The sum of $95,000 was one half of the appellant's estimate of the value of the property at the date of the transfer by the bankrupt of her half share to Con Racovitis.

Presumably by arrangement between the appellant and Con Racovitis, on 4 December 1992 the latter executed a transfer of the property to himself and the appellant as tenants in common in equal shares. The consideration for the transfer is expressed to be:

'... pursuant to section 120 of the Bankruptcy Act 1966 by which the transfer of the Bankrupt's interest in the land to the Transfer registered on 29 March 1988 is void as against the Official Trustee and to a notice given to the Transferor by the Official Trustee on 26 October 1992 pursuant to section 139ZQ of the Bankruptcy Act.'

Further, the transfer was expressed to be 'subject to the encumbrances affecting the land including any created by dealings lodged for registration before the lodging of [the] transfer'.

As the transfer from the bankrupt to Con Racovitis of her half interest in the property was executed on 22 March 1988, it was a settlement made within two years before the commencement of her bankruptcy. Thus, it would be voidable as against the appellant as trustee in bankruptcy, unless the settlement was made in favour of Con Racovitis as a purchaser in good faith, and for valuable consideration. Now Con Racovitis obviously took the view that the settlement was voidable under s. 120(1). For this reason, he executed the transfer of the property to himself and the appellant as tenants in common in equal shares on 4 December 1992. The appellant now holds the bankrupt's former half interest in the property as tenant in common, on behalf of her creditors.

The Official Trustee took the view that the mortgage granted by Con Racovitis to his parents on 25 January 1989 was voidable as against the trustee. In his opinion, they were not persons who had acquired the mortgage from Con Racovitis in good faith and for valuable consideration (s. 120(7)). Accordingly, the appellant commenced this proceeding and sought an order that the respondents execute a registrable partial discharge of the mortgage with respect to the Official Trustee's half share in the land - formerly the property of the bankrupt.

Section 120 of the Act, so far as relevant, provides as follows:

"(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 the bankruptcy.

(2) ...

(3) ...

(4) ...

(5) ...

(6) ...

(7) Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has, in good faith and for valuable consideration, purchased or acquired from the persons entitled to the benefit of the settlement, covenant or contract or from the trustee of the settlement the money or property the subject of the settlement, covenant or contract or an interest in that money or property.

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

The first available act of bankruptcy was the act of bankruptcy committed on 1 March 1989. Hence, that is the date of the commencement of the bankrupt's bankruptcy. At that
date, Con Racovitis was the sole registered proprietor of the property. It was not then subject to any registered encumbrance; although, as mentioned earlier, on 25 January 1989 Con Racovitis had executed the mortgage in favour of his parents.

The transfer of the bankrupt's half share in the property to her husband plainly is voidable, under s. 120 of the Act, at the behest of the Official Trustee. No argument to the contrary was put before us. However, whether the subsequent mortgage of the property by Con Racovitis to his parents is voidable under s. 120 is a different question.

The case was conducted before the primary Judge and on appeal on the basis that, if the respondents acquired the mortgage over the property in good faith and for valuable consideration, their title to or interest in the mortgage could not be impugned, because of the operation of s. 120(7).

It was not argued before the primary Judge or on appeal that the respondents acquired the mortgage otherwise than in good faith, so the issue was and is whether the mortgage was acquired for valuable considerable within the meaning of subsection (7).

The primary Judge found that the mortgage was given by Con Racovitis to the respondents in good faith and for valuable consideration. He therefore dismissed the appellant's application.

Counsel for the appellant submitted that the reference in the mortgage to money 'agreed to be lent' must be read as contemplating advances about to be made or to be made at some time in the future, and that there have been no such advances. Counsel further argued that the reference in the mortgage to money 'lent' must be taken as contemplating a contemporaneous advance, because past consideration is not valuable consideration. And counsel for the appellant argued that there was in fact no contemporaneous advance to support the mortgage - a conclusion established by the history of the financial dealings between Con Racovitis and his parents and by the fact that there was no evidence of any prior request from the parents for the giving of the mortgage. This consideration was said to be important in view of the decision of Linter Group Limited v Goldberg (1992) 7 ACSR 580 per Southwell J. at 666. So, it was argued by counsel for the appellant that the consideration stated in the mortgage never passed.

Counsel for the respondents supported the findings of the primary Judge, in particular the finding that 'the evidence establishes positively that the mortgage was given in good faith and for valuable consideration'.

When a settlement is avoided under s. 120 it is avoided not from its date, but from the accrual of the trustee's title; and consequently anyone who claims under the settlement as a purchaser for valuable consideration without notice has a good title: Re Brall. Ex parte Norton [1893] 2 QB 381; and Re Vansittart. Ex parte Brown [1893] 2 QB 377, approved by the Court of Appeal of England in Re Carter and Kenderdine's Contract [1897] 1 Ch 776. See also Re Theodore Charles Trautwein; Richardson v Theo William Nugent Trautwein (1944) 14 ABC 61 per Clyne J. at 75.

A settlement is only avoided so far as is necessary to satisfy the debts of the bankrupt and pay the costs and the expenses of the bankruptcy. The title to the surplus of the settled property, if any, is not affected: Re Simms. Ex parte Sheffield [1896] 3 Mans 340; Re Parry. Ex parte Salaman [1904] 1 KB 129; and Re Macdonald. Ex parte McCullum [1920] 1 KB 205.

The expression 'purchaser or encumbrancer ... for valuable consideration', in s. 120(1)(a) of the Act, has been considered in many cases. See Re Barton; Ex parte Official Receiver v Barton (1983) 52 ALR 95 (McGregor J.), affirmed on appeal by the Full Court of the Federal Court (Sweeney, Fisher and Lockhart JJ. (1984) 4 FCR 380), and by the High Court ((1986) 161 CLR 75). In the High Court, Gibbs C.J., Mason, Wilson and Dawson JJ. said in a joint judgment (at 86) that the words 'purchaser' and 'valuable consideration' should be read together as a single concept, and that a purchaser for valuable consideration 'is one who has given consideration for his purchase which has a real and substantial value, and not one which is merely nominal, trivial or colourable.' See also Official Trustee in Bankruptcy v Martin (1990) 24 FCR 504.

The word 'purchaser' is not limited to (but plainly includes) a purchaser in the business sense of the term; that is a person who has bought something by contract of purchase and sale. The release of a right or the compromise of a claim by the donee under a settlement may be sufficient to constitute the donee a purchaser: Re Pope. Ex parte Dicksee [1908] 2 KB 169; and Bloomfield v Rummage [1897] 23 VLR 365.

In determining whether there is valuable consideration, it is the reality of the transaction to which regard is to be had. The whole transaction must be looked at to see if valuable consideration has been given: Re Johnstone; Ex parte Cole (1984) 3 FCR 32.

The Court will go behind a written agreement in order to ascertain the reality of the transaction: Re Trimbole; Ex parte Donnelly, unreported, Beaumont J., 11 July 1986 affirmed by the Full Court of the Federal Court, unreported, 5 November 1986; and Re Douglas; Ex parte Starkey (1987) 15 FCR 475 per Pincus J. at 480.

Although the mere existence of an antecedent debt is not sufficient valuable consideration: Wigan v English and Scottish Law Life Assurance Association [1909] 1 Ch 291; Re Hyams; Official Receiver v Hyams (1970) 19 FLR 232; and Linter Group per Southwell J. at 666, a forbearance to sue for an antecedent debt is sufficient. This is the case even if the agreement is not express, because the law may imply an agreement to give time. Furthermore, even if there is no express agreement, and an agreement cannot be implied at the time and under the circumstances at and under which the settlement was made, if the settlement is communicated to the donee, and on the faith of that settlement he in fact forebears to sue on the debt, there may be sufficient consideration, notwithstanding that in a sense it is ex post facto: Wigan at 297-8; Glegg v Bromley [1912] 3 KB 474 at 487; and Re McCauley. Ex parte Official Receiver (1931) 4 ABC 77 at 82. See also N A Kratzmann Pty Limited (In Liq) v Tucker (1966) 123 CLR 257, per Kitto J. at 289.

It is not necessary that there should be an arrangement, or forbearance, for any definite or particular time. It is sufficient if it can be inferred from the circumstances that there was an implied request for forbearance, and that forbearance for a reasonable time was in fact extended to the person who asked for it.

With the state of the law in mind, it is necessary to examine the course of the financial dealings, so far as relevant, between Con Racovitis and his parents.

On 29 September 1987, $17,658.91 was drawn from a joint banking account of the respondents and paid to the State Bank of Victoria. This was at the request and for the benefit of the bankrupt and Con Racovitis. Thus, they sought to reduce their indebtedness to that bank. On 27 January 1988, $15,700 was repaid by the bankrupt and Con Racovitis to the respondents, in partial repayment of the monies paid to them on 29 September 1987. The $15,700 was deposited into the account of the respondents with the State Bank of Victoria. But immediately, it was withdrawn that same day and paid into the banking account of Con Racovitis and his brother, George Racovitis, also held with the State Bank of Victoria.

On 27 and 29 January 1988, the first respondent lent $15,700 and $4,300 - a total of $20,000, derived from two joint banking accounts of the respondents - to Con and George Racovitis.

On 7 November 1988, the first respondent lent $7,500.43 to Con Racovitis, to which it would seem his two granddaughters had been beneficially entitled. Also on 7 November 1988, $7,486.43 was paid by bank cheques drawn on the banking account of Con Racovitis with the State Bank of Victoria, to sundry creditors of the bankrupt and Con Racovitis. The source of those payments obviously was the $7,500.43 withdrawn from the account of the first respondent, as trustee for his granddaughters.

The sum of $20,000 (constituted by the $15,700 and the $4,300 paid on 27 and 29 January 1988) was withdrawn from the account of Con and George Racovitis on 30 December 1988 and applied for the benefit of Con Racovitis alone. It was regarded by the respondents and by Con Racovitis as a loan. Also on 30 December 1988, the first respondent lent $5,508.82 to Con Racovitis, money which was beneficially the property of the first respondent's two granddaughters.

The sums of $20,000 and $5,508.82 were applied to the benefit of Con Racovitis, and on 4 January 1989 they were paid to AGC in satisfaction of the mortgage debt due to it by Con Racovitis. The $25,508.82 paid to AGC comprised $20,000 drawn on the banking account of Con and George Racovitis on 30 December 1988, and $5,508.82 drawn on the account of the first respondent as trustee for his granddaughters on 30 December 1988.

It will be remembered that on 25 January 1989 Con Racovitis executed the mortgage in favour of his parents, in consideration of what was expressed to be a loan of $37,345.69.

This recitation of the financial arrangements between the respondents, and Con Racovitis and his brother, George Racovitis, is rather involved, and the evidence is not entirely satisfactory with respect to it.

Nevertheless, in my opinion the conclusion of the primary Judge - that the payments made by the first and second respondents to Con Racovitis were loans - is a conclusion which he was entitled to reach on the evidence. Over the years, varying amounts had been advanced by the respondents to Con Racovitis, or to Con Racovitis and his brothers, for various purposes. His Honour said that this was the uncontested evidence, and there was no evidence to support a contrary conclusion. He said that in the absence of any other agreement, such a debt would, in accordance with normal principles, be interest-free and repayable on demand. I agree with that conclusion.

The Trustee sought to gain support for his case from the fact that the mortgage was not executed until 25 January 1989, yet the last advance was made some three weeks earlier. The primary Judge concluded:

"Given the relationship between the parties and the history of their prior dealings, I do not think that there is anything sinister about this apparent delay. There is no evidence as to when the decision was made to secure the debt by way of mortgage nor as to when the solicitors were instructed to prepare the
mortgage. There is, however, no question that at the time the mortgage was executed Con Racovitis was indebted to his parents in the sum actually secured by the mortgage. Nor, in my opinion, does anything turn upon the fact that the mortgage document, which is in common form, refers to the principal sum secured as being "lent or agreed to be lent to the mortgagor". A mortgage may secure an existing debt and the text of the document quite accurately describes the total amount of the series of loans payable on demand.'

I am not persuaded that his Honour erred in drawing these conclusions. Indeed, the whole of the financial arrangements between the respondents and Con Racovitis over the period of December 1988 and January 1989 should be viewed as one. Any other conclusion seems to me to be unrealistic.

Prior to the grant of the mortgage, the sum of $37,345.69 was repayable by Con Racovitis on demand. By the terms of the mortgage, however, he was provided with two years in which to pay the money; that is by 31 January 1991. He was thus expressly granted two years by the respondents to pay the mortgage debt. There was a forbearance to sue, extended by his parents to him, subsisting until 31 January 1991. The debt previously due to the respondents by Con Racovitis and his brother, George, was a debt that was discharged and replaced by one debt, namely, a debt due by Con Racovitis. The joint debt became the debt of Con Racovitis alone.

Also, the mortgage provided that the interest rate was to be 16%. The evidence does not establish that interest was payable on loans by Con Racovitis to his parents before the grant of the mortgage.

In my opinion the conclusion of the primary Judge that the respondents acquired the mortgage from Con Racovitis for valuable consideration is one which should not be disturbed.

The effect of the arrangements made between the respondents and their son, Con Racovitis, culminating in the mortgage, is that AGC was paid out, its mortgage was discharged, and broadly speaking the respondents were substituted. If the respondents had not been substituted for AGC, AGC would have been entitled to exercise its rights as a secured creditor against the property to the extent of the mortgage debt then owing, and the parents would have been left as unsecured creditors in the bankruptcy. This was said by the appellant to be a curious transaction, and to support the conclusion of absence of valuable consideration. But in my opinion it does not support that conclusion. It may have touched on the question of good faith if that had been an issue in this case; but it never was.

I would dismiss the appeal with costs.

I certify that this and the preceding sixteen (16) pages are a true copy of the reasons for judgment herein of the Honourable Justice Lockhart.

Associate

Dated: 28 November 1995

Counsel for the Appellant : Mr G T Bigmore QC

Mr M J Galvin

Solicitors for the Appellant: J M Smith & Emmerton

Counsel for the Respondents : Mr J W S Peters

Solicitors for the Respondents: Goulopoulos Shiels & Mangopoulos

Date of Hearing : 5 October 1995

Date of Judgment : 28 November 1995

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