FEDERAL COURT OF AUSTRALIA

Victorian Producers’ Co-Operative Co Ltd v Kenneth [1999] FCA 1488

BANKRUPTCY – whether transfer of property, being live stock, under a mortgage of live stock is void against the trustee – whether value of forbearance to recover indebtedness of debtors is less than the market value of the live stock transferred under the mortgage

Bankruptcy Act 1966 (Cth) ss 120, 139ZQ and 139ZS

Halse v Norton (1997) 76 FCR 389 – cited

Ogilvie v Adams (1981) VR 1041 – distinguished

Sutherland v Brien [1999] NSWSC 155 - considered

VICTORIAN PRODUCERS’ CO-OPERATIVE COMPANY LIMITED V KENNETH AND OTHERS

VG 7754 OF 1998

JUDGE:          MERKEL J

PLACE:          MELBOURNE

DATE:            29 OCTOBER 1999

IN THE MATTER OF the bankrupt estate of Robert William Heather and Martha Faye Heather

THE COURT ORDERS THAT:

1.      The Application dated 1 October 1998 be dismissed.

2.      A declaration be made that the transfer of property made under the mortgage granted by RW and MF Heather to the applicant dated 14 November 1995 is void against the first respondent.

3.      The applicant pay to the first respondent the sum of $34,725.39.

4.      The applicant pay the respondents’ taxed costs of the Application and the Cross Claim dated 12 February 1999.

5.      Reserve liberty to apply in respect of interest.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE MATTER OF the bankrupt estate of Robert William Heather and

Martha Faye Heather

REASONS FOR JUDGMENT

Introduction

1                     The present matter relates to a dispute concerning a mortgage of live stock granted by Robert William Heather and Martha Faye Heather (“the debtors”) to Victorian Producers Co-operative Company Limited (“the Co-operative”) on 14 November 1995.  The first respondent (“the trustee”) and the second respondent (“the official receiver”) claim that the mortgage is void against the trustee pursuant to s 120 of the Bankruptcy Act 1966 (Cth) (“the Act”) on the ground that the value of the consideration given by the Co-operative for the mortgage was less than the market value of the live stock the subject of the mortgage.

Background

2                     On or about 1 March 1993 the Co-operative and the debtors entered into an arrangement pursuant to which the Co-operative was to provide credit to the debtors to enable them to purchase live stock for later resale by the Co-operative.  The arrangement was that the debtors would obtain live stock from the Co-operative on credit, fatten the stock on their property and, in due course, deliver the live stock to the Co-operative for sale.  In the usual course, the debit balance on the debtors’ account with the Co-operative was to be reduced by the Co-operative applying the proceeds of sale in reduction of the debtors’ indebtedness to the Co-operative.  Although an application for finance was signed by the debtors the application did not contain details of the terms upon which loans made by the Co-operative were to be repayable.

3                     The arrangement between the debtors and the Co-operative resulted in the debtors being indebted to the Co-operative in the sum of $78,878 on 14 November 1995.  The Co-operative was concerned that the amount owing had “got a bit high” and requested that the debtors mortgage their live stock to secure their indebtedness, from time to time, to the Co-operative.  The debtors agreed to that request and executed the mortgage.  Under the mortgage the debtors covenanted to grant, assign, transfer and assure to the Co-operative the live stock of the debtors described in the Schedule (which had a value at the time that approximated the amount of the indebtedness), progeny of that live stock and other live stock acquired by the debtors from time to time.

4                     The consideration for the mortgage was stated to be the Co-operative’s agreement, at the request of the debtors, to forebear from immediately suing for the amount of the indebtedness.  In the ensuing twelve months the Co-operative, in reliance upon its security under the mortgage, advanced to the debtors further amounts totalling $6,438.48.

5                     At the date of the mortgage, as a result of the failure of their timber milling business, the debtors were unable to pay all of their debts as they fell due.  The debtors were indebted to Westpac Banking Corporation in an amount in excess of $1 million.  After certain demands by the bank for payment had not been complied with by the debtors, the bank proceeded to exercise its rights under the real property mortgages granted to it by the debtors.  After the realisation of the securities the debtors remained indebted to the bank in the sum of approximately $680,000.  A bankruptcy notice, which was issued on behalf of the bank on 27 February 1997, led to the debtors declaring themselves bankrupt on their own petition on 9 April 1997.  Accordingly, the bankruptcy of the debtors commenced on that date.

6                     The evidence also discloses that as at 14 November 1995 the unsecured assets of the debtors approximated $100,000 and their unsecured liabilities approximated $700,000.  It is estimated that if the debtors had been sued at that time by the Co-operative, after taking into account legal and potential insolvency costs, it would have recovered an amount within “the range of approximately $0-$8,000”.

7                     Ultimately the Co-operative, relying on its power of sale of live stock under the mortgage, realised a net sum of $45,163.87.  The official receiver and the trustee claimed that that amount is payable by the Co-operative to the trustee.  They contend that the transfer of live stock under the mortgage is void against the trustee pursuant to s 120(1)(b) of the Act as the value of the forbearance to sue is less than the market value of the property transferred under the mortgage.  The Co-operative disputes that the value of the consideration given by it for the mortgage was less than the market vale of the live stock transferred to it under the mortgage.

8                     On 26 August 1998 the official receiver gave notice, under s 139ZQ of the Act, to the Co-operative requiring it to pay to the trustee the amount of $45,163.87.  On 30 September 1998 the Co-operative made application to the Court to set aside the notice given under s 139ZQ.  The trustee has cross-claimed for a declaration that the mortgage is void against the trustee.

The legislative scheme

9                     Section 120 provides as follows:

“(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 transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and

(b)     the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property;

  …

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

(a)   the transfer took place more than 2 years before the commencement of the bankruptcy; and

(b)     the transferee proves that, at the time of the transfer, the transferor was solvent;

(4)   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.

…

  (7)     For the purposes of this section:

(a)   “transfer of property” including 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.”

10                  Section 139ZQ provides that if a person has received any money or property as a result of a transaction that is void against the trustee of a bankrupt, inter alia under s 120 of the Act, the official receiver may, by written notice, require the person to pay to the trustee an amount equal to the money or the value of the property received.  Section 139ZS confers power on the Court to set aside a notice given under s 139ZQ in the event that the Court is satisfied that s 139ZQ does not apply.  The respondent to an application under s 139ZS has the onus of proving that the relevant provision, in this case s 120(1), applies: see Halse v Norton (1997) 76 FCR 389, 392 and 398.  In the event that a notice under s 139ZQ is not set aside the amount payable by a person to the trustee under the notice is recoverable by the trustee, as a debt, by action in a court of competent jurisdiction.

11                  The current form of s 120 is intended to overcome the decision in Barton v Official Receiver (1986) 161 CLR 75, that a transaction is not void under the section if the person who claims to be purchaser of property shows that the consideration given is real and substantial even if it is not fully adequate consideration. Unlike its predecessor, under the current form of s 120 the Court is required to assess the value of the consideration given.

12                  Accordingly, the present proceeding requires determination of the following issues:

·        whether the transfer of live stock under the mortgage is void against the trustee on the ground that the value of the consideration given by the Co-operative for the transfer was less than the market value of the live stock transferred: see s 120(1)(b);

·        in the event that the transfer of live stock under the mortgage is void against the trustee whether the trustee is required, under s 120(4), to pay to the Co-operative a sum equal to the value of any consideration that the Co-operative gave for the transfer of property pursuant to the mortgage?

The consideration given for the Mortgage

13                  It is common ground that s 120 applies to the mortgage in the event that the Court is satisfied that the value of the consideration given by the Co-operative was less than the market value of the live stock mortgaged.

14                  The mortgage states that the consideration is the Co-operative’s agreement to “forebear from immediately suing” the debtors in respect of their indebtedness.  As was stated at para 84.14 of the Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 1996, which enacted s 120 in its current form:

“Forbearance to sue has always been regarded at law as good consideration.  Such forbearance will, under the Act as proposed to be amended by the Bill, have to be looked at in the light of the likely value of the chose in action.”

15                  In the present matter the evidence does not establish that the Co-operative was entitled to “immediately” sue the debtors and recover the amount of their indebtedness to it without giving reasonable notice that repayment of their debt is required.  Accordingly, the likely value of a forbearance from “immediately” suing is problematic.

16                  Counsel for the trustee relied upon Ogilvie v Adams (1981) VR 1041 at 1043 to contend that where a loan of money is made and nothing is said as to repayment the money is repayable without prior demand.  In my view that is not the situation in the present case.  It was a term of the credit arrangement entered into between the Co-operative and the debtors that, in the usual course, the loans that were made from time to time to enable the purchase of live stock would be repayable out of the proceeds of sale of the live stock after the fattening of that stock on the debtors’ property.  In the absence of breach, termination of that arrangement may require reasonable notice.  There may be no entitlement to repayment without the giving of that notice.  Thus, a forbearance from “immediately suing” the debtors may have little value.

17                  It is unnecessary to pursue that matter further as I am satisfied that the consideration actually given by the Co-operative for the mortgage was its agreement to forebear from taking such steps, as were within its power to take, to recover the amount of the debtor’s indebtedness to the Co-operative and to continue to provide credit on the same basis as had previously been provided.  Although that consideration has value the issue is whether that value is less than the market value of the live stock the subject of the mortgage.

18                  Section 120 in its current form was recently considered by Austin J in Sutherland v Brien [1999] NSWSC 155 where his Honour observed:

·        property is broadly defined in s 5 of the Act and includes personal property such as a chose in action [15];

·        s 120(1)(b) requires the court to identify the consideration actually given by the transferee, rather than the consideration which might have been given but was not in fact given [21];

·        the value of the property transferred is to be its “market value” at the time of the transfer which is to be compared with the “value” – not necessarily the market value – of the consideration given by the transferee [40];

·        the consideration given by the transferee is to be assessed on an objective basis not dependent on any special value which the transferor may have subjectively placed on the consideration [40].

19                  I respectfully agree with his Honour’s observations.  Thus, a value is to be determined of the agreement by the Co-operative to forebear from taking steps to recover the amount of the debtors’ indebtedness and of the continuing provision of credit to the debtors in accordance with the credit arrangement.

20                  The value of an agreement to forebear from recovering a debtor’s indebtedness will be closely linked to the “value” of the chose in action.  In the present case the chose in action of the Co-operative, in respect of the existing indebtedness of the debtors on 14 November 1995 of $78,878, plainly had a value that was significantly less than that amount as a result of the insolvency of the debtors at the time.  Even if the debtors were somehow able to pay that amount to the Co-operative, the significant risk that the payment would be void under the Act by reason of the debtors’ insolvency would inevitably result in the value of the chose in action being significantly less than the amount due.  As no further loans were made on 14 November 1995 the agreement, presumably terminable on reasonable notice, to provide credit in the future was of little value at that date.  In so far as the loans subsequently made were part of the consideration given by the Co-operative I am satisfied that at all material times the value of the consideration given by the Co-operative remained significantly less than the market value of the live stock transferred to it from time to time under the mortgage.

21                  In the circumstances, I am satisfied that the value of the consideration given by the Co-operative for the transfer of property under the mortgage on 14 November 1995, and thereafter, was significantly less than the market value of the property transferred under that mortgage.

22                  It was submitted by counsel for the Co-operative that I ought to have regard to the value of the security given by the debtors to the Co-operative.  It was then contended that that security ensured that the value of the chose in action was the amount realisable under the mortgage, which was equivalent to the indebtedness at the time.  In my view that approach is erroneous as it does not value the consideration given by the transferee; rather, it values that consideration and the consideration given by the transferor.

23                  It was also submitted by counsel for the Co-operative that a finding of insufficiency of consideration under s 120(1)(b) cannot be made without determining the precise amount of the insufficiency.  I do not accept that submission.  The requirement under s 120(1)(b) is that the consideration given be less that the market value of the property transferred.  The precise value of the consideration given (which is a matter arising under s 120(4)) may, but need not necessarily, be determined for the purposes of s 120(1)(b).

24                  Accordingly, I am satisfied that the transfer of property under the mortgage is void against the trustee under s 120(1)(b) of the Act with the consequence that the application of the Co-operative to the Court under s 139ZS to set aside the notice given under s 139ZQ must fail.

Refund of Consideration

25                  Section 120(4) provides that the trustee must pay to the Co-operative an amount equal to the value of any consideration that the Co-operative gave for any transfer that is void against the trustee under s 120(1).  As explained above I have had some difficulty in the present case in valuing the “forbearance” aspect of the consideration although I am satisfied that its value is significantly less than the market value of the property transferred under the mortgage.

26                  Counsel for the trustee has conceded that if I conclude that the consideration given by the Co-operative was to forebear from taking steps to recover the amount due, then the proper way to value that forbearance was on the basis that, as the amount likely to have been recovered at the time was in the range of $0-$8,000, it was appropriate to take the middle of the range, being $4,000, as the value of that forbearance.  In the circumstances I am of the view that it is appropriate to treat $4,000 as the value of the forbearance for the purposes of s 120(4).  I note that the Co-operative has not adduced evidence to support any other value being placed on the “forbearance” in the event that I do not accept its contention that the value is the amount of the debtors’ indebtedness.

27                  The trustee has also applied a common sense approach to valuing the other aspect of the consideration given by the Co-operative, being the making of further advances under the credit arrangement.  The trustee has conceded, correctly in my view, that it is appropriate to regard the value of the consideration given by the Co-operative as the amount that was, in fact, advanced, in reliance upon the mortgage, as a result of the continuation of the credit arrangement.  As the advances totalled the sum of $6,438.48 the total amount the trustee is required to pay to the Co-operative under s 120(4) is the sum of $10,438.48.

Conclusion

28                  It follows from the foregoing that:

·        the application of the Co-operative under s 139ZS must fail;

·        the trustee is entitled to a declaration that the transfer of property under the mortgage is void against the trustee;

·        the Co-operative is obliged to pay to the trustee the proceeds it received as a result of the sale of live stock pursuant to the mortgage, being the sum of $45,163.87, less the amount the trustee is obliged to pay to the Co-operative under s 120(4), being the sum of $10,438.48.

29                  Accordingly, the net indebtedness of the Co-operative to the trustee is the sum of $34,725.39.  As the trustee has succeeded in its claims in the proceeding, including the cross-claim, it is appropriate that the Co-operative pay the trustee’s and the official receiver’s taxed costs of and incidental to the proceeding and the cross-claim.

Associate:

Dated:              29 October 1999