FEDERAL COURT OF AUSTRALIA

Official Trustee in Bankruptcy v Trevor Newton Small Superannuation Fund Pty Ltd [2001] FCA 1267

bankruptcy – payments made to a superannuation fund – interests in superannuation funds excluded from property divisible among creditors by s 116(2)(d) of the Bankruptcy Act 1966 (“the Act”) – difference between transfers of money into a superannuation fund and an interest in a fund – whether payments made at a time when bankrupt was aware he was insolvent are property divisible amongst his creditors – inference as to insolvency – what constitutes “consideration” for the purposes of s 121 of the Act – onus in relation to establishing existence of such consideration.

Bankruptcy Act 1966 (Cth), ss 5(2), 5(3), 40(1)(g), 58, 115, 116(1), 116(2), 116(5), 120, 121(1), 121(2), 121(4), 121(5), 121(9), 129(4)

Acts Interpretation Act 1901 (Cth), s 15AA

NM Superannuation Pty Ltd v Young (1993) 41 FCR 182, referred to

Mills v Meeking (1990) 169 CLR 214, cited

Saraswati v R (1991) 172 CLR 1, cited

R v L (1994) 49 FCR 534, applied

Re Jury: Ashton v Prentice  (1999) 92 FCR 68, applied

Ashton v Prentice [1998] FCA 1464, referred to

Official Trustee in Bankruptcy v Alvaro (1996) 138 ALR 341, cited

PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515, cited

Barton v Official Receiver (1986) 161 CLR 75, applied

In re Abbott [1983] Ch 45, cited

Cook (Trustee), In the matter of Benson [2000] FCA 1777, followed

IN THE MATTER OF TREVOR NEWTON SMALL

OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE OF THE BANKRUPT ESTATE OF TREVOR NEWTON SMALL v TREVOR SMALL SUPERANNUATION FUND PTY LIMITED (AS TRUSTEE OF THE TREVOR SMALL SUPERANNUATION FUND) ACN 074 496 692 & ANOR

N7761 of 2000

MADGWICK J

SYDNEY

6 SEPTEMBER 2001

IN THE MATTER OF TREVOR NEWTON SMALL

THE COURT ORDERS THAT:

1.      The first respondent be restrained, until further order, from transferring, conveying, assigning, surrendering, or paying out the fund held by the first respondent in respect of the Trevor Small Superannuation Fund.

2.      The first respondent be restrained, until further order, from terminating or winding up the Trevor Small Superannuation Fund.

THE COURT DIRECTS THAT:

1.      The parties confer and bring in (by way of fax to his Honour’s Associate) within 14 days short minutes of order that give effect to these reasons for decision or failing agreement their respective proposed orders.

IN THE MATTER OF TREVOR NEWTON SMALL

REASONS FOR JUDGMENT

HIS HONOUR:

1                     In this matter the applicant, the Official Trustee in Bankruptcy, makes an application under ss 58, 116, 120 and 121 of the Bankruptcy Act 1966 (Cth) (“the Act”), seeking a number of declarations in relation to moneys paid by the second respondent, Trevor Small a bankrupt, to the first respondent (“the superannuation fund trustee”).

2                     The application sets out the details of the applicant’s claim:

“1.      A declaration that the amount of $92,900.00 (“the First Payment”) paid by the Second Respondent into a Superannuation Fund known as the Trevor Small Superannuation Fund (“the Fund”) on 23 July 1997 is vested in the applicant from the commencement of the bankruptcy of the Second Respondent and is properly divisible among the creditors of the Second Respondent pursuant to Sections 58 and 116(1)(a) of the Bankruptcy Act (as amended) (“the Act”).

2.                  A declaration that the First Payment is not a payment of the kind which falls within Section 123(1)(a), 123(1)(b), 123(1)(c) and 123(1)(d) of the Act and could not be validated by those sub-sections.

3.                  A declaration that the First Respondent holds the First Payment and any interest accrued on the First Payment upon Trust for the Applicant.

4.                  An order that the First Respondent do all such things and take all such steps as may be necessary to pay the First Payment and any interest accrued thereon to the Applicant.

5.                  Further, and in the alternative, an order that the following payments made by the Second Respondent to the First Respondent in its capacity as trustee of the Trevor Small Superannuation Fund are void against the Applicant pursuant to Section 120 of the Act:

Date                            Payment                                  Amount

23 July 1997                First Payment                         $92,900.00

26 July 1996                Second Payment                     $85,387.00

15 January 1997         Third Payment                        $85,387.00

6.                  Further, and in the alternative, an order that the following payments made by the Second Respondent to the First Respondent in its capacity as trustee of the Trevor Small Superannuation Fund are void against the applicant pursuant to Section 121 of the Act:

Date                            Payment                                  Amount

23 July 1997                First Payment                         $92,900.00

26 July 1996                Second Payment                     $85,387.00

            15 January 1997         Third Payment                        $85,387.00

7.                  Costs.”

The applicant also sought interlocutory relief by way of:

“1.      An order that the First Respondent be restrained from transferring, conveying, assigning, surrendering, or paying the fund held by the First Respondent in respect of the Fund.

2.                  An order that the First Respondent be restrained from terminating or winding up the Fund.”

From taxation debt to superannuation interest

3                     On 25 September 1995, three Notices of Assessment together with a provisional tax notice were issued by the Australian Taxation Office (“ATO”) to the second respondent, care of Messrs Peter W McGee & Co., who were accountants acting on his behalf.  Pursuant to these notices, the sum of $308,802.20 became due and payable to the Deputy Commissioner of Taxation (“the DCT”) on 27 October 1995.  As at that date, Mr Small was unable to pay the sum of $308,802.20 to the DCT.  On 21 March 1996, the DCT commenced proceedings against him to recover the unpaid income tax.

4                     On 1 April 1996, Mr Small was personally served with a statement of claim issued out of the Supreme Court of New South Wales by the DCT claiming the sum of $398,223.01.  No defence was filed to the statement of claim. 

5                     A superannuation fund, the “Trevor Small Superannuation Fund” was established on 21 June 1996 and the first respondent was appointed as the trustee of that fund.  At all relevant times the directors of the superannuation fund trustee were Mr Mark Green, Mr Small’s accountant and Mr Small (he ceased being so on 8 September 1997).  The superannuation fund was at all material times a regulated superannuation fund pursuant to the Superannuation Industry (Supervision) Act 1993 (Cth) (“the SIS Act”) and the Superannuation Industry (Supervision) Regulations 1994. 

6                     On 26 June 1996, Mr Small paid the sum of $85,387.00 (“the first payment”) to the first respondent as a contribution to the fund.  On 9 July 1996, the DCT obtained judgment against Mr Small in the Supreme Court in the sum of $391,778.14.  On 15 January 1997, Mr Small paid a further sum in the amount of $85,387.00 into the superannuation fund (via the first respondent).

7                     On 28 February 1997, Mr Small was served with a bankruptcy notice issued on the application of the DCT.  The notice alleged that he was indebted to the DCT in the sum of $370,003.63.  The bankruptcy notice required that he pay or secure the payment of that sum to the satisfaction of this Court or the DCT, or that he compound that sum to the satisfaction of the DCT.  By 14 March 1997, Mr Small had failed to comply with the bankruptcy notice.  Having also failed to satisfy this Court that he had a counter-claim, set off or cross-demand equal to or exceeding the sum specified in the bankruptcy notice, being one that he could not have set up in the action in which the judgment was obtained, Mr Small committed an act of bankruptcy on 14 March 1997.

8                     On 23 July 1997 Mr Small paid a further amount of $92,900 into the fund.

9                     On 29 July 1997, the DCT filed a creditor’s petition based on Mr Small’s failure to comply with the bankruptcy notice.  The petition claimed the sum of $595,387.63.  On 6 October 1997, a sequestration order was made against Mr Small’s estate by a Registrar of this Court.

10                  It was agreed that the amounts paid to the superannuation fund by Mr Small were payments falling within the “reasonable benefit limits” provided under the Income Tax Assessment Act 1936 (Cth).

11                  In respect of the three payments made into the superannuation fund, the trustee paid contribution tax equal to 15% of the deductible amount referable to each payment being $9,718.50 for the first payment, $10,107.30 for the second payment and $10,572.30 for the third payment.  The superannuation fund trustee also paid a superannuation surcharge calculated at 15% on each of the second and third payments in the amounts of $10,107.30 and $10,572.30 respectively.  Therefore, the total tax paid to the ATO on contributions made to the superannuation fund was $51,077.70.  Further, the superannuation fund derived income from, and was charged or held liable for expenses in relation to, the trustee’s management of the fund’s assets.

Relevant legislation

12                  At the relevant times, the Act contained the following sections:

“58(1)Subject to this Act, where a debtor becomes a bankrupt:

(a)               the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee ...

…

(6)               In this section, “after-acquired property”, in relation to a bankrupt, means property that is acquired by, or devolves on, the bankrupt on or after the date of the bankruptcy, being property that is divisible amongst the creditors of the bankrupt.

…

115(1)The bankruptcy of a person who becomes a bankrupt on a creditor’s petition or by virtue of a sequestration order made under Division 6 of Part IV or under Part X shall be deemed to have relation back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by that person within the period of 6 months immediately preceding the date on which the creditor’s petition was presented or the application for the making of the sequestration order was made, as the case may be.

…

(3)              A creditor’s petition or a sequestration order made on a creditor’s petition is not invalid by reason of the commission of an act of bankruptcy before the time when the debt on which the petition was based was incurred.

…

116(1)Subject to this Act:

(a)               all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge;

…

is property divisible amongst the creditors of the bankrupt.

(2)               Subsection (1) does not extend to the following property:

…

(d)               subject to subsection (5):

(i)                 policies of life assurance or endowment assurance in respect of the life of the bankrupt or the spouse of the bankrupt;

(ii)               the proceeds of such policies received on or after the date of the bankruptcy;

(iii)             the interest of the bankrupt in:

(A)              a regulated superannuation fund (within the meaning of the Superannuation Industry (Supervision) Act 1993); or

(B)               an approved deposit fund (within the meaning of that Act); or

(C)              an exempt public sector superannuation scheme (within the meaning of that Act);

(iv)             a payment to the bankrupt from such a fund received on or after the date of the bankruptcy, if the payment is not a pension within the meaning of the Superannuation Industry (Supervision) Act 1993;

(v)               the amount of money a bankrupt holds in [a Retired Savings Account];

(vi)             a payment to a bankrupt from [a Retired Savings Account] received on or after the date of the bankruptcy, if the payment is not a pension or annuity within the meaning of the Retirement Savings Accounts Act 1997.

…

(5)               The following provisions apply in working out how subsection (1) extends to property covered by paragraph (2)(d);

(a)               if the total value of the property does not exceed the bankrupt’s pension RBL (worked out under section 140ZD of the Income Tax Assessment Act 1936) for the year of income in which the date of bankruptcy occurred – subsection (1) does not extend to any of that property;

(b)               if the total value of the property exceeds that pension RBL – subsection (1) does not extend to so much of that total value as equals that pension RBL.

…

120(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.

(2)               Subsection (1) does not apply to:

(a)               a payment of tax payable under a law of the Commonwealth or of a State or Territory; or

…

(d)       a transfer of property of the transfer is of a kind described in the regulations.

(7)               For the purposes of this section:

(a)               “transfer of property” includes 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.

…

121(1)A transfer of property by a person who later becomes bankrupt (the “transferor”) to another person (the “transferee”) is void against the trustee in the transferor’s bankruptcy if:

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

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

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

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

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

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

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

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

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

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

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

…

(9)              For the purposes of this section:

(a)                “transfer of property” includes payment of money.

…

129(4)If a person has in his or her possession or power any moneys or security that he or she is not by law entitled to retain as against the bankrupt or the trustee, he or she shall pay or deliver the moneys or security to the trustee.”

The rules of the superannuation fund

13                  The Trust Deed between the trustee and Mr Small, the founding member, recited the trustee’s acceptance of the trust and its agreement to hold all contributions on the terms of the trust in the accordance with the Fund Rules annexed to the Trust Deed, which were to govern the fund.  The parties covenanted in clause 4 of the Deed “to perform and observe the agreements, covenants, trusts, stipulations and conditions of the Rules so far as they are, or ought to be, observed by each of them respectively”.

14                  The Rules relevantly provided:

“3.17   Trustee’s Remuneration

(a)               Subject to the Superannuation Law, the Trustee may charge the Fund for the Trustee’s reasonable remuneration and reasonable out of pocket expenses at such amount or amounts an in such manner as the Trustee may determine from time to time acting as Trustee.

…

4.1              Eligibility

(a)               The Founding Member shall be eligible and shall be a Member from the Commencement Date.

…

4.3       Commencement of Membership

            Subject to the Superannuation Law, a person shall become a Member from the date when the Trustee accepts a contribution to the Fund, in respect of the Employee (including a transfer from a Rollover Fund) or such other date as the Trustee decides.

…

6.1              Member Contributions

Unless required by the Superannuation Law, a Member:

(a)               shall not be required to contribute to the Fund;

(b)               may contribute as much as the Superannuation Law allows; and

(c)                may transfer amounts to the Fund from Rollover Funds with the consent of the Trustee.

…

7.1       Member Financed Benefits

            Notwithstanding anything to the contrary contained anywhere else in the Deed, Member Financed Benefits accruing in respect of a Member shall vest in the Member as they accrue to that Member.

…

8.1             Entitlement to Benefit

A Member shall be entitled to be paid a Benefit when:

(a)                the Member ceases to be an Employee;

(b)                the Member requests the Benefit to be paid and the Superannuation Law allows a Benefit to be paid; or

(c)                the Superannuation Law requires a Benefit to be paid.

…

8.2             Benefits Payable

The Benefit payable shall, at the option of the Member but with the Trustee’s consent, be any one or a combination of the following:

(a)                a Pension (including an allocated pension) or Annuity that complies with the Superannuation Law on such terms as the Trustee and Member agree calculated in accordance with sub-Rule 8.4;

(b)                a lump sum;

(c)                any other form permitted or required by the Superannuation Law, provided that the total amount payable shall not exceed the vested amount in the Member’s Accumulated Benefit Account or any such additional amounts as the Trustee determines.

…

10.1          Rights of Members

No person, whether as a Member or otherwise, shall have any claim, right or interest to or in respect of the Fund or any contributions to it or any claim upon or against the Trustee or the Employer except under and in accordance with the provisions of the Rules.

…

14.1          Assets of the Fund

The following property, the investments for the time being representing that property and the income thereof shall constitute the assets of the Fund:

(a)               contributions;

(b)               any assets transferred to the Trustee pursuant to any arrangements made by the Trustee and a Rollover Fund; and

(c)                any other moneys received or receivable by the Trustee for the purpose of the Fund.

…

14.3Assets vested in Trustee

The assets of the Fund shall be vested in the Trustee upon the terms and conditions and subject to the trusts, powers, authorities and discretions contained in the Rules and shall be managed, administered and applied by the Trustee in accordance with the Rules.

14.4Expenses

            All expenses incurred from time to time in operating the Fund which are not paid by an Employer or the Founding Member shall be paid out of the Fund.”

The parties’ submissions

15                  In relation to the first and second payments, the applicant submitted that, when each of these payments was made, it could reasonably be inferred that Mr Small “was or was about to become, insolvent” for the purposes of s 121(2) of the Act.  Further, it was submitted that s 121(2) provided a conclusive means of establishing the main purpose of a transfer for the purpose of s 121(1).  Accordingly, once s 121(2) applies, it is not possible for the bankrupt to save a transfer from avoidance under s 121(1) by reliance on other evidence about the purpose of the transfer, nor is it necessary for the applicant to rely on further evidence of the transferor’s purpose.  Therefore, the applicant submitted, the first two payments were void against the Official Trustee.

16                  In relation to the third payment, the applicant submitted that this was recoverable irrespective of the application of s 121.  This was claimed to be so because, on 14 March 1997, Mr Small had committed an act bankruptcy arising from his failure to comply with the bankruptcy notice: s 40(1)(g).  As Mr Small was made bankrupt on a creditor’s petition, pursuant to s 115(1)(g) his bankruptcy was deemed to have commenced on the date of the commission of the act of bankruptcy.  Section 58(1)(a) provides that, on the commencement of the bankruptcy, the bankrupt’s property vests in the Official Trustee.  Accordingly, it was submitted that the third payment, made on 23 July 1997, was a payment out of assets legally vested in the applicant, without the applicant’s authority.  Therefore, the first respondent derived no title to the moneys paid which are wholly recoverable from the superannuation fund trustee:  s 129(4).

17                  As to s 116(2), the applicant submitted that s 116 determines that property that “belonged to or was vested in, a bankrupt at the commencement of the bankruptcy” is “divisible amongst the creditors”.  Section 116 does not define what property “belonged to or was vested in” the bankrupt nor does it deal expressly with property transferred by the bankrupt either during the relation back period under s 115 or the avoidance periods under ss 120 to 122.  The applicant’s submission was that transfers made during the relation back period must fall within s 116 because nothing in s 115 suggests that it is restricted by other provisions of the Act; nothing in s 116(1) is inconsistent with the operation of the relation back period; and s 116 operates “subject to” the other provisions of the Act.  Further, s 116(1) in its operation includes property acquired by a trustee in bankruptcy in the exercise of the avoidance entitlements created by ss 120 to 122 because s 116(1) is “subject to the Act” and those words must have a wider effect than merely repeating the exception provided for by s 116(2); the avoidance provisions in ss 120 to 122 integrate with s 116(1) by allowing the trustees in bankruptcy to assert the priority of the bankrupt’s title to property; and, unless s 116(1) is treated as including property acquired by trustees in bankruptcy in the exercise of the entitlements arising under ss 120 to 122, no specific provision of the Act governs the way in which recovered property is to be applied.  Section 116(2)(d) provides for the protection of a bankrupt’s interest in a superannuation fund, but does not refer to the way in which that interest has been obtained.  According to the applicant, subs (d) refers to a validly obtained interest as determined by the Act.

18                  Counsel for the superannuation fund trustee started with the proposition that all the exemptions provided for by s 116(2) were included because of an obvious social policy.  Reliance was placed on the Clyne Committee Report which had led to the enactment of the Bankruptcy Act 1966 (Cth).  Counsel submitted that what was stated in that report as to insurance policies was equally applicable to the more modern encouragement of superannuation arrangements.  Section 116(2)(d) should be construed in light of the relevant policy objectives.  Reference was made to the decision of Burchett J in NM Superannuation Pty Ltd v Young (1993) 41 FCR 182 at 183, where his Honour quoted part of that Report:

“It has been for many years the policy of Parliaments throughout Australia to give protection to policies of life insurance against the claims of creditors.  This policy is now embodied in sections 92 to 94 of the Life Insurance Act 1945-1961 of the Commonwealth.  The protection given by that Act is, however, expressed to be subject to the Bankruptcy Act.  The limited charge given by section 91(b) for the benefit of creditors appears to the Committee to be a compromise that is difficult to justify and the Committee recommends that, if a policy of life or endowment assurance has been in force for more than two years before the bankruptcy, neither the policy nor its proceeds should form part of the divisible property of the bankrupt and that, in such a case, there should be no charge in favour of the trustee in respect of any premiums paid.”

19                  It was submitted that the words “the interest of the bankrupt” in s 116(2)(d)(iii) mean any lawful interest and, by virtue of s 116(2), any interest that arises from payments made to a regulated superannuation fund is a lawful interest which is protected for the benefit of the bankrupt.  It was argued that the applicant is seeking artificially to distinguish the interest in the fund and the payments made Mr Small, in order to recover the payments; however, without those payments no interest in the fund can arise and therefore the two cannot be separated.  Accordingly, in order to protect the interest, s 116(2)(d) should be construed as protecting any payment that gives rise to the relevant interest.  Counsel also submitted that another reason why the interest in, and the payment into a fund merit the same treatment is because a superannuation fund is likely, as here, to have paid tax on the money at the time that it came in and, if the payment were to be void because of ss 120 or 121, the Taxation Commissioner would get a windfall, as he would need not pay back money received in good faith from a fund’s trustee.  The framers of the Act, it was submitted, would never have intended such payments into a fund to be touched upon bankruptcy.

20                  The principal submission for Mr Small was that neither ss 120 or 121 applied to the property that was transferred, because of the exemption provided by s 116(2).  This was claimed to be so because the framework of the Act points towards s 116(2) being independent of s 116(1) and the remainder of the Act; this is made clear by the words “subject to this Act” in s 116(1) but absent in s 116(2).  Alternatively, it was submitted that, if there is a conflict between the provisions, any such conflict should be resolved in favour of the construction which gives the widest possible scope to the exemptions set out in s 116(2).  The interpretation of the Act urged by the applicant would severely limit the scope of the exemptions provided by s 116(2).

21                  The first and second payments were made before the relation back period and therefore are not caught by s 115 and 116.  In relation to the third payment, counsel for Mr Small submitted that, on a proper interpretation of ss 115 and 116(1), it was not caught by the relation back provision.  This was claimed to be so because the only property that is caught by s 116(1) is property that is deemed to have vested in the trustee pursuant to ss 58 and 115, however the third payment gave Mr Small an interest that, by virtue of s 116(2), was not s 116(1) property.  Therefore, an interest acquired within the relation back period that falls within s 116(2)(d) is not caught by s 116(1).  In support of this interpretation, counsel sought to rely on policy considerations to do with the protection of superannuation:  the amendment of the Act to exclude an interest in a superannuation fund from inclusion in a bankrupt’s estate represented a remedial and beneficial provision for bankrupt persons and should be interpreted liberally in their favour.

22                  In relation to the application of s 121, it was submitted that the onus is on the trustee to prove the negative of the defences provided for in ss 121(4), (5) and (6).  However, it was conceded that the superannuation fund must have known what Mr Small’s purpose was in making each contribution, as he (along with only his accountant) was at the relevant times a director of the Fund’s trustee.

The relationship between ss 116(2) and 121

23                  The first question in this matter is whether or not the three payments made by Mr Small are void pursuant to s 121(1) or whether s 116(2)(d) of the Act operates in such a manner as to give such payments complete protection.  I agree with the respondent’s submissions that the protection offered by s 116(2)(d)(iii)(A) is part of a broad legislative policy, manifest in a number of statutes touching superannuation, actively encouraging individuals to provide for their own future and retirement rather than to rely on government assistance.  In order to achieve this goal, the legislature has provided for a person’s interest in a regulated superannuation fund to be protected in the event that he or she should become bankrupt:  the legislative policy seems to be that a person should not lose what he or she has bona fide managed to provide for retirement merely because that person becomes insolvent. 

24                  However, in my opinion the legislative protection is not as broad as the respondents submitted.  There is a need to draw a distinction between an interest and a payment into a fund.  I have little doubt that the protection provided for by s 116(2)(d)(iii)(A), operates in favour of any lawful interest in a regulated superannuation fund.  However, the exemption of a wide range of superannuation interests from divisibility, along with a bankrupt’s other property, amongst the creditors (subject to s 116(5)) applies to the interest.  This does not exclude the potential for a payment to a superannuation fund to be caught by the relation back or avoidance provisions of the Act, even though that payment gives rise to the interest in the fund, which is protected.  Such a payment is a transfer of property.  The structure of Part VI of the Act is clear.  Sections 120 and 121 deal with transfers.  Section 116(2)(d)(iii) only protects superannuation interests which have arisen out of transfers of property prior to a person becoming a bankrupt that are not caught by s 121 as transactions to defeat creditors.  If the Official Trustee can show that payment to a superannuation fund was, pursuant to the Act, void then the creditors are entitled to the benefit that flows from that.

25                  As indicated, Mr Aldridge SC sought to place reliance on the Clyne Committee Report and to draw analogies between the protection given by ss 116(2)(d)(i) and (ii) to assurance policies and that given by para (iii) to superannuation.  Mr Aldridge submitted that the Clyne Committee Report had made it clear as to life assurance that “neither the policy nor its proceeds should form part of the divisible property and there should be no charge in favour of the trustee [in bankruptcy] in respect of any premiums paid”; the same reasoning should apply to superannuation interests and the contributions that produce them.  However, two things may be said about this.  Firstly, something like what Mr Aldridge submits may have been intended, but the statutory wording has simply failed to state it.  The duty under s 15AA of the Acts Interpretation Act 1901 (Cth), to prefer a “construction that would promote the purpose or object underlying the Act”, whether or not the purpose has been expressly stated in the Act, to another construction, is clear enough.  But the language of the Act must still bear that construction even if one knows the underlying purpose: see  Mills v Meeking (1990) 169 CLR 214 at 235 per Dawson J and Saraswati v R (1991) 172 CLR 1 at 21-23 per McHugh J, Toohey J agreeing.  In R v L (1994) 49 FCR 534 at 538, a Full Court of this Court held:

“The requirement of s 15AA(1) that one construction be preferred to another can have meaning only where two constructions are otherwise open, and s 15AA(1) is not a warrant for redrafting legislation nearer to an assumed desire of the legislature.”

By no amount of generous construction can such a conclusion be reached here.  A distinction seems deliberately to have been drawn between transfers of money or other property, whether such transfers are by way of policy premiums or to superannuation funds or otherwise and the benefits such payments may have produced. 

26                  Secondly, there is no injustice to the bankrupt and no necessary loss of the socially desired benefit, by adhering to the broader and more general policy of the Act, whether in relation to premiums for a life policy or contributions to a superannuation fund.  Apart from the first couple of years, when insurers or funds are apt to meet start-up or set up expenses, a life policy would have had a surrender value, had the bankrupt not illegally preferred his future well being to that of his creditors, and superannuation funds of the kind under consideration usually provide for payments into the fund at the discretion of the contributor with preservation of benefits if payments cease for a period of time or altogether.  Where superannuation fund contributions are made by legal compulsion, there is a question whether there has been a voluntary transfer of property (or at least a positive act by the putative transferor) represented by a compulsory contribution to a superannuation fund.  An implication that voluntariness is requisite may protect, as an instance discussed in argument, a public officer unable to prevent his or her employer from deducting superannuation contributions, even though that officer knows that he or she is about to become insolvent (cf. s 121(2) and (4)).  There is probably a difference between a “transfer or property by a person” and an exaction (or extraction) of property by somebody else from that person; this view appears to be supported by s 121(9)(b) which provides that “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”.  I have supplied the emphasis to indicate that positive action by the bankrupt is seen as necessary.  In any event, this is not the case of a government officer with a bona fide legal obligation to make irreducible superannuation contributions and the legal position in such a case may await its occurrence.

27                  Thus, in my view, the scope of the exemption in s 116(2)(d)(iii)(A) is limited to existing interests in a superannuation fund but it does not prevent a challenge, as the Official Trustee is seeking to make in this case, to the validity of any transfer of money that gave rise to that interest.  The policy considerations for providing an exemption for interests in superannuation funds do not, in my opinion, overshadow the policy considerations underlying the other provisions of the Act, and the Court should not strain to interpret a section of the Act in a manner that would aid a bankrupt deliberately to strip himself or herself of property that would otherwise be available to his or her creditors. 

28                  I note the submissions of both respondents that the interpretation that I have adopted potentially gives rise to questions in relation to taxes paid by the trustee of the superannuation fund.  This does not provide any reason why the interpretation I have adopted should not be adopted.  I am not satisfied that the law is unequal to denying tax collectors the benefit of receipts later revealed as unwarranted.

29                  Having determined that s 116(2) does not, as a threshold matter, preclude the operation of s 121 on the transfers of moneys to the superannuation fund by Mr Small, it needs be determined whether in fact each of the three payments is void by operation of the Act.

The third payment

30                  As indicated above, the third payment of $92,900 was paid to the superannuation fund trustee on 23 July 1997, whereas on 14 March 1997 Mr Small failed to comply with a bankruptcy notice in relation to a judgment debt.  Therefore, applying s 115(1) (and as Mr Small was made bankrupt on a creditor’s petition issued within six months immediately after the act of bankruptcy) his bankruptcy is deemed to have commenced on 14 March 1997.  By operation of s 58(1)(a), where a person becomes bankrupt, his or her property vests from the date of bankruptcy in the Official Trustee.  Accordingly, as at the date of the third payment, the $92,900 was money that had vested in the hands of the applicant and Mr Small had no authority to part with it.  It follows that the superannuation fund trustee, which must be taken to have been aware of that lack of authority, derived no title to the moneys paid.  Pursuant to s 129(4) the money paid to the superannuation fund trustee is recoverable and should be paid back to the Official Trustee.

31                  During the course of the hearing an issue arose in relation to whether the third payment should be treated as property or income under the Act.  Money derived as income before the deemed commencement of the bankruptcy becomes property in the hands of the bankrupt; however, it may be arguable that this may not be so for income earned thereafter.  In any event, no evidence was presented from Mr Small as to the provenance of the money that constituted the third payment.  The case proceeded on the basis that it was property in the bankrupt’s hands.  However, as I indicated at the hearing, liberty will be granted to Mr Small, subject to costs, to make an any application he may wish to in relation to that matter.

The validity of the transfers

32                  Unlike the third payment, the first two payments were made before the commencement of the relation back period provided by s 115.  The applicant sought primarily to have these two payments recognised as void by reason of the operation of s 121 of the Act.  To be void under s 121, it must either directly appear that the bankrupt’s main purpose in making the transfer was to prevent the money from becoming divisible among his creditors:  s 121(1)(b)(i); or the evidence must be such so as to allow a reasonable inference to be drawn that at the time of the transfer he was or was about to become insolvent.  In the latter case, his purpose is then conclusively deemed to have been to prevent the property from becoming divisible amongst his creditors: s 121(2).  The presumption effected by s 121(2) cannot be rebutted even by direct proof that the transferor’s main purpose was other than that described by s 121(2)(b):  see Re Jury: Ashton v Prentice  (1999) 92 FCR 68 at 82.  The Full Court acknowledged in Re Jury (at 81) that the wording of the section leaves open the possibility that the person is in fact solvent and all that is required is that the inference is “reasonably open”.

33                  In my opinion, it is readily to be inferred from all the circumstances that, at the time of both transfers (and also the third transfer), Mr Small was or was about to become insolvent, thereby establishing the requisite purpose in s 121(1)(b)(i).  As Hill J said in Ashton v Prentice [1998] FCA 1464, “[t]his element looks objectively at the financial position of the transferor at the time the relevant transfer was made”.  The Act in s 5(3) defines a person who is “insolvent” as meaning a person who is not solvent; a person being defined to be “solvent”, in s 5(2):

“if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.”

34                  The relevant circumstances include:

·        On 25 September 1995, Mr Small was issued with Notices of Assessment by the DCT totalling $308,802.21;

·        About 6 months later, proceedings were commenced by the DCT on 21 March 1996 to recover the debt arising from those notices;

·        After a further three months, when the first transfer was made to the superannuation fund Mr Small had made no payments to the DCT in partial satisfaction of the notices;

·        On 9 July 1996 judgment was obtained by the DCT against Mr Small in the amount of $391,778.14 plus $485 in costs;

·        Six months later, when the second transfer was made to the superannuation fund, Mr Small had paid nothing on account of that judgment debt;

·        Mr Small’s Statement of Affairs dated 13 November 1997 revealed that his total liabilities of $640,038 (including $623,609 owed, by him, to the ATO) substantially exceeded his assets of $348,490, which included $135,626 in debts owed to him and $155,223 in superannuation.  Further, his annual pre-tax income of $250,000 was substantially less than his liabilities and he had not, in the two years prior to his bankruptcy, disposed of any significant assets which he could use to satisfy any of his debts;

·        The transcript of Mr Small’s and his accountant’s examinations under s 81, before a Registrar of this Court on 23 November 1998, reveal that, in the accountant’s opinion, the only basis upon which Mr Small would not have been insolvent as at 26 June 1996 was the possibility that he could negotiate a part payment scheme with the DCT, even though most of the DCT’s assessments require a lump sum payment.  After receiving the notices from the DCT, Mr Small was advised by his accountants that he should see a registered trustee in bankruptcy.  This he did by June 1996, and shortly thereafter he went to see his solicitors.  Mr Small admitted that, at the time he received the notices, he was in no position to make any lump sum payment to the DCT and, by 26 June 1996, Mr Small was aware that money in a regulated superannuation fund was protected in the event of bankruptcy.  (See s 255(2) as to the admissibility of the transcript of a s 81 examination – no order was sought to make the transcript inadmissible).

35                  On the basis of this evidence, it is impossible not to draw the inference urged by counsel for the applicant that, as at 26 June 1996, Mr Small was already insolvent or at the very least about to become insolvent.  He owed a large sum of money to the DCT, his liabilities exceeded his assets and he and his advisers were of the view that he could only meet his obligations to the DCT if he could negotiate a re-payment scheme, a course usually not agreed to by the DCT.  Accordingly, Mr Small’s main purpose in making the three transfers must be taken to have been to prevent the transferred property from becoming divisible amongst his creditors and, subject to any exception provided in s 121, the transfers would be void against the applicant.

36                  Section 121(4) provides that a transfer is not void if stated conditions are satisfied, including that in subs (c) which requires that the transferee could not have reasonably have inferred that, at the time of the transfer, the transferor was, or was about to become insolvent.  As stated above, it was conceded by counsel for both respondents that, as Mr Small and his accountant were the only directors of the superannuation fund’s trustee company at all relevant times, if I found that Mr Small was or was about to become insolvent, as I have, then the superannuation fund trustee was also aware of this.  Accordingly, the exception provided by s 121(4) is not available to the respondents.

Consideration moving from the superannuation fund trustee

37                  For the reasons given, there is no need to deal with the possible invalidity of the payments under s 120 of the Act nor the issue of consideration allegedly given by the superannuation fund trustee in that context.  However, as to s 121 of the Act, counsel for the first respondent submitted that the superannuation fund trustee had provided consideration to Mr Small for the transfer of the three payments and, accordingly, it would be entitled under s 121(5) to be paid the value of the consideration which it gave.  Mr Taylor SC for the applicant denied that the first respondent had provided any valuable consideration.

38                  The parties debated the preliminary question:  who bore the onus of establishing that valuable consideration had been provided?  There is no doubt that the Official Trustee bears the overall onus in establishing that a transfer is void:  see for example Official Trustee in Bankruptcy v Alvaro (1996) 138 ALR 341 at 381 and PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 at 527-8.  However, in dealing with the exception provided by s 121(4) and the need to show valuable consideration under s 121(4)(a), the Full Court held in Re Jury (at 84) that the burden is on the transferee.  Given that s 121(4) is a provision beneficial to the transferee, as is s 121(5), I see no reason not to extend the Full Court’s view as to onus to s 121(5), so that the transferee must prove what if any consideration was provided, in order to receive any payment from the Official Trustee.

39                  In Barton v Official Receiver (1986) 161 CLR 75, Gibbs CJ, Mason, Wilson and Dawson JJ at 86, in considering what constituted consideration in s 120 prior to its amendment, affirmed the view of Sir Robert Megarry in In re Abbott [1983] Ch 45 that valuable consideration is something for the transferred property “which has a real and substantial value, and not one which is nominal or trivial or colourable”.  The issue is whether or not the obligations incurred by the superannuation fund trustee on receipt of the transferred money constituted something which had real and substantial commercial value in return for the moneys provided by Mr Small.

40                  The respondents submitted that the consideration provided by the trustee pursuant to the Trust Deed was its promise and obligation to deal with the money in accordance with the terms and rules of the Trust and also pursuant to the provisions of the SIS Act.  However, in Cook (Trustee), In the matter of Benson [2000] FCA 1777, a case involving payments made by a bankrupt to a number of commercial entities including a superannuation service, Marshall J held (at para 14):

“What occurred was that each of those respondents pledged to manage and preserve funds given to each such entity in return for management fees or charges.  The … respondents were not ‘buyers’ in a commercial sense of he relevant interest passing to them.”

I respectfully agree.  The promises and guarantees that the superannuation fund trustee provided pursuant to both the trust Rules and the provisions of the SIS Act, as well as the management services it provided, were not provided as consideration for the three contributions made by Mr Small.  Those services were provided in return for the management fees and charges that that trustee was permitted by the Rules under the Deed to charge the fund for the administration of it.  I do not accept that the first respondent has otherwise provided any consideration for which it is entitled to receive repayment under s 121(5).  I note the Official Trustee’s concession that if there is any bona fide expenses or losses incurred by the superannuation fund trustee in its own right, he will take a benevolent view of this.  The evidence is lacking to enable me to investigate this matter further.  I will, if asked, grant liberty to apply about this matter.

Disposition

41                  Accordingly, for the reasons given, the application will be allowed.  As requested in the application, interlocutory orders will be granted restraining the first respondent from transferring, conveying, assigning, surrendering, or paying out any of the funds held by the first respondent as trustee of the superannuation fund and also from terminating or winding up that superannuation fund. 

42                  However, I will for the moment make no other orders but rather direct that the parties bring in (by fax to my Associate) within 14 days either an agreed set of short minutes or their own proposals to give effect to these reasons for decision.  If need be, a short further hearing to settle the orders will be arranged in the week commencing 24 September 2001.

Associate:

Dated:              6 September 2001