C A T C H W O R D S
BANKRUPTCY - settlement - fraudulent disposition - application to set aside s.139ZQ notice - onus of proof - whether applicant under s.139ZS has an evidentiary onus - whether, once that onus is satisfied, respondent has burden of proving matters relied upon in notice - notice challenged applicant's good faith - applicant's good faith conceded at hearing - whether applicant was a purchaser for valuable consideration.
Bankruptcy Act 1966 (Cth) ss.120, 121, 139ZQ, 139ZS
Purkess v. Crittenden (1965) 114 CLR 164
Barton v. Official Receiver (1986) 161 CLR 75
Official Trustee v. Mitchell (1992) 38 FCR 364
Official Receiver v. Barton (1983) 52 ALR 95
P.T. Garuda Indonesia Ltd v. Grellman (1992) 35 FCR 515
Cannane & Anor v. Official Trustee (unreported Full Court, 22 March 1996 No. 179 of 1996)
Century 21 (South Pacific) Pty Ltd (In liq) v. Century 21 Real Estate Corporation & Anor (unreported Burchett J, 21 March 1996 No. 170 of 1996)
MICHAEL NORMAN NORTON v. ALDEN JON HALSE as Trustee for the
Bankrupt Estate of NEVILLE ROSS PAYNE and THE OFFICIAL RECEIVER
for the State of Western Australia
No. 1528 of 1992
CARR J
PERTH
29 MAY 1996
IN THE FEDERAL COURT )
OF AUSTRALIA )
GENERAL DIVISION )
BANKRUPTCY DISTRICT ) No. 1528 of 1992
OF THE STATE OF )
WESTERN AUSTRALIA )
B E T W E E N : MICHAEL NORMAN NORTON
Applicant
and
ALDEN JON HALSE as Trustee for
the Bankrupt Estate of NEVILLE
ROSS PAYNE
First Respondent
and
THE OFFICIAL RECEIVER for the
State of Western Australia
Second Respondent
CORAM: CARR J.
PLACE: PERTH
DATE: 29 MAY 1996
MINUTE OF ORDERS
THE COURT ORDERS THAT:
1. The notice dated 13 May 1994 (and amended on 27 February 1995), served by the second respondent upon the applicant, be set aside.
2. The first respondent pay the applicant's costs, including any reserved costs.
3. The question whether the applicant should, upon taxation of his costs, recover the costs of any affidavits filed but not admitted into evidence, is to be reserved to the District Registrar or the Deputy Registrar taxing those costs.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT )
OF AUSTRALIA )
GENERAL DIVISION )
BANKRUPTCY DISTRICT ) No. 1528 of 1992
OF THE STATE OF )
WESTERN AUSTRALIA )
B E T W E E N : MICHAEL NORMAN NORTON
Applicant
and
ALDEN JON HALSE as Trustee for
the Bankrupt Estate of NEVILLE
ROSS PAYNE
First Respondent
and
THE OFFICIAL RECEIVER for
the State of Western Australia
Second Respondent
CORAM: CARR J.
PLACE: PERTH
DATE: 29 MAY 1996
REASONS FOR JUDGMENT
Introduction
In this
matter the applicant, Mr Michael Norman Norton, seeks an order under s.139ZS of
the Bankruptcy Act 1966 (Cth)
("the Act") setting aside a notice ("the Notice") served
upon him by the second respondent under s.139ZQ of the Act. That Notice (as subsequently amended)
required Mr Norton to transfer to the first respondent, Mr Alden Jon Halse as
trustee for the bankrupt estate of Neville Ross Payne, title to a property at
Lot 28 Quambi Drive, Gelorup in the south-west of Western Australia ("the
Property"). In the alternative, the
Notice required Mr Norton to pay to the first respondent the sum of $130,000
being the value of the Property less
the amount of $110,000 secured by way of a first mortgage which was registered
on the title to the Property when it was transferred to Mr Norton. The Official Receiver for the State of
Western Australia is a submitting respondent.
The first respondent opposes the application.
Factual Background
Mr Norton swore three affidavits in support of his application. The first respondent objected to the admissibility of many parts of those affidavits. In view of the fact that those objections were filed and served on the eve of the hearing, and in the interests of expediting the matter, I gave leave for Mr Norton to give oral evidence. He was also cross-examined by counsel for the first respondent. No other witness gave evidence. The following factual background is intended to relate purely to matters which were not in contention.
Mr Norton has for some years farmed near Capel in the south-west of Western Australia. In 1986 he was Senior Vice President of the Meat Section of the Western Australian Farmers' Federation and President of the Vasse Zone of that organisation. Vasse is the name given to a locality in the nearby Shire of Busselton.
In mid-1986 Mr Norton and a group of other local farmers and interested persons loaned moneys to a Mr Neville Ross Payne ("the Bankrupt") and his son Mr Michael Payne for the purpose of re-opening a local abattoir known as the "Elgin Abattoir". Apparently the abattoir had formerly been conducted by interests connected with the Bankrupt, but had closed down. An amount of approximately $150,000-$160,000 was loaned for the re-opening of the Elgin Abattoir. On 26 August 1986 Mr Norton (on behalf of the partnership of Messrs H & A Norton & Sons) lent $20,000 to the Bankrupt and Mr Michael Payne by way of their contribution to the total amount subscribed. That loan was treated as a loan to a company called Elgin Abattoir Pty Ltd ("the Company") which conducted the abattoir business. Henceforth, unless otherwise indicated, I shall refer to Mr Norton as including his partners.
On or about 17 March 1991 the Bankrupt approached Mr Norton and offered him a one-third share in the abattoir business for a total consideration of $120,000. Mr Norton agreed to lend the Company a further $80,000 while he and his partners considered this proposal. On 22 March 1991 Mr Norton lent to the Company the sum of $50,000 and on 26 March 1991 a further sum of $30,000.
On 17 May 1991 there was a meeting of the board of directors of the Company. The directors resolved to accept Mr Norton's offer to acquire a one-third interest in the company by an allotment of ordinary one dollar shares in its capital for a "purchase price" of $120,000. The minutes of the Company evidence an agreement whereby the sum of $100,000 already loaned to the Company by Mr Norton was to be applied in partial satisfaction of the moneys payable upon allotment of the shares, together with a further payment of $20,000 in cash. On 1 July 1991 Mr Norton paid the sum of $20,000 to the Company and the Company issued to him fifty one dollar ordinary shares in its capital at a premium of $2,399 per share.
On 2 July 1991 the Bankrupt, Mr Michael Payne and Mr Norton entered into a deed which conferred certain pre-emptive rights upon each other in relation to their respective shareholdings in the Company ("the Pre-emption Agreement").
On 26 August 1991 Mr Norton resigned as a director of the Company. The minutes of a meeting of the board of directors of the Company held on that date state that Mr Norton tendered an application to transfer all of his shares in the Company to the Bankrupt for a consideration of $120,000 "... as at the 6th of September 1991".
The share register of the Company shows that on 6 September 1991 a transfer was registered of all of Mr Norton's shares to the Bankrupt.
On 9
September 1991 the Bankrupt, Mr Michael Payne and Mr Norton executed a deed
("the Deed"). The Deed
evidenced the sale of the Property by the Bankrupt to Mr Norton for the sum of
$230,000 and the sale of Mr Norton's shares in the Company to the Bankrupt, for
a price of $120,000. The Deed recited
the fact that the Property was subject to a first mortgage to secure $110,000
and provided that there would be no outstanding interest as at the date of
settlement. Under Clause 6 of the Deed,
Mr Norton covenanted and undertook to assume full liability in respect of that
mortgage and to indemnify the Bankrupt fully in respect of moneys payable under
the mortgage as from the date of settlement.
It was a term of the Deed that the purchase price for Mr Norton's shares
would be deemed to have been paid by the Bankrupt to Mr Norton on transfer of
the Property. The Deed was expressed as
being conditional upon the mortgagee named in the above-mentioned mortgage
agreeing to the substitution of Mr Norton as mortgagor under the mortgage and
to a variation to the
rate of interest payable pursuant to the mortgage. Although the Deed was dated 9 September 1991,
the settlement date stipulated in the Deed was 6 September 1991. Clause 13 of the Deed provided that transfer
of the Property and Mr Norton's shares was to be effected on or as soon as
practically possible after the settlement date.
On 8 October 1991 a petition was lodged to wind up the Company.
On 6 November 1991 a transfer of the Property from the Bankrupt to Mr Norton was registered at the Land Titles Office. On 11 November 1991 a provisional liquidator was appointed to the Company. On 4 December 1991 the Company was wound up by court order. The first respondent accepts that nothing turns on the fact that the share transfer was registered two months before the transfer of the Property. The case was conducted on the basis that the shares were exchanged for the Property.
On 12 October 1992 a sequestration order was made against the estate of the Bankrupt. On 13 May 1994 the Official Receiver for the State of Western Australia issued a notice to Mr Norton under s.139ZQ of the Act requiring him either to transfer the Property to the first respondent or to pay to the first respondent the sum of $120,000. On 25 November 1994 Mr Norton filed this application under s.139ZS to set aside that notice. On 27 February 1995 the Official Receiver amended the Notice.
The Relevant Statutory Provisions
The Official Receiver expressly based the Notice on the ground that the transfer of the Property by the Bankrupt to Mr Norton was a settlement of the Property made by the Bankrupt within two years of the commencement of his bankruptcy which was not made for valuable consideration or in good faith. In the alternative, the Official Receiver claimed that the transfer of the Property was made with the intention of defrauding the creditors of the Bankrupt. At the hearing, the first respondent did not dispute that the settlement or disposition of the Property was made in good faith. The first respondent resists the application to set aside the Notice on the basis that the transaction pursuant to which Mr Norton became owner of the Property was not made for valuable consideration and was either a settlement within s.120(1) or a fraudulent disposition within s.121(1) of the Act and thus void as against him. Those sections relevantly provide as follows:
Avoidance of Voluntary and Marriage Settlements
120(1) A settlement of property ... not being:
(a) a settlement ... made in favour of a purchaser or encumbrancer in good faith and for valuable consideration; or
(b) ...
is, if the settlor becomes a bankrupt and the settlement came into operation after, or within two years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy.
. . .
(8) In this section, "settlement of property" includes any disposition of property.
Fraudulent Dispositions
121(1) Subject to this section, a disposition of property, whether made before or after the commencement of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.
(2)
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 the
property the subject of the disposition or any interest in that property.
Subdivision J of Division 4B of Part VI of the Act was inserted in 1992 and is entitled "Collection of money or property by Official Receiver from party to transaction that is void against the trustee". The subdivision comprises sections 139ZQ to 139ZT. Section 139ZQ provides a procedure whereby the Official Receiver may require a person, by written notice given to that person, to pay to the trustee an amount equal to the money or the value of the property received. That notice must set out the facts and circumstances "because of which, the Official Receiver considers that the transaction is void against the trustee." There are other, machinery, provisions concerning the contents and service of the notice. Section 139ZR provides that a notice given under s.139ZQ in respect of any property, charges that property with the liability of that person to make payments to the trustee as required by the notice. The section also contains provisions relating to, amongst other things, priority and registration of that charge. Section 139ZT makes it a criminal offence (punishable upon conviction by imprisonment for a period not exceeding 6 months) for a person to refuse or fail to comply with a notice given under s.139ZQ.
Section 139ZS, under which Mr Norton brings this application, is in the following terms:
"Power of Court to Set Aside Notice
139ZS(1) If the Court, on application by a person to
whom a notice has been given under section 139ZQ or by any other interested
person, is satisfied that this Subdivision does not apply to the person on the
basis of the alleged facts and circumstances set out in the notice, the Court
may make an
order setting aside the notice.
(2) A notice that has been set aside is taken not to have been given."
The Respective Contentions of the Parties
The first respondent accepts that an applicant in an application made under s.139ZS may challenge the statement of facts and circumstances contained in the s.139ZQ notice, as I held in Re McLernon; Ex parte SWF Hoists & Industrial Equipment Pty Ltd v. Prebble (1995) 130 ALR 609 at p.617 following the earlier decision of Olney J. in Re Lucera; Ex parte Official Trustee in Bankruptcy v. Lucera (1994) 53 FCR 329 and certain doubts expressed by Einfeld J. in Re McInnes; Ex parte McInnes v. Official Receiver (No. 882 of 1994, 18 November 1994, unreported). In McLernon there were no problems of onus of proof because the liquidator had initiated what was in effect a cross-application for declarations that the three payments in question were preferences.
The first respondent submits that in this matter, where he has chosen simply to defend the application, the onus is upon Mr Norton to establish the incorrectness of the alleged facts and circumstances stated in the Notice. The first respondent says that unless and until that is done the facts and circumstances stated in the Notice "remain binding".
Mr J C Vaughan, counsel for the first respondent
submitted that unless this were so then s.139ZQ would serve no purpose
"more than the old section 120, 121 and 122 did". The intent of the legislation, so he
submitted, was to allow efficient and cost-effective means of
"recovering" void transactions.
I have read the passages in the
explanatory memorandum and the second reading speech relevant to the
introduction of this subdivision to which Mr Vaughan referred me. I agree with his submission that the intent
of the legislation is to allow efficient and cost-effective means of recovering
money or property from parties to transactions that are void against the
trustee. Even so, Parliament has chosen in
this piece of legislation to say nothing about the onus of proof. This is in marked contrast, for example, with
section 14ZZK and 14ZZO of the Taxation
Administration Act 1953 (Cth). In
those provisions it is made clear that the taxpayer applicant or appellant
respectively has the burden of proving that the assessment is excessive,
incorrect or should have been made differently.
On behalf of Mr Norton it was submitted that an application under s.139ZS is a hearing de novo of the correctness of the facts and circumstances alleged in the s.139ZQ notice. Mr A.R. Beech, counsel for Mr Norton, accepted a tentative view, which I put in argument, that his client had an evidentiary onus but that the onus of proving the facts upon which the Notice was based lay upon the first respondent.
Neither party has cited any authority in respect of where the burden of proof lies when an application is made to the Court under s.139ZS.
I noted in Re McLernon that Olney J. in Re Lucera had followed the course of allowing the trustee in that matter to adduce further evidence which was directed to proving the facts asserted in his notice. I also referred to the use of the word "alleged" in the phrase "the basis of the alleged facts and circumstances" which is used in s.139ZS.
In my view, the matter should be approached by reference to the distinction between the two meanings of the burden of proof referred to by the High Court of Australia in Purkess v. Crittenden (1965) 114 CLR 164 at pp.167-168. In that case the High Court expressly approved certain passages in "Phipson on Evidence" [10 ed (1963) par.92] where the expression "onus of proof" was identified as having two distinct and frequently confused meanings. First there is the burden of proof, as a matter of law and pleading, of establishing a case on the balance of probabilities or beyond a reasonable doubt. Secondly, there is the onus of proof in the sense of introducing evidence, often referred to as an evidentiary onus. The evidentiary onus may shift from time to time as a hearing progresses.
The power to issue a s.139ZQ notice is conditioned not upon the Official Receiver's opinion or satisfaction that the transaction is void against the trustee but upon the existence of certain circumstances in which a person has received money or property as a result of a transaction that is void against the trustee. The Official Receiver's power is dependent upon the existence of those jurisdictional facts.
Accordingly, in my opinion, where an applicant in an application made under s.139ZS has by direct or circumstantial evidence made out a prima facie case that either the alleged facts and circumstances set out and relied upon in the challenged notice do not exist or (if they do exist) they do not disclose a voidable transaction, then the onus of adducing evidence shifts to the respondent. I use the expression "prima facie" in its ordinary sense of "at first sight, on the face of it; as appears at first sight without investigation", [Oxford English Dictionary, 2ed pp.470-471]; see North Ganalanja Aboriginal Corporation v. Queensland (1996) 135 ALR 225 at p.235.
But that does not answer the question who has the onus of proof of establishing whether Subdivision J does or does not apply to the applicant.
The answer to that question does not, in my opinion, depend exclusively upon the terms of s.139ZS or the terms of Subdivision J as a whole for that matter, but requires consideration of s.120(1) and s.121(1) of the Act. Subdivision J only applies where a person has received (in this case) property as a result of a transaction that is void against the trustee of a bankrupt. That is a basic jurisdictional fact. Once the applicant has made out a prima facie case that the Subdivision does not apply, then, in my view, Parliament's intention will be carried into effect by the notice being set aside unless the respondent establishes the voidable transaction upon which the notice is based. A trustee has always carried the onus of proof of such matters: see Official Trustee v. Mitchell (1992) 38 FCR 364 at pp.369-370 (a decision of the Full Court of this Court) and the line of authorities there cited.
Where preferences are concerned (see s.122 of the Act), Parliament has seen fit to make express provision [in s.122(3)] that, for example, a person claiming to be a purchaser in good faith and for valuable consideration (and in the ordinary course of business) has the burden of proving such matters. The absence of such a provision in the two immediately preceding sections, in my view, sheds some light upon Parliament's intentions in that regard. In my view, the introduction of Subdivision J has not changed the position other than requiring an applicant to put before the Court sufficient evidence to call the validity of the notice into question. Subdivision J has introduced a convenient administrative method whereby a notice may be issued which, unless challenged, will remain in effect. It was designed to avoid the need to approach the Court on each occasion to obtain a declaration and an order for repayment. I think that this answers Mr Vaughan's submission that unless the onus of proof falls on the recipient of the notice, s.139ZQ would serve no purpose. It does serve a purpose by giving the full force of law to the notice unless its recipient approaches the Court with sufficient evidence to question the jurisdictional basis upon which it was issued. Another useful purpose is to create the charge and the priority referred to in s.139ZR, all without any need for an application to the Court.
I was somewhat puzzled by the fact that in his written
submissions (see paragraph 14) the first respondent accepts that he has the
onus of establishing that the alleged settlement was not made in favour of Mr
Norton as a purchaser in good faith for valuable consideration. In oral argument the first respondent's
submission was that Mr Norton carried the burden of proof of such matters. In any event, the first respondent submits
that (if he carries a burden of proof) he need not establish that the
settlement lacks all of the characteristics referred to in s.120(1)(a) of the
Act. His counsel says that it is
sufficient to establish either that the settlement was not in favour of a
purchaser or not in good faith or not for valuable consideration. The first respondent cites Official Receiver v. Barton (1983) 52
ALR 95 at p.107 as authority for that proposition. In that case McGregor J. so held and I
respectfully agree with his Honour and accept the first respondent's submission
in that regard. One break in the chain
will suffice. As is well-known, Barton's case went on appeal to the High
Court
of Australia on a narrower point to which I return later in these reasons.
In relation to the alleged fraudulent disposition, again in his written submissions the first respondent accepted that the onus of establishing an intention to defraud and the absence of valuable consideration or good faith fell on him, but on the same basis as outlined in Official Receiver v. Barton. However, in oral submissions, Mr Vaughan argued that the burden of proving that valuable consideration had been given fell on Mr Norton. I treated the oral submission as prevailing over the written submission. In my view the conclusions which I have drawn above concerning the evidentiary onus and the burden of proof apply equally to the extent that the Notice is based upon s.121 of the Act as they do where s.120 is relied upon.
As the hearing of the application progressed, it emerged that there were really only two issues to be decided.
First there was the question whether, as the applicant
contended, the first respondent was, by the terms of the Notice confined to an
attack upon only the transfer of the Property and could not impugn the Deed as
a settlement falling within s.120 of the Act.
Mr Beech submitted that the Notice "focussed" on the formal
transfer of 6 November 1991. That
transfer, so it was put, was in fulfilment of the applicant's [presumably an
intended reference to the Bankrupt's] contractual obligations under the
Deed. For that reason, it was submitted,
the transfer was not a settlement and the question whether the Deed was
voidable did not arise. I reject that
submission for the following reasons. The Notice in my opinion complies with
s.139ZQ by specifying
"...the facts and circumstances because of which the Official Receiver
considers that the transaction is void against the trustee". The transaction is a composite one including
both the execution of the Deed and the execution and registration of the
transfer of the Property. The Notice
describes both of these matters very clearly.
It refers expressly to the provisions of the Deed whereby the Bankrupt
agreed to transfer his legal and beneficial interest in the Property to Mr
Norton. It refers also to the transfer
of the Property by reference to its date of registration at the Land Titles
Office. The applicant relies on the
following paragraph at the very end of the Notice which reads as follows:
"24. The transfer of the Property by the Bankrupt to Norton was a settlement of the Property made by the Bankrupt within 2 years of the commencement of his bankruptcy which was not made for valuable consideration or in good faith and/or the transfer of the Property was made with the intention of defrauding the creditors of the Bankrupt."
I do not consider that that paragraph shuts the first respondent out from setting aside the transaction as a whole. To start with the reference to "the transfer of the Property" does not describe it by date. This contrasts with the earlier reference to the transfer as registered. The reference in paragraph 24 to "the transfer of the property" is wide enough to include the agreement to do so, as evidenced by the Deed. More importantly, however, the Notice when read as a whole makes perfectly clear the basis upon which the Official Receiver considers that Mr Norton "... has received ... property as a result of a transaction that is void against the trustee of a bankrupt..." (the language of s.139ZQ). There can be no doubt that the transaction being attacked was the transaction whereby the Property came to be transferred to Mr Norton.
The applicant did not seriously contest that the transfer of the Property to him was a "settlement of property" within s.120(1). Nor was it disputed that for the purposes of s.121 an intention to defraud creditors may be inferred, notwithstanding lack of direct proof of such intention, from the fact that the Bankrupt makes a disposition which reduces the property available so that some creditors must remain unpaid: see P.T. Garuda Indonesia Ltd v. Grellman (1992) 35 FCR 515 at pp.523-524, 526 and the cases there cited. There was no issue of fact on that point, i.e. the case was fought on the factual assumption that there had been such a disposition. That leaves as the only remaining issue the question whether Mr Norton was a purchaser for valuable consideration. His counsel expressly abandoned reliance upon the assumption of liability under the mortgage and discharge of the Bankrupt's liability as consideration on its own. Mr Beech said that if the shares in the Company were worthless then the applicant did not rely on these matters as amounting in themselves to valuable consideration for the purposes of ss.120 or 121. Despite this concession, it might have been necessary to consider this aspect if I found that the shares were not "worthless" but fell short, on their own, of amounting to the requisite consideration. But first it is necessary to consider the admissible evidence before me on the question of the value of the shares in the Company, to which I now turn.
Were the Shares in the Company of Relevantly Sufficient Value?
In my opinion the relevant time for considering the value of the shares was 26 August 1991. That was the date when Mr Norton and the Bankrupt reached their agreement. The agreement was partially performed on that date by the transfer (duly registered on that date) of the shares in the Company. On that date a legally enforceable contract came into existence for the sale of the Property.
The authorities are to the effect that for a purchaser to be "a purchaser for valuable consideration" the consideration must be real and substantial, not merely nominal, trivial or colourable. The consideration need not be fully adequate or the market equivalent: Barton v. Official Receiver (1986) 161 CLR 75 at p.86; P.T. Garuda Indonesia Ltd at p.532, Official Trustee v. Mitchell at p.369.
In Cannane & Anor v. Official Receiver (unreported Full Court, 22 March 1996 No. 179 of 1996 at pp.22-23) the Court observed that s.121 makes no specific mention of the adequacy of that consideration. Their Honours added:
"It is, of course, true that there is a distinction between valuable consideration on the one hand and fully adequate consideration on the other. A consideration may be valuable where it consists:
"... either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment loss or responsibility, given, suffered or undertaken by the other" [authorities cited].
So long as the disposition is not voluntary (or the consideration is not illusory) the disposition will be for valuable consideration. The adequacy of that consideration, so long as the consideration is not nominal or illusory, will be irrelevant." [In the next sentence the Full Court explained that adequacy of consideration might be relevant, for example, to the question of fraud.]
At the time of writing these reasons, Cannane is the subject of an application
to the High Court for special leave to appeal, but not on
this point. In Century 21 (South Pacific) Pty Ltd
(In liq) v. Century 21 Real Estate Corporation & Anor (Federal Court, unreported 21 March 1996
No. 170 of 1996) Burchett J. (at p.17) said in
relation to
the phrase "for valuable consideration" in s.120(1)(a) of the Act:
"... valuable consideration does not have to be fully adequate consideration, nor need it be equal, or even nearly equal, to the value of the property. What is required is that it be real and substantial, rather than merely nominal, trivial or colourable: [authorities cited]."
Whether the Applicant Has Established a Prima Facie Case
As I have mentioned, Mr Norton gave oral evidence of the negotiations and transactions which I have summarised above.
I think it is fair to say that the first respondent
took a somewhat restrictive approach to matters of evidence. For example, Mr J.C. Vaughan, counsel for the
first respondent, objected to admission into evidence of the financial
statements of the Company for the period ended 31 March 1991. The objection was on the basis of
hearsay. I overruled the objection, but
that is not the point which I am seeking to develop. In making submissions that the financial
statements were inadmissible, Mr Vaughan made much of the concession that Mr
Norton's good faith was no longer in issue.
Mr Vaughan's written submissions dated as late as 4 April 1996 (the
hearing took place on 11 April 1996) certainly challenged Mr Norton's good
faith. The issue was abandoned only at the
hearing. I have inferred that the first
respondent abandoned that issue as a tactic i.e. as an attempt to limit such
evidence as might be admitted on the question whether Mr Norton was a purchaser
for valuable consideration. Mr Beech
submitted that his client ought not to be circumscribed by a concession as to
one of the three elements of (a) being a purchaser, (b) in good faith and (c)
for valuable consideration, in respect of
the evidence which he may adduce. He
submitted that it might well be useful to consider the various aspects
separately, but that in the end the commerciality of a contract or other
transaction should be viewed as a whole.
I agree. Although the High Court
of Australia did not find it necessary to decide the point in Barton v. Official Receiver (1986) 161
CLR 75, there is this passage at p.79:
"In the course of argument, it was submitted for the respondent that a proper construction of the paragraph [s.120(1)(a)] required that the three elements contained in the description "a purchaser ... in good faith and for valuable consideration" be read together in determining their application to the circumstances of a particular case. In our opinion the submission has considerable force because it will often be the case that the considerations touching each of the elements will overlap and thereby influence the conclusion as to any one element. Certainly one would expect this to be so with respect to the elements of "purchaser" and "valuable consideration": cf., as to "good faith", Re Hyams (1970) 19 FLR at p.256. However, it is unnecessary to pursue this aspect of the matter separately from a consideration of the argument presented for the appellant, although in coming to a conclusion we shall take as the appropriate phrase "purchaser ... for valuable consideration"."
See also Official Trustee v. Mitchell at p.369.
In my view, evidence in this matter which might bear
primarily on the question of good faith should not be excluded when I make an
assessment of the adequacy or sufficiency of the consideration which moved from
Mr Norton to the Bankrupt. To the extent
that I rely on such evidence I shall make that plain. Mr Vaughan submitted that good faith was
irrelevant to this case. I
disagree. I consider also that it is
relevant, although certainly not determinative, to have regard to what took
place in the two months following the Bankrupt's approach to Mr Norton to
subscribe for shares in the Company. I
do so to assess whether that (earlier) transaction was of a commercial
nature. I am conscious of the fact that
to characterise what took place in March-July 1991 as being of a commercial
nature does not require the same conclusion necessarily to be drawn in respect
of the transaction of 26 August 1991.
Mr Norton gave evidence that before he agreed to apply
the sum of $100,000 loaned to the Company together with a further sum of
$20,000 paid on 1 July 1991 as subscription moneys for shares in the Company,
he asked for financial statements concerning the Company. He sought them from a Mr Peter Manolas whom
he identified as being the Company's accountant. Mr Norton's evidence was that upon receipt of
those financial statements which (under objection from counsel for the first
respondent) became Exhibit C, he faxed them immediately to his own accountant
in Busselton. This was in late April or
early May 1991. Mr Norton said that
subsequently he had numerous discussions with his accountant. No attempt was made to admit into evidence
the content of those discussions. I
interpolate here some further observations to justify the admission into
evidence of Exhibit C. The first
respondent tendered a copy of the report of the Company's affairs as at 29
November 1991. That document became
Exhibit 8. In the balance sheet which
forms part of Exhibit C there are no less than six items which correspond,
precisely to the dollar, with the financial information contained in Exhibit
8. In the interests of brevity, I shall
set out the respective amounts without further identification. The figures will suffice to enable the
comparison to be made: $1087, $9918, $5000, $6000, $137,500 and $250,000. In the absence of a substantive challenge to
the accuracy of Exhibit C from the first respondent, I consider that this
correlation with part of his own evidence gives Exhibit C sufficient further
verisimilitude to justify reliance upon it as being at least prima
facie evidence relevant to the value of the shares in the Company as at 31
March 1991. Exhibit C shows that the
Company had a surplus of assets over liabilities as at that date of $358,672
which is very close to $360,000. One
third of $360,000 is $120,000 which is the sum Mr Norton paid for his shares on
1 July 1991. I note that there is no
item for "goodwill" in the balance sheet. I note also that the profit and loss
statement (which I have inferred was for the nine-month period to 31 March
1991) showed a net loss from trading of $16,721 and a net operating loss of
$40,616.
Mr Norton said that a further step which he took in investigating the proposal to invest in shares in the Company was to have discussions with the branch manager and accountant of a firm of livestock agents (Elders Burnett Moore) which dealt with the Company on credit i.e. in particular sold cattle and sheep to the Company on credit. He was told approximately the amount of debt owed by the Company to that firm. Mr Norton said that, in the course of his investigations, he also attended upon the general manager of the Western Australian Meat Marketing Corporation, a Mr J. Burston. At that time, under its constituent legislation, the Meat Marketing Corporation became the owner of all lambs in Western Australia at the point of slaughter. Mr Norton said that he saw Mr Burston to find out "if there were any charges or any problems between the Corporation and Elgin Abattoirs ...". It is evident that the relationship between an abattoir and the Corporation involves a degree of trust. He was told that there were problems in relation only to twelve lambs. Mr Norton gave evidence that the Company, depending upon the time of year, killed between five hundred and seven hundred lambs per week. Mr Norton's evidence was that he was aware that other domestic abattoirs had long-running disputes with the Meat Marketing Corporation. Hence his approach to the Corporation. He also contacted the Chief Health Surveyor of the Capel Shire Council and a former health inspector to ascertain whether there were any problems with the Company. Then he contacted the Company's abattoir consultant. He examined a valuation (prepared by a Mr Ranson) of the assets owned by the Company and contacted the real estate agent who prepared that valuation. Mr Norton was not cross-examined about any of these matters.
I find that before Mr Norton entered into the transaction which resulted in the issue to him of shares in the Company for a consideration of $120,000, he made careful and extensive inquiries. His evidence was that all of the responses from the persons whom he contacted were to the same effect. Then there is the evidence that he proceeded with the transaction.
I find that the transaction involving the acquisition of the shares in the Company was a commercial transaction at arm's length and that as at 1 July 1991 the shares in the Company had a real and substantial, not merely nominal, trivial or colourable value. Mr Norton's evidence was that he reached an oral agreement with the Bankrupt for the sale of the shares on 26 August 1991, the date upon which he ceased to be a director. In cross-examination Mr Norton's evidence was that the position of the Company was substantially the same on 26 August 1991 as it was on 1 July 1991.
In my view, the inference about the value of the fifty shares in the Company as at the date of their acquisition by subscription (which I have made above) is supported by the rest of the evidence given by Mr Norton, in particular the fact that he was prepared to outlay $120,000 in acquiring them. My assessment was that he was doing this not as a matter of benevolence but as a commercial transaction. I should make it clear that in reaching this finding I have not relied upon Mr Ranson's valuation of the Company's real estate. Mr Norton said that he saw Mr Ranson's valuation. It was made as at December 1990 and assessed the replacement value of the abattoir at approximately $600,000 with a "fire sale value" of possibly half that. I admitted that evidence only on the question of Mr Norton's state of mind and that remains the status of that evidence.
Mr Norton swore that he formed the opinion that the profitability of the Company's business could be improved. He said that the business was turning over $10 million per annum with operating costs of some $3 million per annum. He held that opinion before he and his partners decided to acquire the shares in the Company.
Mr Norton swore also that the purpose of the Deed dated 2 July 1991 (Exhibit E) was to "lock" the Bankrupt into the management of the Company. In the negotiations leading up to the acquisition of the shares, the Bankrupt had agreed to Mr Norton's suggestions for achieving a quick turnaround of the Company's financial situation. Mr Norton said that after payment had been made for the shares, the Bankrupt's attitude appeared to change somewhat and he became rather "recalcitrant". As a result Mr Norton said that it became necessary for him (Mr Norton) to put considerably more time into overseeing the Company than he had planned. This was one of the main factors which caused him to decide to sell his shares.
I should say, at this stage, that my assessment of Mr
Norton was that he was a man of truth. I
believed his evidence. Mr Norton said
that within a period of about a month from the acquisition of the shares there
were discussions about a third party taking a share in the Company. Mr Norton told the Bankrupt and Mr Manolas
that he was not prepared to become involved with such a third party. In early to mid August 1991 he discussed with
the Bankrupt a proposal that he (the Bankrupt) would purchase Mr Norton's
shares. It was obvious, so Mr Norton
said, that the Company was not able "... to pay the cash out of the
Company that we'd injected into it."
The Bankrupt was prepared to use the Property to buy Mr Norton's
shares. There was some debate about the
value of the Property, which the Bankrupt believed was $250,000. At that stage there was an amount of $110,000
owing in respect of the mortgage registered on the title to the Property. This meant that the Bankrupt valued his
equity in the Property at $140,000. The
Bankrupt initially sought a cash adjustment, payable by Mr Norton, plus the
right to use the house on the Property for a period of two years. Mr Norton said that he caused the Property to
be valued and put a counter-proposal to the Bankrupt to the effect that the
Property be regarded as being worth $230,000, and that the Bankrupt have the
use of the house on the Property for twelve months provided that he paid all the
outgoings. That was the agreement
eventually reached between the parties. I
think that there is one, perhaps small, aspect of the Deed of 9 September 1991
which adds to the commerciality of the transactions which it evidenced. That is the fact that the Bankrupt's son (Mr
Michael Payne) was a party to the Deed.
This was necessary because he had rights of pre-emption under the
Pre-emption Agreement. By clause 8 of
the Deed Mr Michael Payne declared his consent to the sale of the shares by Mr
Norton to the Bankrupt. It is a
relatively small matter, but if the shares
were valueless why go to the length of obtaining such consent? There can be no question of
"window-dressing"; good faith is conceded. Mr Norton gave evidence that during the period
of approximately seven weeks in which he was a director of the Company there
was a renegotiation of the slaughter tally with its employees. That resulted in a saving of approximately
$600 per week. There was also pending
litigation (in which the Company was subsequently successful) with the Capel
Shire Council which, at the relevant time, presented the prospect of saving a
further $400 a week. The hearing of that
litigation took place later in September 1991.
The Company's position had been fairly stable in the winter months and
he was not aware of any debts which it was failing to pay. It was not until mid September 1991 that Mr
Norton said he first heard of police investigations concerning the affairs of
the Company. Mr Vaughan submitted, in
his closing address, that there was no evidence from Mr Norton which could
satisfy me, on the balance of probabilities, that the Company was not
experiencing severe financial difficulty, making its shares valueless from on
or about 2 July 1991 (as asserted in paragraph 13 of the Notice). He submitted that there was simply no
evidence that really dealt with the financial circumstances of the Company at
that time. He submitted that there was
no evidence to impugn the assertion made in the Notice (paragraph 21) that the
shares in the Company were at the relevant time worthless or at best worth $1.00
each.
I do not accept Mr Vaughan's submissions in that regard. In my view the applicant has established a prima face case that the shares had a real and substantial value when they were acquired by subscription on 1 July 1991 (and Mr Norton made the further payment of $20,000 in cash) and also when he sold the shares to the Bankrupt on 26 August 1991. I am satisfied, on a prima facie basis, from Mr Norton's evidence that in financial terms during that period there was, if anything, an improvement in the Company's position. I find that Mr Norton was a purchaser in a commercial sense of the Property giving in return shares which he had purchased some seven weeks earlier for an amount of $120,000 and which still had a real and substantial value. In Barton v. Official Receiver at p.86 the High Court said:
"It is true that the earlier decisions to which we have referred focus attention more on the word "purchaser" than on the words "valuable consideration" whilst in the more recent case the reverse is true. As indicated in the early part of this judgment, we have considerable sympathy with the proposition that the words "purchaser" and "valuable consideration" should be held together as a single concept. One could then accept as of more general application Lord Wilberforce's statement that "valuable consideration" is a term of art which precludes any inquiry as to adequacy but find room in which to give effect to the beneficent purpose of the bankruptcy legislation by construing "purchaser" broadly in a commercial sense. A beneficiary under a settlement is not a purchaser within the meaning of the section unless he has given such valuable consideration as is sufficient in all the circumstances to make him a "buyer" in a commercial sense of the interest passing to him under the settlement. ... We ... endorse the Full Court's ruling that a "purchaser ... for valuable consideration" within the meaning of s.120(1) of the Act is one who has given consideration for his purchase "which has a real and substantial value, and not one which is merely nominal or trivial or colourable": in Re Abbott [1983] Ch., at p.57."
The first respondent relied upon certain pieces of
evidence as tending to show that the shares in the Company were valueless when
Mr Norton sold them to the Bankrupt. I
shall deal with these in chronological order.
First there was a letter dated 30 August 1991 from a firm of solicitors
acting for the West Australian Meat Marketing Corporation ("the
Corporation") demanding payment from the Company of $123,444.85 (Exhibit
4). Any impact of that evidence is very
substantially lessened by
a facsimile dated 2 September 1991 from the Corporation to the Company which
showed that against the above amount an amount of $91,090.09 was owing by the
Corporation to the Company and that the total net indebtedness as at 2
September 1991 was only $12,933.20. Then
there was a notice of demand under s.460 of the Corporations Law dated 4
September 1991 in which $31,312.56 was claimed by the Corporation from the
Company. Once again, any inference of
insolvency which might be drawn from that demand is lessened by the fact that
the Corporation's statement in Exhibit 5 showed the estimated total net
indebtedness of the Company not only as at 2 September 1991 but also as at 3
September 1991 as being $12,933.20.
Exhibit 5 indicates that the Company was trading with the Corporation at
a rate of about $9700 per week. The
first respondent relied on the fact that on 9 September 1991 the Corporation
wrote to the Company terminating its agreement on the basis that the Company
had exceeded its terms of payment by in excess of 14 days in respect of an
amount of $18,425.43. Finally there was
Exhibit 8. Exhibit 8 was a copy of the
report as to affairs of the Company, prepared in accordance with the
Corporations Law, as at 29 November 1991.
This showed an estimated deficiency of assets compared to liabilities of
$162,639 after providing for contingent liabilities of $69,448. It should be noted that the report states the
position of the Company some three months after the date of the impugned
transaction.
In Cannane at first instance the Court had the benefit of expert valuations from both sides on the question of the value of the shares involved in that matter. On appeal (at p.37) there is the following, most useful, statement of the degree to which events subsequent to the date of valuation may be taken into account:
"It is well settled that events subsequent to the date of valuation cannot be taken into account directly in making a valuation: Longworth v. Commissioner of Stamp Duties (1953) 53 SR (NSW) 342 at 348-9; Weldon (Commissioner of Taxes for Victoria) v. Union Trustee Company of Australia Limited (1925) 36 CLR 165. However, it is both necessary and relevant to take into account all facts affecting value which may have been in the contemplation of the hypothetical buyer and seller. These include the probability (if there be one) or even possibility of the events happening as they in fact did. So, if it be necessary to value for some purpose a remainder interest, the fact that the life tenant died shortly after the date the valuation is required will not, of itself, be relevant, where, for example, the death of the life tenant arose from an unforeseen accident. However, if the life tenant had been suffering a life threatening illness as at the date the valuation was required, the probability of death would be a relevant matter to take into account: Trustees Executors & Agency Company Limited v. The Commissioner of Taxes (Vic) (1941) 65 CLR 33."
Mr Norton said in cross-examination (and I believe him) that he first heard of problems from the Police Stock Squad on 9 September 1991. It should be noted that the Corporation terminated the Company's agency agreement on that very date.
It may well have been the case that towards the end of August 1991 events were building up which eventually had the result of the Company going into liquidation.
However, the first respondent did not lead any evidence to suggest that as at 26 August 1991 there existed facts affecting the value of the shares which may have been in the contemplation of a hypothetical buyer and seller.
Neither party to these proceedings sought to adduce
any expert evidence on the question of the value of the shares as at 26 August
1991. There was no evidence that the
books and financial records of the Company were unavailable for scrutiny so as
to
preclude the presentation of any accounting or other expert evidence to
indicate the value of the shares in the Company as at 26 August 1991.
There are two further matters which I consider warrant mention. The last sentence of paragraph 21 of the Notice reads:
"The transfer of the Property was made by the Bankrupt so as to allow Norton to recover, on behalf of H & A Norton & Sons, [there is a word missing here, presumably "moneys"] due under the Loan which would otherwise not have been recoverable from Elgin."
This completely misstates the legal relationship existing between Mr Norton and the Company at the time of the transaction sought to be impugned, i.e. as at 26 August 1991. It was common ground that the relationship was one of Mr Norton being a shareholder in the Company, not a creditor. There was never any question, after 1 July 1991, of Mr Norton recovering any loan moneys from the Company.
Secondly, Mr Norton swore that the Company had always paid interest on the loans promptly. Exhibit D indicates that as at 18 July 1991 the Company was able to pay, and did in fact pay, the interest ($3598.34) on the sums totalling $80,000, advanced by Mr Norton in March 1991, for the period ended 30 June 1991. Again, these are only small pieces of evidence but they are evidence of the Company meeting its commitments.
Conclusion
In my opinion Mr Norton has adduced prima facie
evidence that the shares in the
Company had a real and substantial value when he agreed to sell them to the
Bankrupt in exchange for the Property.
None of the evidence adduced by the first respondent (such as it was)
has in my view either displaced or negatived that prima facie evidence. Nor has it discharged his onus of
establishing, on the balance of probabilities either that the facts and
circumstances alleged in the Notice and relied upon at the hearing existed or
that any other facts or circumstances existed which would bring that
transaction within ss.120 or 121 of the Act.
I am satisfied that the Subdivision referred to in s.139ZS does not
apply to Mr Norton's purchase of the Property and I will make an order setting
aside the Notice.
I certify that this and the preceding thirty-two
(32) pages are a true copy of the Reasons for
Judgment of Justice Carr.
Associate:
Date: 29 May 1996
Counsel for the Applicant: Mr A R Beech
Solicitors for the Applicant: Marks Healy Sands
Counsel for the Respondent: Mr J C Vaughan
Solicitors for the Respondent: Phillips Fox
Date of Hearing: 11 April 1996
Date of Judgment: 29 May 1996
