FEDERAL COURT OF AUSTRALIA

Donnelly (Trustee) v Windoval Pty Limited (Trustee), In the Matter of Donnelly (Trustee) [2012] FCA 943

THE COURT ORDERS THAT:

1.    By 17 September 2012, the applicant amend his Statement of Claim by providing:

(a)    Particulars of the facts upon which he relies in support of the allegation made by him in par 23 of that Statement of Claim that the bankrupt became aware or knew of the press release referred to in that paragraph; and

(b)    Particulars of the facts, matters and circumstances upon which he relies as the basis for the inference which he proposes to ask the Court to draw that the bankrupt’s main purpose in paying the sum of $5,000,000 to Windoval Pty Limited on 1 July 1999 was one or other of the proscribed purposes specified in s 121(1)(b) of the Bankruptcy Act 1966 (Cth).

2.    The applicant have leave to amend pars 31 and 34 of his Statement of Claim in such manner as he may be advised, such amendment to be effected by way of the filing and service of an Amended Statement of Claim.

3.    Any Amended Statement of Claim be filed and served by 17 September 2012.

4.    The Interlocutory Application filed by the first, second and fourth respondents on 6 June 2012 otherwise be dismissed.

5.    The costs of and incidental to the said Interlocutory Application be the applicant’s costs in the proceeding.

6.    The first, second and fourth respondents file and serve their Defence by 2 October 2012.

7.    The proceeding be listed for directions at 9.30 am on 10 October 2012 before Foster J.

8.    All parties have liberty to apply on three (3) days’ notice.

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

IN THE MATTER OF MAX CHRISTOPHER DONNELLY, THE TRUSTEE OF THE PROPERTY OF DAVID NEIL BONNELL, A BANKRUPT

REASONS FOR JUDGMENT

1    The applicant is the trustee of the property of David Neil Bonnell (the bankrupt) whose estate was sequestrated on 10 September 2008 by order of the Federal Magistrates Court of Australia. The petitioning creditor was the Commissioner of Taxation.

2    The first respondent (Windoval) is the trustee of the Bonnell Family Trust (BFT) which is a discretionary trust established by the bankrupt. He is the appointor and a beneficiary of that trust. He controls Windoval. In 1998 and in 1999, Windoval was also the trustee of a non-complying superannuation fund (NCSF) styled “the Bonnell No 2 Superannuation Fund” (BSF No 2). The BSF No 2 was wound up on 1 July 1999.

3    The second and fourth respondents (Lawjag and Bondcall) are both corporations which were established by the bankrupt and which are controlled by him.

4    The fifth respondent is the solicitor who represents Windoval, Lawjag and Bondcall in this proceeding. He holds in his firm’s trust account the amount of $1,950,000 (the settlement sum) which was paid to him by Leah Gail McKenzie in settlement of three sets of proceedings instituted in the Supreme Court of New South Wales in 2006 and 2007 by Lawjag, the third respondent (Spring Cove), Bondcall and the bankrupt (the Supreme Court proceedings), as plaintiffs, in which the plaintiffs in those proceedings claimed the whole beneficial interest in a residential property known as “99 Stuart Street, Manly, NSW” (the Manly property). The fifth respondent has filed a submitting appearance in this proceeding. He acknowledges that he holds the settlement sum subject to the control and orders of this Court. He wishes to be heard only on the question of costs.

5    Because all relevant parties have settled their claims against Leah McKenzie, she is not a party to this proceeding.

6    Spring Cove has been deregistered and has not appeared in the proceeding.

7    Windoval, Lawjag and Bondcall (the active respondents) have applied to the Court for an order that the Statement of Claim be struck out, in whole or in part, pursuant to r 16.21 of the Federal Court Rules 2011 (Cth) (FCR) or, in the alternative, that the proceeding be dismissed pursuant to s 31A of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act).

8    In this proceeding, the applicant claims that a transfer of funds from the bankrupt to Windoval in its capacity as trustee of the BFT in the amount of $5,000,000 made by the bankrupt on 1 July 1999 (the challenged payment) is void as against the applicant by reason of the operation of s 121 of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) or, alternatively, by reason of the operation of s 37A of the Conveyancing Act 1919 (NSW) (the Conveyancing Act). The applicant claims that the said transfer was made by the bankrupt in order to put the amount thereof beyond the reach of his creditors or, alternatively, was made at a time when he was insolvent or about to become insolvent. The applicant also claims a declaration that the settlement sum is held by the fifth respondent in trust for him and an order that the settlement sum be paid to him. He also claims interest and costs.

9    These Reasons for Judgment determine the active respondents’ interlocutory application which I have described at [7] above.

The Applicant’s Case

The Causes of Action and Material Facts Pleaded in the Statement of Claim

10    The matters which I record in this section of these Reasons are taken from the applicant’s Statement of Claim. For present purposes, these matters are assumed to be correct. None of the respondents has filed a Defence and the extent to which any of these matters will be contested at a trial, should the active respondents’ current application be unsuccessful, is not presently known.

11    On 10 September 2008, the Federal Magistrates Court of Australia made a sequestration order against the estate of the bankrupt. The applicant was appointed the trustee of the property of the bankrupt which, pursuant to s 58 of the Bankruptcy Act, vested in the applicant. For some years prior to May 1999, and since February 2000, the bankrupt practised as a solicitor, specialising in taxation law.

12    Windoval was incorporated on 26 August 1992. From about September 1998 until 1 July 1999, Windoval was trustee of the BSF No 2, which was a personal NCSF of which the bankrupt was the sole beneficiary. On 1 July 1999, Windoval ceased to be the trustee of the BSF No 2. On that date, the BSF No 2 was wound up.

13    From the date in 1999 when the BFT was established, Windoval was also the trustee of the BFT. The BFT is a discretionary trust, the beneficiaries of which are:

(a)    The bankrupt and certain specified relatives and descendants of the bankrupt;

(b)    Any corporation of which any one or more of the beneficiaries specified in (a) is a member;

(c)    The trustee of any trust in which any one or more of the beneficiaries specified in (a) have any interest; and

(d)    Such other persons or entities as may be nominated to be beneficiaries in accordance with the Trust Deed.

14    The Trust Deed whereby the BFT was established contains wide powers of advancement in favour of any one or more of the beneficiaries (cl 5) and very wide powers to deal with the Trust Fund (cl 6).

15    Lawjag was incorporated on 15 February 1999.

16    Spring Cove was incorporated on 13 November 2000. Spring Cove is the trustee of the Spring Cove Trust (the SC Trust) of which the bankrupt and Leah McKenzie are and, at all material times, were beneficiaries. The SC Trust was established on 4 April 2001.

17    Bondcall was incorporated on 9 March 2000.

18    In addition to the above corporations and trusts, the bankrupt established and controlled:

(a)    Leada Ltd (Leada), a corporation incorporated in Vanuatu, now deregistered;

(b)    Caronia Ltd (Caronia), a corporation incorporated in New Zealand, now deregistered; and

(c)    Spring Cove Partnership Pty Limited, (formerly called “Pontifex Asset Management Pty Ltd”) (SCP), now deregistered, which was the trustee of the Spring Cove Partnership Trust (the SCP Trust).

19    By reason of his position as the sole director and secretary of most of the above corporations and by reason of his position as the sole shareholder of Lawjag and Bondcall, the bankrupt controlled absolutely Windoval, Lawjag, Spring Cove, Bondcall, Leada, Caronia and SCP. Although not alleged by the applicant in his Statement of Claim, it appears to be common ground amongst the parties that, by reason of his control of Windoval and Spring Cove, the bankrupt also controlled the BSF No 2, the BFT and the SC Trust.

20    By no later than March 2000, the bankrupt commenced a de facto relationship with Leah McKenzie, who also became his personal assistant in his law practice. That relationship continued until at least February 2004.

21    The BSF No 2 was established in September 1998.

22    During the Income Tax Year 1998–1999, the bankrupt derived income from his legal practice in the amount of $5,936,606. During the same Income Tax Year, the bankrupt made contributions to the BSF No 2 totalling $5,000,000 and claimed tax deductions for the total of those contributions.

23    After the above matters are set out in the Statement of Claim, at pars 22 to 37 of that pleading, the applicant pleads the following matters:

Scheme

22    On 29 September 1998, the Bankrupt obtained a private ruling from the then Assistant Commissioner of Taxation, Mr Nick Petroulis, to the effect that contributions to his non-complying superannuation fund were tax deductible (“Private Ruling”).

23    On 19 May 1999, the Commissioner of Taxation, to the knowledge of the Bankrupt, issued a media release to the effect that schemes such as those established and marketed by the Bankrupt in his Legal Practice were considered to be contrived arrangements intended to frustrate the clear policy of the taxation legislation (“Media Release”).

Particulars

Australian Taxation Office media release NAT 99/16 – “Aggressively Marketed Schemes Fail” dated 19 May 1999.

24    In or about May 1999 the Bankrupt formed or had formed the following intentions:

(a)    to make the Contributions in the financial year ended 30 June 1999 to the Fund;

(b)    to claim tax deductions for the Contributions totalling $5,000,000.00;

(c)    on 1 July 1999 to wind up the Fund and to distribute all its assets, namely the Contributions, to himself as sole beneficiary of the Fund as a tax-free distribution; and

(d)    immediately thereupon to gift the sum of $5,000,000.00 so received to Windoval in its capacity as trustee of the Bonnell Family Trust.

25    In or about May 1999, the Bankrupt purported to cease carrying on his aforesaid business.

26    On 1 July 1999, at the instance of the Bankrupt, Windoval resolved:

(a)    to wind up the Fund; and

b)    distribute all the assets of the Fund, namely the said sum of $5,000,000.00, to the Bankrupt as sole beneficiary of the Fund.

27    On 1 July 1999, Windoval, at the instance of the Bankrupt:

(a)    Wound up the Fund; and

(b)    Paid $5,000,000.00 to the Bankrupt.

28    On 1 July 1999, forthwith upon receipt of the said sum of $5,000,000.00 from the Fund, the Bankrupt distributed the said sum of $5,000,000.00 (the “Transferred Sum”) to Windoval in its capacity as trustee of the Bonnell Family Trust (the “Transfer”).

29    But for the Transfer, the Transferred Sum would probably have become part of the Bankrupt’s estate, or would probably been available to creditors if the said Transferred Sum had not been transferred.

30    In carrying out the actions set out in paragraphs 25 to 28 above with intention pleaded in paragraph 24 above, the Bankrupt’s main purpose in making the Transfer was to prevent the Bankrupt’s property, being the Transferred Sum, from becoming divisible amongst his creditors or to hinder or delay the process of making the Transferred Sum available for division amongst his creditors.

Insolvency of Bankrupt

31    At the time of the Transfer the Bankrupt was or was about to become insolvent.

Particulars

(a)    The Bankrupt knew of the Media Release;

(b)    The Bankrupt knew that a Private Ruling issued to him by the Deputy Commissioner of Taxation was likely to be subject to attack and possible overturning by the Commissioner of Taxation;

(c)    The Bankrupt knew that in the event that the Commissioner of Taxation determined that the Contributions to the Fund were not legitimately claimable as deductions against the Bankrupt’s income for the financial year ended 30 June 1999, then the Bankrupt’s assessable or taxable income for that year would be greater than $5,000,000 and he would be liable for income tax of not less than approximately $2,425,000.00;

(d)    The Bankrupt knew that there was a real possibility that the Commissioner of Taxation would disallow the Contributions to the said Fund as tax deductions; and

(e)    By gifting the Transferred Sum to Windoval as trustee of the Bonnell Family Trust in July 1999, the Bankrupt deprived himself of the funds with which to meet the additional tax of approximately $2,425,000.00 that would be assessed in the event that the Commissioner of Taxation disallowed the said Contributions to the Fund as deductible.

32    By reason of the matters pleaded in paragraphs 24 to 31 inclusive, the Transfer is void against the Trustee pursuant to section 121 of the Bankruptcy Act.

Voluntary Alienation to Defraud Creditors

33    The Transfer pleaded in paragraph 28 was an alienation of property within the meaning of section 37A of the Conveyancing Act 1919 (NSW).

34    The Transfer was made by the Bankrupt with the intent to defraud creditors and the natural consequence of the Transfer was to delay, hinder or defraud creditors in circumstances where:

(a)    The Bankrupt was in control and the guiding mind of the Windoval, Lawjag, Spring Cove Management, Bondcall, Leada and Caronia; and

(b)    The Bankrupt used each of the Respondents and Leada and Caronia to hold assets and funds derived from his personal exertions; and

(c)    The assets and funds of the Respondents and Leada and Caronia are the property of the Bankrupt; and

(d)    Prior to the failure of their relationship the Bankrupt relied upon the assistance and co-operation of Leah McKenzie; and

(e)    The Bankrupt knew that there was a real possibility that contributions to the Fund would ultimately not be tax deductible; and

(f)    Upon winding up the Fund the Bankrupt immediately transferred and divested himself of assets and funds; and

(g)    The Bankrupt transferred assets and funds via the Respondents and Leada and Caronia to, inter alia, towards the cost of the purchase, design and construction of the Manly Property as herewith pleaded, thereby leaving him without funds to meet any tax liability in respect of the Contributions made to the Fund; and

(h)    The Bankrupt knew or ought to have known that by divesting himself of assets he would become insolvent; and

(i)    Leah McKenzie has sold the Manly Property and the Supreme Court Proceedings have been resolved by the payment of the Settlement Sum.

35    In the premises, the Transfer is voidable on the application of the Applicant in circumstances where but for the Transfer the sum of Transferred Sum would have been available to the Bankrupt’s creditors.

Accounting for Transferred Sum

36    Windoval received the Transferred Sum from the Bankrupt, on or about 1 July 1999, with the knowledge of the Bankrupt’s intentions pleaded in paragraph 24.

37    By reason thereof, Windoval holds the Transferred Sum on trust for the Trustee.

24    The challenged payment is the payment described in par 28 of the Statement of Claim. It is referred to in that pleading as “the Transferred Sum”. The transaction pursuant to which that payment was made is referred to as “the Transfer”.

25    There was no movement of cash on 1 July 1999. The transactions described in pars 26 to 28 of the Statement of Claim were documented in the books and records of the BSF No 2 and the BFT and effected by that means. Thereafter, Windoval, in its capacity as the trustee of the BFT, made a payment of $1.5 million to the bankrupt’s former wife, Sandra, and other payments to various corporations controlled by him.

26    In pars 38 to 63 of the Statement of Claim, the applicant sets out his contentions as to the movement of funds out of Windoval after 1 July 1999. It is alleged in these paragraphs that:

(a)    By five payments made in the period from about 15 December 2000 to about 5 July 2001, a total of $1,184,759 was paid to Lawjag (par 38);

(b)    By 23 payments made in the period from about February 2001 to about December 2004, a total of $352,037.46 was paid to Spring Cove (par 41);

(c)    By four payments made in the period from about December 2000 to about September 2001, a total of $807,000 was paid to Bondcall (par 44);

(d)    Each of Lawjag, Spring Cove and Bondcall received all of the amounts paid to them by Windoval:

(i)    Out of the sum of $5,000,000 transferred to Windoval by the bankrupt on 1 July 1999;

(ii)    With knowledge of the bankrupt’s intentions as pleaded in par 24; and

(iii)    In circumstances where, by reason of the above matters, each of the said corporations holds the amounts paid to them on trust for the applicant (pars 39, 40, 42, 43, 45 and 46);

(e)    On or about 2 November 2000, Leah McKenzie entered into a contract to purchase the Manly property for the price of $1,400,000 (par 47);

(f)    The purchase price was provided by SCP, Lawjag and Bondcall by means of several payments, which payments (or the benefit of which payments) were received by Leah McKenzie with knowledge that:

(i)    All of the funds paid to her had been derived from the personal exertions of the bankrupt; and

(ii)    As at November and December 2000, the bankrupt was insolvent or about to become insolvent (pars 48, 49, 50 and 51);

(g)    Alternatively, Leah McKenzie received the total amount paid to her or for her benefit as a volunteer (par 52);

(h)    All of the moneys paid to or for Leah McKenzie in respect of the Manly property were deployed in the acquisition of that property with the consequence that the Manly property was thereafter charged in favour of the applicant to the extent of $1,400,000 (par 53 and par 54);

(i)    Thereafter, between about 11 January 2001 and late July 2005, Leah McKenzie caused a new dwelling to be constructed on the Manly property at a total cost of $1,850.664.24, which amount was largely funded by payments made by Lawjag, Bondcall, Spring Cove, SCP, Leada and Caronia during that period with the consequence that, for the same reasons as obtained in respect of the payment of the purchase price for the Manly property, the Manly property became charged to the further extent of the funding provided by those corporations viz $1,474,756.60 (pars 55 to 63).

27    On 29 July 2004, the Deputy Commissioner of Taxation disallowed the bankrupt’s claimed deductions for the Income Tax Year ended 30 June 1999 to the extent that those deductions included the total amount contributed to the BSF No 2 (viz $5,000,000). The Deputy Commissioner of Taxation issued an amended assessment for that year for an amount payable of $4,531,915 including primary tax in respect of the disallowed contributions in the amount of $2,780,806.82. On 29 September 2004, the bankrupt lodged an objection against that assessment. That objection was disallowed. An appeal against the disallowance of that objection failed.

28    Because he had transferred to Windoval, in its capacity as trustee of the BFT, the whole of the $5,000,000 paid to him by Windoval, in its other capacity as trustee of the BSF No 2, the bankrupt did not have the capacity to pay the amount of the amended assessment.

29    In 2007, the bankrupt, Lawjag, Spring Cove and Bondcall commenced the Supreme Court proceedings seeking declarations and orders that:

(a)    Leah McKenzie held the Manly property on constructive trust, or, alternatively, resulting trust, in favour of the bankrupt, Lawjag, Spring Cove and Bondcall in proportions to be determined by the Court and that the Manly property was subject to an equitable charge to the extent of the advances made by the plaintiffs to Leah McKenzie; and

(b)    Consequential orders for payment of the moneys claimed to be subject to those trusts and that charge.

30    Leah McKenzie cross-claimed in the Supreme Court proceedings claiming to be beneficially entitled to the Manly property.

31    On 21 April 2010, the applicant and the parties to the Supreme Court proceedings entered into a Deed whereby, without any admission as to liability, the parties thereto agreed to settle and to bring to an end the Supreme Court proceedings. Pursuant to the terms of that Deed, Leah McKenzie agreed to sell the Manly property and to pay the settlement sum out of the proceeds of sale the payment of which would bring to an end the Supreme Court proceedings. Under that Deed, the other parties agreed to compromise their claims against Leah McKenzie. The effect of the settlement of the Supreme Court proceedings was that the applicant and the plaintiffs gave up all of their rights against Leah McKenzie in return for payment of the settlement sum by her to the fifth respondent who was required to hold that sum in accordance with the terms of a second deed dated 21 April 2010.

32    Leah McKenzie complied with her obligations under the Deed and paid the settlement sum to the fifth respondent, as agreed. That sum has thereafter been held by the fifth respondent to await the outcome of the present proceeding.

33    The applicant claims that the settlement sum “… stands charged in its entirety to the benefit of [the applicant]”.

34    The applicant’s claims for pecuniary relief are, therefore, now confined to securing payment of the amount of $1,950,000 held by the fifth respondent.

Additional Relevant Facts

35    Some additional facts and matters were either assumed as true for the purposes of the present application or proven by evidence and accepted as true for the purposes of that application.

36    These additional facts and matters were:

(a)    The applicant conducted examinations into the affairs of the bankrupt pursuant to s 81 of the Bankruptcy Act on five separate occasions. The applicant examined the bankrupt on four of those occasions (12 October 2010; 5 April 2011; 17 May 2011; and 27 March 2012) and Leah McKenzie on one occasion (11 October 2010);

(b)    The bankrupt says that he retired as a practising solicitor giving tax advice in about May 1999 and resumed practice in February 2000;

(c)    The total of all amounts paid in respect of the planning, design and construction of the new dwelling on the Manly property was $2,239,000.00; and

(d)    As at July 2000, the bankrupt had no large outstanding debts. At that time, creditors of his legal practice were being paid in accordance with their normal trading terms.

37    On 9 November 1998, the bankrupt received a written Opinion from Messrs FL Harrison QC and ML Robertson of Counsel. The essence of that Opinion was expressed as follows:

In our opinion, subject to the background and assumptions set out below, and on the assumption that there are no other relevant facts, we consider that if the “scheme” is implemented as described then it would not be reasonable for the Commissioner to form an opinion that the sole or dominant purpose of entering into the scheme was the obtaining of a “tax benefit”. Accordingly, we consider that Part IVA of the Act cannot be applied by the Commissioner so as to allow him to cancel any tax benefits or otherwise reconstruct the transactions.

38    The substance of the reasoning which led to that Opinion was that, once the criteria for deductibility in s 82AAE of the Income Tax Assessment Act 1936 (Cth) (the Tax Act) were satisfied, there was no scope for the operation of Pt IVA of the Act. The “scheme” in respect of which this advice was given did not include making the challenged payment. Those barristers had been asked only to consider the applicability of Pt IVA of the Tax Act. They were not asked to consider the question of whether the contributions made by the bankrupt to the BSF No 2 would be deductible. Messrs Harrison and Robertson also said that, if a large lump sum contribution were made to an NCSF at a time which was just before the taxpayer was due to retire, with the consequence that, on retirement, he would receive back the amount of that contribution, it could be concluded that the contribution was not made for the purpose of providing retirement benefits. They went on to observe:

In that situation, the purpose test of s 82AAE of the Act would fail, and there would be no tax benefit under section 177C of the Act.

39    On 30 November 1998, the bankrupt received a Written Opinion from two other barristers. On this occasion, the Opinion was given by Messrs AH Slater QC and RL Hamilton. The authors of this second Opinion said that, if Windoval, in its capacity as trustee of the BSF No 2, were to invest the contributions made by the bankrupt and to pay benefits only at retirement, death or disablement in accordance with the provisions of the Trust Deed and the SIS legislation, it seemed to them “… likely that it would be strongly arguable that the Commissioner [of Taxation] could not successfully apply Part IVA to deny the deduction to [the bankrupt]”. Messrs Slater and Hamilton also commented upon certain recent pronouncements of the Commissioner of Taxation in respect of arrangements of a similar nature. They said that the Commissioner would attempt to move against such arrangements and would litigate the validity of them. They observed that the Commissioner would rely upon Pt IVA of the Tax Act and any other weapons he believed he could use. Messrs Slater and Hamilton also expressed doubt as to whether the bankrupt was truly an employee of Windoval who was engaged in producing income for Windoval. They suggested that, if the Commissioner were to take the view that s 82AAA of the Tax Act did not apply, the private ruling which the bankrupt had obtained may not protect him because the Commissioner had assumed that the bankrupt would be an employee of Windoval when he gave the private ruling.

40    On 26 March 1999, the Commissioner of Taxation issued Media Release Nat 99/12. That release was in the following terms:

Tax Office clamps down on schemes

Media Release – Nat 99/12

Following the issue of a ruling on certain employee benefit arrangements last year and subsequent intelligence, the Tax Office has placed an embargo on the issue of private binding rulings and advance opinions on employee benefit schemes, controlling interest arrangements, offshore and non-complying superannuation funds as the next step in tackling aggressive tax planning in this area.

Tax Commissioner Michael Carmody said in addition the Tax Office would withdraw a range of advance opinions previously issued.

“This is being done while we undertake a review of all information and arrangements now available in the area.

“We have also seen evidence in the past where advance opinions were used to heavily market arrangements that in the end event were not implemented according to the arrangement on which the opinion was given.

“In the wake of last year’s ruling (TR98/D12), a number of taxpayers are rolling into new arrangements. We will be paying particular attention to these arrangements and will be ensuring they meet the requirements of the law,” Mr Carmody said.

41    On 19 May 1999, the Commissioner issued Media Release Nat 99/16. In that release, the Commissioner said:

Aggressively marketed schemes fail

Media Release – Nat 99/16

A Tax office review of aggressively marketed employee benefit arrangements has found that many of these schemes are contrived arrangements that intend to frustrate the clear policy intent of the law. In our view these arrangements fail both at law and in their implementation.

Tax Commissioner Michael Carmody said today these arrangements, which include employee benefit trusts, employee benefit share plans, controlling interest superannuation schemes and off-shore superannuation schemes, are claimed to attract no, or only long-deferred, tax.

“In the case of superannuation and employee share arrangements they seek to secure even more concessional treatment than that supported by Parliament,” Mr Carmody said.

“Far from securing the claimed benefits, it is the Tax Office’s view that in their contrivance participants are exposing themselves to possible multiple taxing points and penalties.

“These taxing points include deductions disallowed to the employer, fringe benefits tax, increased taxable income to the employee, superannuation contribution tax and the superannuation surcharge. They are also exposing themselves to the application of anti-avoidance provisions and penalties.”

Last October, the Tax Office issued a draft ruling (TR 98/D12) on the associate FBT test which raised the likelihood of FBT applying to these arrangements. A final expanded ruling on this topic (TR99/5) will be issued today.

The Tax Office placed an embargo on the issuing of private binding rulings and advance opinions on these arrangements in March pending the review and consultation with industry. Previously issued advice was also withdrawn.

“It became clear to us that previously provided private binding rulings or advance opinions have been used as marketing tools to attract people into these arrangements,” Mr Carmody said.

“We are bound under law to stand by our rulings. While not bound at law, administratively we adhere to our advance opinions because this is in the public interest. In the present case, I considered whether the balance of the public interest was in not adhering to these opinions.

“In the end event, I have not felt the need to reach a conclusion on this because we consider that these private binding rulings and advance opinions are unlikely to have any practical application.

“This is because the arrangements we have seen have not been implemented according to the facts presented. In what is a highly competitive marketplace arrangements are often hastily marketed on the basis of abbreviated summaries. Little attention is paid to fully implementing the originally submitted arrangements.

“Further, our advice was premised on the expressed purpose for the arrangements – a purpose that was lost in their marketing and implementation.

For example, the controlling interest superannuation arrangements as marketed and implemented have more to do with washing income of tax than the originally expressed purpose of providing genuine retirement income.

“We are offering participants the opportunity to work with us to provide an appropriate tax outcome.

“If participants come forward voluntarily by 30 June 1999, penalties will be reduced to five per cent and only a single and appropriate tax liability will be applied.

“For example, in the case of employee share-plan arrangements participants are being offered the opportunity of having the deduction for claimed contributions disallowed, fringe benefits tax applied to the employer, or having the employee assessed on the value of the benefit.

“Ninety per cent of one advisor’s clients have already accepted this offer. We have also been approached by advisors who have marketed a range of employee benefits schemes, seeking settlement on similar terms.

“We have identified a large number of advisors and participants and our investigations to identify participants will continue.

“Naturally the offer outlined above will not be available to those engaged at the extreme end of sham and fraudulent behaviour.”

The ATO position under the law and the options available are accessible on our website www.ato.gov.au under ‘Tax Practitioner’. People wishing to come forward to take advantage of our offer can contact us on ph: 1800 001 111 or write to the Employee Benefit Taskforce at P0 Box 3000 Moonee Ponds Vic 3039.

“Taxpayers, of course, have the right to contest our view in the courts. Many of these schemes rely on fine technical distinctions and arguments which seek to undermine the underlying purpose of the relevant provisions.

“Our views are supported by counsel opinions and, given the significance to the integrity of our tax system and in fairness to the community, we will be prepared to argue all the way to the High Court.

“The adoption of a purposive approach to the law will send a clear signal to aggressive tax planners and their clients that using techniques such as interposed entities, special purpose companies and timing differences in an attempt to circumvent the clear policy intent of the law will not be successful,” Mr Carmody said.

42    On 26 January 2001, the bankrupt sent a memorandum to Leah McKenzie. It was entitled: “our structures” and was in the following terms:

The purpose of this memo is to outline where my structures started from the very beginning and where I want to end and how we get there in the middle.

I have drawn pen diagrams for you to help with this.

1.    The Beginning

In the beginning, before I even left Gadens I had a company called Windoval Pty Limited. This company acted as trustee for the Albany Property Trust, which owns the suite at Level 6, 2 Barrack Street. It also acted as trustee for my self-managed superannuation fund, the Bonnell Superannuation Fund.

As at 1 October 1998, I had three entities only:

    Windoval Pty Limited, of which Sandra and I were shareholders and I was sole director.

    The Bonnell Superannuation Fund, a complying superannuation fund of which Sandra and I were members and Windoval was trustee. It owned units in the Albany Property Trust and had an FAI policy purchased through Felsch.

    The Albany Property Trust, this is a unit trust in which units were held by the Bonnell Superannuation Fund and also the N.O. Bonnell Superannuation Fund. This is a superannuation fund of which I was the trustee and my father Neil is the sole member. He is now also a trustee.

2.    1 October 1998

When I left Gadens I set up extra structures to deal with the new practice. These [sic] as follows:

    The Bonnell Family Trust. Windoval Pty Limited is the trustee. This was set up as a trust to provide services to my practice. I intended to keep the services it provided very narrowly focussed. Therefore the only service it provided was my administrative time involved in running the practice. For this it was to receive a fee from the practice.

    The Bonnell No.2 Superannuation Fund (NCSF). Again Windoval Pty Limited is the Trustee. This was set up in accordance with my ruling to receive contributions I chose to make. Total contributions made to the Fund in the year ended 30 June 1999 were $5 million.

    Windoval Pty Limited. In addition to the trust structures which this company was trustee of it also derived income during the 1998/1999 financial year in its own right. It did this as distribution of income from the discretionary trust to me.

The amount of money earned by the BFT and Windoval during the 1998/1999 financial year was limited. The discretionary trust was paid $42,000.00 by the practice for services rendered. It distributed that amount to Windoval Pty Limited which used that money to buy the Mazda for $28,000 for my use as employee and to pay the balance of $14,000 to me as a salary for acting as director.

The NCSF invested in two companies, Bondcall Pty Limited and Lawjag Pty Limited. It only invested small amounts in shares and lent large sums to the companies to allow them to invest. They then invested in various investments. Lawjag invested an amount of $80,000.00 in the Albany Property Trust which cleared its debt.

3.    1 July 1999

At this time the trustee of the NCSF sat down to consider its utility as a savings vehicle for me. It considered the following matters:

The fact that the Commissioner would ultimately not allow my contributions to the NCSF as tax deductible and that therefore I would be unable to pay the tax.

The fact that the law was likely to change and therefore further contributions were not advisable.

The fact that as the Commissioner was likely to disallow deductions claimed by all my clients I would require substantial funds to run several test cases.

On the basis of these natters the Trustee concluded that the fund had no utility as a superannuation fund for me. The Trustee therefore resolved to wind up the fund as at 1 July 1999 and pay to me all the assets and cash standing to the credit of the fund to me personally.

I immediately made a gift of these assets and funds to Windoval Pty Limited as trustee for the Bonnell Family Trust.

I have since continued to run the Bonnell Family Trust as the source for all my drawings etc. It will be a party to my divorce proceedings and will pay Sandra the $1.5million settlement. Windoval Pty Limited will transfer the car.

4.    2 February 2001

By this date I intend to consolidate all the assets and funds of the Bonnell Family Trust and disburse them. As to $1.5 million to Sandra in accordance with the Family Court Orders. As to the balance they will be paid to Spring Cove Partnership Pty Limited as Trustee for the Spring Cove Partnership Trust.

5.    1 March 2001

Having consolidated all the assets and funds in the Spring Cove Partnership Trust I then intend to liquidate Windoval Pty Limited and Spring Cove Partnership.

To wind up Windoval Pty Limited I need to do the following:

Redeem all units in the Albany Property Trust, after valuing 2 Barrack Street.

Change ownership of 2 Barrack Street to you.

Roll over all cash from the Bonnell Superannuation Fund to another complying fund.

Liquidate all the assets of Lawjag and Bondcall and transfer them to Spring Cove Partnership Trust.

43    Prior to filing their Interlocutory Application, the solicitors for the active respondents wrote to the solicitors for the applicant. In their letter, they set out in some detail the alleged deficiencies in the Statement of Claim. This correspondence drew a response from the solicitors for the applicant. In their response, the solicitors for the applicant provided additional information and additional particulars of their client’s pleading. Amongst other things, it was proposed that a new particular (f) in the following terms would be added to the particulars specified in par 31 of the Statement of Claim:

(f)    The Bankrupt did not otherwise have funds available to him with which to meet the additional tax of approximately $2,425,000 that would be assessed in the event that the Commissioner of Taxation disallowed the said Contributions to the Fund as deductible.

The Relevant Statutory Provisions

44    Section 121 of the Bankruptcy Act provides:

121    Transfers to defeat creditors

Transfers that are void

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

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

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

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

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

Note:    For the application of this section where consideration is given to a third party rather than the transferor, see section 121A.

Showing the transferor’s main purpose in making a transfer

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

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

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

Transfer not void if transferee acted in good faith

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

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

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

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

Rebuttable presumption of insolvency

(4A)    For the purposes of this section, a rebuttable presumption arises that the transferor was, or was about to become, insolvent at the time of the transfer if it is established that the transferor:

(a)    had not, in respect of that time, kept such books, accounts and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor’s business transactions and financial position; or

(b)    having kept such books, accounts and records, has not preserved them.

Refund of consideration

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

What is not consideration

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

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

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

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

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

(e)    if the transferee is the spouse, or a former spouse, of the transferor—the transferee granting the transferor a right to live at the transferred property, unless the grant relates to a transfer or settlement of property, or an agreement, under the Family Law Act 1975;

(f)    if the transferee is a former de facto partner of the transferor—the transferee granting the transferor a right to live at the transferred property, unless the grant relates to a transfer or settlement of property, or an agreement, under the Family Law Act 1975.

Exemption of transfers of property under debt agreements

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

Protection of successors in title

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

Meaning of transfer of property and market value

(9)    For the purposes of this section:

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

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

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

45    Section 37A of the Conveyancing Act provides:

37A    Voluntary alienation to defraud creditors voidable

(1)    Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930, with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced.

(2)    This section does not affect the law of bankruptcy for the time being in force.

(3)    This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors.

The Parties’ Arguments

The Active Respondents’ Submissions

46    The active respondents submitted that the applicant has no reasonable prospect of making good the allegation that the bankrupt was or was about to become insolvent as at 1 July 1999. Senior Counsel for those respondents submitted that no reliance could be placed upon the possibility that an amended taxation assessment might issue to the bankrupt as at 1 July 1999. After all, so it was submitted, no amended assessment was issued until 29 July 2004 which is more than five years after the material date.

47    It was also submitted on behalf of the active respondents that the attribution of a fraudulent state of mind to the bankrupt in relation to his conduct in May and June 1999 and also on 1 July 1999 turns upon establishing an intention on his part that, by causing funds to be paid to a trustee of a trust of which he was appointor and principal beneficiary, his main purpose was to defeat the claim that the Commissioner of Taxation would have if and when an amended assessment issued in respect of the bankrupt for the Income Tax Year ended 30 June 1999.

48    Primary reliance was placed by the respondents upon s 31A of the Federal Court Act. Senior Counsel submitted that the deficiencies in the applicant’s claim against the active respondents are to be assessed in circumstances where the applicant has had the benefit of having conducted extensive examinations into the affairs of the bankrupt, including examinations of the bankrupt himself and of his associate, Leah McKenzie. It was said that, if the applicant is unable to identify the material facts and particulars underlying his claim after having the benefit of such extensive examinations and production of documentary material, the claim should be dismissed or, alternatively, struck out.

49    The respondents also attacked the Statement of Claim as failing to disclose a reasonable cause of action within the meaning of r 16.21 of the FCR.

50    In particular, the respondents submitted that:

(a)    No particulars of the knowledge said to reside in the bankrupt as pleaded in par 23 of the Statement of Claim have been provided. The failure to provide a proper basis for the allegations made in that paragraph ought to be fatal to the pleading.

(b)    Even if the bankrupt was aware of the terms of ATO Media Release Nat 99/16, there is nothing in that release that suggests it could relate to the circumstances in which the bankrupt found himself as at that date.

(c)    Paragraph 24 of the Statement of Claim contains a number of bare assertions as to the bankrupt’s intentions as at the material date. Those bare assertions, without more, do not satisfy the pleading requirements of the FCR.

(d)    The pleading does not support the conclusion which has been pleaded in par 30 of the Statement of Claim that the bankrupt’s main purpose in making the challenged payment was to prevent that part of his property from becoming divisible amongst his creditors or to hinder or delay the process of making those funds available for division amongst his creditors. Particulars of the bankrupt’s creditors as at the material date should be provided.

(e)    Allegations of constructive trust are dependent upon Ms McKenzie’s knowledge of the bankrupt’s intentions as pleaded in par 24 of the Statement of Claim. It was submitted by the respondents that such knowledge, even if established, would not give rise to the pleaded trusts.

The Applicant’s Submissions

51    Senior Counsel for the applicant submitted that:

(a)    Sufficient material facts are pleaded to support the applicant’s claim under s 121 of the Bankruptcy Act (pars 30 and 31 of the Statement of Claim) and his claim pursuant to s 37A of the Conveyancing Act (pars 33 to 35 of the Statement of Claim);

(b)    Actual knowledge on the part of the bankrupt is to be inferred from the facts and matters pleaded and particularised in pars 22 to 24 of the Statement of Claim and the additional material referred to in the letter from the applicant’s solicitors to the active respondents’ solicitors dated 16 May 2012;

(c)    In order for the applicant to succeed, it is not necessary for him to establish the bankrupt’s state of mind at the time when the challenged payment was made (ie on 1 July 1999). The applicant is entitled to make his case by inference drawn from established facts;

(d)    The constructive trust case against Windoval, Lawjag, Bondcall and Spring Cove is based upon the knowing receipt of funds without providing any consideration. It is adequately pleaded; and

(e)    The settlement sum is the property of the respondents subject to the applicant’s claims. The applicant does not seek to trace moneys into the hands of Leah McKenzie.

Consideration

Summary Dismissal (Principles)

52    Subsections (2), (3), (4) and (5) of s 31A of the Federal Court Act are in the following terms:

31A    Summary judgment

…

(2)    The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if:

(a)    the first party is defending the proceeding or that part of the proceeding; and

(b)    the Court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceeding or that part of the proceeding.

(3)    For the purposes of this section, a defence or a proceeding or part of a proceeding need not be:

(a)    hopeless; or

(b)    bound to fail;

for it to have no reasonable prospect of success.

(4)    This section does not limit any powers that the Court has apart from this section.

(5)    This section does not apply to criminal proceedings.

53    In Singh v Super City Home Loans Pty Ltd [2011] FCA 646, at [129], I said:

129    In Spencer v The Commonwealth (2010) 241 CLR 118, the High Court considered the meaning and effect of s 31A of the Federal Court Act. The following principles may be gleaned from that decision:

(a)    Section 31A authorises summary disposition on a variety of bases (at [22] (p 131) per French CJ and Gummow J). At [22], their Honours also said:

… It will apply to the case in which the pleadings disclose no reasonable cause of action and their deficiency is incurable. It will include the case in which there is unanswerable or unanswered evidence of a fact fatal to the pleaded case and any case which might be propounded by permissible amendment. It will include the class of case in the longstanding category of cases which are “frivolous or vexatious or an abuse of process”. The application of s 31A is not, in terms, limited to those categories.

(b)    The power to order summary dismissal pursuant to s 31A is different from the power to strike out defective pleadings pursuant to O 11 r 16 of the Federal Court Rules (at [23] (p 131) per French CJ and Gummow J);

(c)    The power to terminate proceedings summarily should be exercised with caution (at [24] (p 131) per French CJ and Gummow J). At [24] (p 131), their Honours also said:

24    The exercise of powers to summarily terminate proceedings must always be attended with caution. That is so whether such disposition is sought on the basis that the pleadings fail to disclose a reasonable cause of action (General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 128–130 per Barwick CJ) or on the basis that the action is frivolous or vexatious or an abuse of process (Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91 per Dixon J). The same applies where such a disposition is sought in a summary judgment application supported by evidence. As to the latter, this Court in Fancourt v Mercantile Credits Ltd said ((1983) 154 CLR 87 at 99. See also Webster v Lampard (1993) 177 CLR 598 at 602–603 per Mason CJ, Deane and Dawson JJ):

“The power to order summary or final judgment is one that should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried.”

More recently, in Batistatos v Roads and Traffic Authority (NSW) ((2006) 226 CLR 256 at 275 [46]) Gleeson CJ, Gummow, Hayne and Crennan JJ repeated a statement by Gaudron, McHugh, Gummow and Hayne JJ in Agar v Hyde ((2000) 201 CLR 552 at 575–576 [57]) which included the following:

“Ordinarily, a party is not to be denied the opportunity to place his or her case before the court in the ordinary way, and after taking advantage of the usual interlocutory processes. The test to be applied has been expressed in various ways (Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91 per Dixon J; General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 130 per Barwick CJ), but all of the verbal formulae which have been used are intended to describe a high degree of certainty about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way.”

There would seem to be little distinction between those approaches and the requirement of a “real” as distinct from “fanciful” prospect of success contemplated by s 31A (In A v Essex County Council [2010] 3 WLR 509, the criterion of “real prospect of success” was variously equated to whether the plaintiff “could succeed at a trial”, whether there was a “triable issue” and whether there was the “least doubt”: at [44] per Lord Clarke of Stone-cum-Ebony JSC; at 541 [119] per Baroness Hale of Richmond JSC; at 544 [133] per Lord Brown of Eaton-under-Heywood JSC; at 552 [163] per Lord Kerr of Tonaghmore JSC). That proposition, however, is not inconsistent with the proposition that the criterion in s 31A may be satisfied upon grounds wider than those contained in pre-existing Rules of Court authorising summary dispositions.

(d)    There must be a high degree of certainty that the applicant/plaintiff cannot succeed if the proceeding is allowed to go to trial in the ordinary way (Batistatos v Roads and Traffic Authority (NSW) (2006) 226 CLR 256 at [46] (p 275) per Gleeson CJ, Gummow, Hayne and Crennan JJ).

(e)    At [25]–[26], French CJ and Gummow J also said:

25     Section 31A(2) requires a practical judgment by the Federal Court as to whether the applicant has more than a “fanciful” prospect of success. That may be a judgment of law or of fact, or of mixed law and fact. Where there are factual issues capable of being disputed and in dispute, summary dismissal should not be awarded to the respondent simply because the Court has formed the view that the applicant is unlikely to succeed on the factual issue. Where the success of a proceeding depends upon propositions of law apparently precluded by existing authority, that may not always be the end of the matter. Existing authority may be overruled, qualified or further explained. Summary processes must not be used to stultify the development of the law. But where the success of proceedings is critically dependent upon a proposition of law which would contradict a binding decision of this Court, the court hearing the application under s 31A could justifiably conclude that the proceedings had no reasonable prospect of success.

26     Where an application under s 31A requires consideration of apparently complex questions of fact, then the caution uttered by Lord Hope is relevant (see above at [21]). The importance of those considerations is amplified if the case involves resolution of issues of law and fact, or mixed law and fact.

(f)    Section 31A requires that there be “no reasonable prospect of success”. This is a different concept from the concept of “no real prospect of success” (per Hayne, Crennan, Kiefel and Bell JJ at [50]–[51] (pp 138–139));

(g)    The statutory admonition is that a proceeding may be found to have no reasonable prospect of successful prosecution even if it is not hopeless or bound to fail (per Hayne, Crennan, Kiefel and Bell JJ at [52] (p 139)). At [52]–[53] (p 139), their Honours went on to say:

52    … it is important to begin by recognising that the combined effect of sub-ss (2) and (3) is that the inquiry required in this case is whether there is a “reasonable” prospect of prosecuting the proceeding, not an inquiry directed to whether a certain and concluded determination could be made that the proceeding would necessarily fail.

53     In this respect, s 31A departs radically from the basis upon which earlier forms of provision permitting the entry of summary judgment have been understood and administered. Those earlier provisions were understood as requiring formation of a certain and concluded determination that a proceeding would necessarily fail. That this was the basis of earlier decisions may be illustrated by reference to two decisions of this Court often cited in connection with questions of summary judgment: Dey v Victorian Railways Commissioners ((1949) 78 CLR 62) and General Steel Industries Inc v Commissioner for Railways (NSW) ((1964) 112 CLR 125).

(h)    Section 31A requires a different inquiry to be undertaken from that undertaken under earlier different regimes (per Hayne, Crennan, Kiefel and Bell JJ at [56] (p 140));

(i)    The expression “no reasonable prospect” should be understood in the manner explained by Hayne, Crennan, Kiefel and Bell JJ in Spencer as follows (at [58]–[60] (p 141)):

58    How then should the expression “no reasonable prospect” be understood? No paraphrase of the expression can be adopted as a sufficient explanation of its operation, let alone definition of its content. Nor can the expression usefully be understood by the creation of some antinomy intended to capture most or all of the cases in which it cannot be said that there is “no reasonable prospect”. The judicial creation of a lexicon of words or phrases intended to capture the operation of a particular statutory phrase like “no reasonable prospect” is to be avoided. Consideration of the difficulties that bedevilled the proviso to common form criminal appeal statutes (Weiss v The Queen (2005) 224 CLR 300 at 312–318 [31]–[47]), as a result of judicial glossing of the relevant statutory expression, provides the clearest example of the dangers that attend any such attempt.

59    In many cases where a plaintiff has no reasonable prospect of prosecuting a proceeding, the proceeding could be described (with or without the addition of intensifying epithets like “clearly”, “manifestly” or “obviously”) as “frivolous”, “untenable”, “groundless” or “faulty”. But none of those expressions (alone or in combination) should be understood as providing a sufficient chart of the metes and bounds of the power given by s 31A. Nor can the content of the word “reasonable”, in the phrase “no reasonable prospect”, be sufficiently, let alone completely, illuminated by drawing some contrast with what would be a “frivolous”, “untenable”, “groundless” or “faulty” claim.

60    Rather, full weight must be given to the expression as a whole. The Federal Court may exercise power under s 31A if, and only if, satisfied that there is “no reasonable prospect” of success. Of course, it may readily be accepted that the power to dismiss an action summarily is not to be exercised lightly. But the elucidation of what amounts to “no reasonable prospect” can best proceed in the same way as content has been given, through a succession of decided cases, to other generally expressed statutory phrases, such as the phrase “just and equitable” when it is used to identify a ground for winding up a company. At this point in the development of the understanding of the expression and its application, it is sufficient, but important, to emphasise that the evident legislative purpose revealed by the text of the provision will be defeated if its application is read as confined to cases of a kind which fell within earlier, different, procedural regimes.

54    I propose to approach my consideration of the active respondents’ summary dismissal application by applying the principles which I summarised in Singh at [129].

The Relevant Pleading Rules

55    Rules 16.02, 16.03, 16.21 and 16.43 FCR are in the following terms:

16.02    Content of pleadings—general

(1)    A pleading must:

(a)    be divided into consecutively numbered paragraphs, each, as far as practicable, dealing with a separate matter; and

(b)    be as brief as the nature of the case permits; and

(c)    identify the issues that the party wants the Court to resolve; and

(d)    state the material facts on which a party relies that are necessary to give the opposing party fair notice of the case to be made against that party at trial, but not the evidence by which the material facts are to be proved; and

(e)    state the provisions of any statute relied on; and

(f)    state the specific relief sought or claimed.

(2)    A pleading must not:

(a)    contain any scandalous material; or

(b)    contain any frivolous or vexatious material; or

(c)    be evasive or ambiguous; or

(d)    be likely to cause prejudice, embarrassment or delay in the proceeding; or

(e)    fail to disclose a reasonable cause of action or defence or other case appropriate to the nature of the pleading; or

(f)    otherwise be an abuse of the process of the Court.

(3)    A pleading may raise a point of law.

(4)    A party is not entitled to seek any additional relief to the relief that is claimed in the originating application.

(5)    A party may plead a fact or matter that has occurred or arisen since the proceeding started.

16.03     Pleading of facts

(1)    A party must plead a fact if:

(a)    it is necessary to plead it to meet an express denial of the fact pleaded by another party; or

(b)    failure to plead the fact may take another party by surprise.

(2)    However, a party need not plead a fact if the burden of proving the fact does not lie on that party.

…

16.21     Application to strike out pleadings

(1)    A party may apply to the Court for an order that all or part of a pleading be struck out on the ground that the pleading:

(a)    contains scandalous material; or

(b)    contains frivolous or vexatious material; or

(c)    is evasive or ambiguous; or

(d)    is likely to cause prejudice, embarrassment or delay in the proceeding; or

(e)    fails to disclose a reasonable cause of action or defence or other case appropriate to the nature of the pleading; or

(f)    is otherwise an abuse of the process of the Court.

(2)    A party may apply for an order that the pleading be removed from the Court file if the pleading contains material of a kind mentioned in paragraph (1) (a), (b) or (c) or is otherwise an abuse of the process of the Court.

…

16.43    Conditions of mind

(1)    A party who pleads a condition of mind must state in the pleading particulars of the facts on which the party relies.

(2)    If a party pleads that another party ought to have known something, the party must give particulars of the facts and circumstances from which the other party ought to have acquired the knowledge.

(3)    In this rule:

condition of mind, for a party, means:

(a)    knowledge; and

(b)    any disorder or disability of the party’s mind; and

(c)    any fraudulent intention of the party.

56    The active respondents relied upon subrr (c), (d), (e) and (f) of r 16.21(1) FCR. They submitted that the unclear, ambiguous and imprecise nature of the allegations made in pars 22 to 37 of the Statement of Claim did not give proper or fair notice to them of the case which they will be compelled to meet at trial. They said that the pleading fell foul of subrr (c), (d) and (f) of r 16.21(1) FCR for these reasons.

57    The active respondents also relied upon r 16.21(1)(e) FCR.

58    Rule 16.21(1)(e) FCR replicates O 11 r 16(a) of the now repealed Federal Court Rules. There is much learning in respect of O 11 r 16(a) which, in my view, is apposite when considering the present r 16.21(1)(e). The discretion to strike out a pleading on this ground should not be lightly exercised. The ground must be clearly made out. The applicant for the order striking out a Statement of Claim must demonstrate that the plaintiff’s case is so untenable that it cannot possibly succeed (General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 130).

Discussion and Decision

Summary Dismissal

Section 121(1) and (2) of the Bankruptcy Act

59    The active respondents contend that the applicant’s case has no reasonable prospect of succeeding. In respect of that part of the applicant’s claim pursuant to s 121 of the Bankruptcy Act which is dependent upon the allegation that the bankrupt was insolvent or about to become insolvent, the active respondents go so far as to argue that the applicant’s chances of making good that allegation are non-existent. They also rely upon r 16.21(1)(c), (d), (e) and (f) FCR.

60    The “transfer of property” which is challenged under s 121 of the Bankruptcy Act is the making of the challenged payment: That is, the transfer of $5 million by the bankrupt on 1 July 1999 by way of gift to Windoval, in its capacity as trustee of the BFT. It is common ground amongst the parties that no consideration for that payment was provided by the BFT. It was a volunteer in relation to that payment.

61    In order to establish an entitlement to relief pursuant to s 121(1), the applicant must show that that amount of $5 million would probably have become part of the bankrupt’s estate or would probably have been available to the bankrupt’s creditors if the challenged payment had not been made and that the bankrupt’s main purpose in making the payment was to prevent the $5 million from becoming divisible among the bankrupt’s creditors or to hinder or delay the process of making property (including the transferred $5 million) available for division among the bankrupt’s creditors.

62    Subsection (2) of s 121 provides that the transferor’s main purpose in making the challenged transfer is taken to be the purpose described in par (1)(b) of s 121 if it can reasonably be inferred from all the circumstances that, at the time of the transfer (in this case, as at 1 July 1999), the transferor was, or was about to become, insolvent. A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable (s 5(2) of the Bankruptcy Act). A person who is not solvent is insolvent (s 5(3) of the Bankruptcy Act).

63    Windoval has not attempted so far to bring itself within the good faith exception provided for in subsection (4) of s 121.

64    In the present case, there is no doubt that the making of the challenged payment constituted a “… transfer of property by a person who later [became] a bankrupt …” within the meaning of s 121(1) of the Bankruptcy Act. For the purposes of s 121, a transfer of property includes a payment of money (see s 121(9)(a)). Furthermore, had the challenged payment not been made, it is likely that the amount thereof ($5 million) would probably have become part of the bankrupt’s estate or would probably have been available to the bankrupt’s creditors (s 121(1)(a)). At a trial, the applicant will bear the onus of proving one or other of these last two matters. In the present case, the question posed by the application of s 121(1)(a) is a question of fact (cf Peldan v Anderson (2006) 227 CLR 471 where the High Court held that an undivided interest as joint tenant in certain property would never have become part of the bankrupt’s estate upon bankruptcy because, upon bankruptcy, the joint tenancy would have been severed thereby destroying the unity of title). In my judgment, in the present case, the active respondents have not established that the applicant has no reasonable prospect of discharging the ultimate onus of proof which he bears in respect of the matters specified in s 121(1)(a).

65    The principal focus of the active respondents’ submissions was on the question of whether the applicant had any reasonable prospect of proving at a trial that the bankrupt’s main purpose in making the challenged payment was to defeat or hinder his creditors (s 121(1)(b)). In this regard, the applicant intends to prove the requisite “… main purpose …” by evidence directed to that end and by relying upon the deeming effect of s 121(2) in that he contends that it can reasonably be inferred from all of the circumstances that, at the time the challenged payment was made (viz on 1 July 1999), the bankrupt was, or was about to become, insolvent.

66    In Trustees of the Property of Cummins (A Bankrupt) v Cummins (2006) 227 CLR 278, the High Court considered whether certain transactions which had taken place thirteen years before Mr Cummins had been made bankrupt were void as against his trustees by reason of the operation of s 121(1) of the Bankruptcy Act. The High Court upheld the appeal in Cummins and reinstated the orders of the trial judge pursuant to which his Honour had granted the relief claimed by Mr Cummins’ trustees under s 121(1).

67    In Cummins, under the heading “Creditors”, the High Court commenced a discussion of the meaning of the term “creditors” in s 121(1)(a) and (b).

68    At [29]–[33] (pp 291–292), the Court said:

29    Whatever may be the operation retained by s 6, there was no substantial controversy between the parties to the present appeal that in an appropriate case it was enough that one or more of the creditors of the transferor was the object of the main purpose spoken of in s 121(1)(b).

30    The question then arises whether the creditor or creditors spoken of in the section must have that status at the time of the transfer. In PT Garuda Indonesia Ltd v Grellman [(1992) 35 FCR 515 at 526], a case upon s 121 in its previous form, the Full Court of the Federal Court rejected a submission that the class of creditors referred to is limited to those who at the time of the disposition in question have claims of a nature which then would be susceptible to proof under s 82 of the Act [cf Coventry v Charter Pacific Corporation Ltd (2005) 227 CLR 234].

31    In R v Dunwoody, an appeal against convictions under s 266 of the Act, McPherson JA said [(2004) 149 A Crim R 259 at 290]:

“It is true that statutory enactments of this kind consistently refer to defrauding or deceiving “creditors”; but the course of judicial decision over the centuries shows that this expression is not to be confined to its limited and technical sense of a person to whom a debt is presently due and owing.”

Section 40(1)(c) stipulates as an act of bankruptcy the departure from or remaining out of Australia of a person “with intent to defeat or delay his or her creditors”. Of that expression, in Barton v Deputy Federal Commissioner of Taxation [(1974) 131 CLR 370 at 374], Stephen J treated as sufficient for the commission of that act of bankruptcy “awareness of an impending liability” or “some impending indebtedness”. In support of that conclusion, his Honour referred to decisions construing the Elizabethan statute and s 37A of the Conveyancing Act.

32    In the light of authorities such as these, there was no real dispute in the present appeal that, if the other elements of s 121 were made out, the Commonwealth, represented by the ATO, was a creditor for the purposes of the section. Given the further proposition that the section may be satisfied in the absence of a plurality of such creditors, it is unnecessary to consider a further point. This concerns whether an apprehension of actions for professional negligence against a barrister such as Mr Cummins and the taking of action with the main purpose of preventing the transfer of property becoming divisible among that class of potential plaintiffs could satisfy the section.

33    However, on the appeal to this Court, the respondents restated the submission that no inference should be drawn as to the level of receipts by Mr Cummins in the period preceding the August transactions. The proposition appeared to be that his “tax liability” did not exist, or was in such a low range as to make it implausible that this provided his “main purpose”. With that contention it will be necessary to deal further in these reasons.

69    At [34] (p 292), the Court observed that what had been required of the trustees to succeed at trial was that the circumstances appearing in the evidence gave rise to a reasonable and definite inference that, in entering into the impugned transactions, Mr Cummins had the requisite “main purpose”. The Court then noted that the trial judge had found that Mr Cummins was well aware that he had incurred substantial liabilities to the Australian Taxation Office and that those liabilities would become due and payable once taxation assessments were issued. The Court also noted that Mr Cummins was obviously cognisant of his tax delinquency going back many years and that, in light of these matters, he took steps to divest himself of all of his assets for no consideration in order to protect his assets from the claims of future creditors. At [40] (p 294), the Court referred to Williams v Lloyd (1934) 50 CLR 341 “by way of contrast”. The Court said that the impugned transactions in that case were directed not to protecting the property of the bankrupt against future creditors, but to withdrawing capital from apprehended improvident hazardous investments. In Williams v Lloyd, at 372, Dixon J had said that, at the time of the impugned dispositions, the bankrupt had been in a perfectly sound financial position “with nothing to fear”.

70    Cummins is authority for the proposition that, in s 121(1), the term “creditors” encompasses future creditors and is not confined to those persons who, at the time of the relevant disposition, had claims susceptible to proof pursuant to s 82 of the Bankruptcy Act. The relevant debt need not be due and owing as at that date. It is sufficient if it is “impending”.

71    In Prentice v Cummins (2002) 124 FCR 67, at [98] (p 91), Sackville J held that, if a debtor makes a voluntary settlement of property, leaving the debtor without sufficient assets to meet his or her debts, it can readily be inferred that the debtor’s main purpose in effecting the relevant transfer was to prevent the transferred property from becoming divisible among his or her creditors. To similar effect is the passage from Lewis’ Australian Bankruptcy Law (4th ed, 1955) at pp 45–46 which was cited with approval by the Full Court in PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 at 523. A debtor may have the requisite “main purpose” even if the debtor has no creditors, or is able to satisfy all creditors as at the date of the transfer (Re Jury; Ashton v Prentice (1999) 92 FCR 68 at 82; Prentice v Cummins at [99] (p 91)). In Prentice v Cummins at [99] (p 91), Sackville J went on to say:

A fortiori, a transferor may have the requisite purpose if assets are given away at a time when he or she is aware of an impending liability, but one which has not yet crystallised into an existing indebtedness: Barton v Deputy Commissioner of Taxation at 374 per Stephen J (where the impending liability related to a taxation debt which would come into existence only once an assessment had issued).

72    In Prentice v Cummins, on the question of “main purpose”, his Honour concluded (at [137]–[138]) (p 100):

137    In summary, I am satisfied that:

•    the Bankrupt was well aware in August 1987 that he had incurred very substantial liabilities to the Commissioner, contingent only on the Commissioner issuing assessments in respect of past income years;

•    the Bankrupt was well aware at that time that the Commissioner would issue assessments once the Bankrupt’s longstanding tax delinquency became known, an event that could occur at any time;

•    the Bankrupt divested himself voluntarily of virtually all his substantial assets in August 1987;

•    in any event, the assets retained by the Bankrupt were not sufficient to meet his taxation liabilities, if the Commissioner decided to issue assessments; and

•    the Bankrupt saw the transfers as increasing the chances that his assets would be protected from any claims made by the Commissioner.

138    These findings, in my view, strongly support the conclusion that the Bankrupt’s main purpose was to prevent the transferred property from becoming divisible among his creditors, in particular the Commissioner.

73    In his Statement of Claim filed in the present case, the applicant refers to the fact that the bankrupt obtained the private ruling (par 22) and the fact that the Commissioner of Taxation issued the 19 May 1999 press release which came to the knowledge of the bankrupt (par 23). He then specifies a number of intentions which he alleges the bankrupt already had by that date or formed at or about that time (par 24). The applicant then identifies the subsequent conduct of the bankrupt by which he is alleged to have given effect to the intentions referred to in par 24 (pars 25–28). At pars 29 and 30, he pleads the integers of the cause of action based upon s 121(1) of the Bankruptcy Act.

74    “Purpose” is an intention to achieve a particular result—in this case to achieve one or other of the outcomes specified in s 121(1)(b). It is not “motive”. The requisite purpose for the purposes of s 121(1) may be established by direct evidence or may be inferred.

75    The evidence before me at the moment shows that:

(a)    In September 1998, the bankrupt sought a private ruling from the Australian Taxation Office (the ATO) in relation to a scheme which he had under consideration at that time. That scheme, as described by the bankrupt for the purposes of that ruling, did not include the various actions engineered by the bankrupt on 1 July 1999.

(b)    A private ruling dated 29 September 1998 in relation to that scheme was given by the Deputy Commissioner of Taxation. Critical to the utility of that private ruling were the following matters which were assumed to be factually correct for the purposes of that ruling:

(i)    The bankrupt was an employee of Windoval both at common law and within the meaning of that term as defined in s 82AAA of the Tax Act (as that section stood in September 1998);

(ii)    The bankrupt was an “eligible employee” within the meaning of s 82AAA of the Tax Act; and

(iii)    Payments to the bankrupt would only be made by the NCSF upon the bankrupt’s retirement, death or permanent disablement. That is to say, the NCSF would be a real superannuation fund and the purpose for making the contributions to it would be to provide for superannuation benefits for the bankrupt.

(c)    In November 1998, the bankrupt obtained two separate Joint Opinions from barristers. One of those Joint Opinions focussed on the likely application of Pt IVA of the Tax Act to the bankrupt’s scheme. The other focussed on the question of whether the planned contributions to the hypothetical NCSF would be tax deductible in the hands of the bankrupt.

(d)    Both Joint Opinions raised a number of concerns (as to which see [38]–[39] above). In particular, the bankrupt was alerted to the need to ensure that the NCSF was a genuine superannuation fund and that he was truly an employee of Windoval and thus an eligible employee for the purposes of s 82AAE of the Tax Act.

(e)    The Commissioner of Taxation issued press releases 99/12 and 99/16. I pause to observe that it is highly likely that, at a trial, the Court will be satisfied that the bankrupt became aware of these two press releases at about the dates when they were issued. By 19 May 1999, the bankrupt had established the BSF No 2 and made most, if not all, of the contributions he proposed to make to that fund. He had also advised a number of his clients to put similar arrangements in place. The 19 May 1999 press release refers to (inter alia) “… controlling interest superannuation schemes …” and generally describes the schemes referred to in the press release as “contrived”. In that press release, the Commissioner of Taxation makes the point that the affected taxpayers are unlikely to be able to rely upon private rulings obtained by them because the arrangements as actually put in place often did not conform to the arrangements as described in the private ruling. If the bankrupt read either or both of these press releases, there is a basis for thinking that he would have been very concerned. In particular, the existence and terms of the press releases may well have caused the bankrupt to fear that the tax deductions which he intended to claim for the contributions which he had made to the BSF No 2 would be disallowed by the Commissioner of Taxation.

(f)    The 26 January 2001 memorandum to Leah McKenzie contains an admission that, as at 1 July 1999, before the bankrupt orchestrated the transactions which took place on that day, he believed that the Commissioner of Taxation would ultimately not allow the contributions which he had made to the BSF No 2 as deductions against his taxable income earned in the 1998–1999 Income Tax Year and that, for this reason, he would be unable to pay the tax that would be assessed against him once the claimed deductions were not allowed. That document also contains admissions to the effect that, as at 1 July 1999, he believed that “… the law was likely to change …” and that therefore the making of further contributions would not be advisable. It also contains an admission that funds would be required in order to address litigation between his clients and the ATO in respect of similar schemes which he had advised his clients to take up. In that memorandum, he said that, on the basis of all of these matters, Windoval (meaning the bankrupt) concluded that the BSF No 2 was no longer useful as a superannuation fund for him and should therefore be wound up. These admissions were not controverted, qualified or explained at the hearing before me.

(g)    In his memorandum to Leah McKenzie, the bankrupt goes on to mention that all of the assets of the BSF No 2 were transferred to him on 1 July 1999 and that immediately after receipt of those assets he transferred them by way of gift to Windoval as trustee of the BFT. He said that the BFT was thereafter the source of all of his “… drawings etc …”. It may be thought that the obvious inference to be drawn from the language used and the context in which these remarks appear to have been made is that both of these steps were taken in order to put the $5,000,000 held by the BSF No 2 beyond the reach of the Commissioner of Taxation.

(h)    The memorandum to Leah McKenzie contains other relevant admissions. In that document, the bankrupt said that:

•    By 2 February 2001, he intended to “consolidate” all of the assets and funds of the BFT and disburse them. After paying out to his first wife the amount of his Family Court settlement ($1.5 million), he intended to pay the balance of the funds in the BFT to the SCP Trust.

•    By 1 March 2011, having stripped the BFT of all of its assets and funds, he intended to wind up Windoval and the SCP.

These intentions recorded by the bankrupt are certainly capable of forming part of relevant circumstances from which an inference can be drawn that the making of the challenged payment was effected for one of the proscribed purposes.

(i)    The bankrupt’s so-called “retirement” from legal practice was some kind of partial withdrawal from certain areas of practice (viz taxation advice). There is every chance that, at a trial, the Court will not find that the true complexion of events from about May 1999 until February 2000 was that the bankrupt had “retired” within the meaning of the relevant Trust Deed and relevant legislation.

76    The above facts and matters are more than capable of supporting a conclusion that, as at 1 July 1999, the bankrupt well appreciated that the tax deductions which he intended to claim in respect of the 1998–1999 Income Tax Year for the contributions which he had made in that year to the BSF No 2 were likely to be disallowed and that, if he were to divest himself of his superannuation benefits held in the BSF No 2, in the event that amended assessments were issued by the Commissioner of Taxation, he would not have sufficient funds at his disposal to pay the additional tax assessed. Because the funds would be in the care of entities which were controlled by him, he would nonetheless have access to and control over the funds. The dictum of Sackville J at [99] (p 91) of Prentice v Cummins is apposite. If the evidence does not change, the above circumstances are more than capable of giving rise to a reasonable and definite inference that, in making the challenged payment, the bankrupt had the requisite purpose, namely, to defeat or hinder his creditors within the meaning of s 121(1)(b).

77    The funds given to the BFT and intended to be moved on to other entities controlled by him could be used for his benefit and for the benefit of his family and associates yet be beyond the reach of his creditors. In particular, the funds would be beyond the reach of the Commissioner of Taxation.

78    The applicant’s case as explained by me at [73]–[77] above is encompassed within the existing pleading although it may be that some matters are relied upon only in respect of the applicant’s allegations that, as at 1 July 1999, the bankrupt was insolvent or about to become insolvent.

79    The applicant also relies upon s 121(2) in order to support a conclusion that the challenged payment was liable to be avoided pursuant to s 121(1) of the Bankruptcy Act. Section 121(2) requires the Court to look objectively at the financial position of the transferor at the time that the relevant transfer was made (Ashton v Prentice [1998] FCA 1464 per Hill J).

80    The matters upon which the applicant relies in establishing the bankrupt’s insolvency are set out in par 31 of his Statement of Claim.

81    The applicant’s case is a simple one: He says that, whatever may have been the quantum of other debts due and payable by the bankrupt as at 1 July 1999 and even if the Court were to accept that all of those other debts were able to be discharged as and when they became due and payable, the actions of the bankrupt on 1 July 1999 which resulted in his divesting himself of the entire benefit held for him in the BSF No 2 inevitably meant that he was thereafter insolvent or, at the very least, about to become insolvent. There was no evidence nor any suggestion that the bankrupt would have used his position as controller of Windoval, the BFT and the other relevant entities to procure the necessary funds to pay the amount of tax assessed under any amended tax assessment in respect of the 1998–1999 Income Tax Year that might have been issued in the future.

82    Conventionally, the retrospective assessment of solvency in respect of a bankrupt generally requires the Court to answer three questions: First, what were the bankrupt’s debts; second, when did they fall due; and third, could the bankrupt pay those debts as and when they fell due (see Marchesi v Apostolou (2007) 5 ABC(NS) 131 at [95] (p 159)). But this does not mean that the party asserting that the bankrupt was insolvent as at a particular date must plead or provide by way of particulars details of the bankrupt’s debts and material tending to prove that those debts were not being met as and when they became due and payable (cf Duus v Dalvella Pty Limited [2007] FCA 1921). In my judgment, the material facts for present purposes are that, as at 1 July 1999, after the transactions put in place by the bankrupt on that day were effected, the bankrupt was insolvent or was about to become insolvent. The facts, matters and circumstances upon which the applicant intends to rely in order to make out the allegation of insolvency or impending insolvency are at best matters for particulars (Cooper v McDonald [2009] FCA 1099 at [12]). Most often, those facts will be properly characterised as matters of evidence.

83    In the present case, the applicant contends that the bankrupt deliberately set upon a course of action which rendered him insolvent. It is not material to that allegation for the applicant to plead or provide particulars of all of the debts which were due and payable by the bankrupt as at 1 July 1999 or that the bankrupt was unable to pay those debts as and when they became due and payable. According to the applicant’s case theory, the matter which tipped the bankrupt into insolvency was the bankrupt’s conduct in rendering himself susceptible to a significant tax assessment including penalties and interest followed by action on his part whereby he deliberately divested himself of the only funds he had available to meet that assessment.

84    It may well be that, at a trial, when the applicant seeks to prove these allegations by evidence, it will be necessary for him to tender evidence of the bankrupt’s full financial position as at 1 July 1999 with particular emphasis on whether the bankrupt was able to pay his debts as and when they fell due as at that date including whether he had the resources in his own name or available to him (if he was prepared to access funds held by others) to meet the potential tax liability which, by that date, appears to have been well and truly in his contemplation.

85    I am not convinced that the allegations made in par 30 and par 31 of the Statement of Claim to the effect that, as at 1 July 199, the bankrupt was, or was about to become, insolvent are bound to fail.

Section 37A of the Conveyancing Act

86    I have set out the terms of s 37A of the Conveyancing Act at [45] above.

87    In order to establish an entitlement to relief pursuant to s 37A, the applicant must show that the challenged payment was made with intent to defraud the bankrupt’s creditors. In Marcolongo v Chen ((2011) 242 CLR 546), after explaining the provenance of s 37A (at [12]–[23] (pp 552–555)), the plurality (French CJ, Gummow, Crennan and Bell JJ) addressed the level of proof required to establish the necessary intent for the purposes of s 37A. At [24]–[25] (pp 555–556), the plurality said:

24     Nevertheless, the nineteenth century cases did support a related distinction bearing upon the sufficiency of proof in these cases. The effect of the decisions was summed up as follows in the treatment under the title “Fraudulent and Voidable Conveyances” in the first edition of Halsbury’s Laws of England ((1911), vol 15, p 84, para 173):

“In an action to set aside an alienation under the statute the onus of proof of actual fraud on the part of the grantor, and that the grantee was privy to the intent, rests upon the plaintiff where the alienation is for valuable consideration (a) (In re Johnson; Golden v Gillam (1881) 20 Ch D 389 at 394; Re Cranston; Ex parte Cranston (1892) 9 Morr 160; Re Tetley; Ex parte Jeffrey (1896) 3 Mans 226 at 233; In re Hirth; Ex parte Trustee [1899] 1 QB 612 at 620; In re Holland; Gregg v Holland [1902] 2 Ch 360; In re Reis; Ex parte Clough [1904] 2 KB 769). Where, however, the alienation is voluntary, then on proof that the grantor was at the time of its execution contemplating his entry upon a hazardous business (b) (Mackay v Douglas (1872) LR 14 Eq 106), or that the natural consequence of the alienation was to delay, hinder, or defraud creditors (c) (Freeman v Pope (1870) LR 5 Ch App 538; Ex parte Mercer; In re Wise (1886) 17 QBD 290; In re Holland; Gregg v Holland [1902] 2 Ch 360; see Re Tetley; Ex parte Jeffrey (1896) 3 Mans 226), or that the circumstances under which the alienation was effected bore one of the indications or badges of fraud hereafter mentioned (d) (see Halsbury’s Laws of England, 1st ed (1911) vol 15, pp 84–87, paras 174–177), the onus of upholding the alienation is imposed on the defendants.”

(Emphasis added.)

The two leading authorities given in footnote (c) to this passage are Freeman v Pope ((1870) LR 5 Ch App 538) and Ex parte Mercer; In re Wise ((1886) 17 QBD 290). However, neither case concerned a transaction cast in the form of a contract for sale of property. Rather, each transaction was a voluntary settlement of property, which was set aside in the first case but not in the second.

25    The point sought to be made in the text of Halsbury attached to footnote (c) may be expressed by saying that it would be the duty of the judge to direct a jury that they might infer an intention by the settlor to defeat or delay creditors, even in the absence of direct evidence of that intention, where this outcome was the necessary consequence of a voluntary settlement (cf Williams v Lloyd (1934) 50 CLR 341 at 360–361). In this way, it was easier to infer a dishonest intention if the conveyance were voluntary than if it were made for consideration (cf Lloyds Bank Ltd v Marcan [1973] 1 WLR 1387 at 1392; [1973] 3 All ER 754 at 761). Evidence that the conveyance was voluntary does not replace the requirement of proof of intent by a distinct category where constructive fraud, with notions of constructive knowledge or notice as understood in equity, would suffice for the application of s 37A80. Rather, the evidence is that species which has sufficient weight to entitle the fact finder to decide an issue (here the necessary intent) in favour of the moving party, although the fact finder is not obliged to do so and other evidence given may be decisive to the contrary (see Cross on Evidence, 8th Aust ed (2010), p 121 ]1600]).

88    The plurality in Marcolongo v Chen (at [32]–[34] (pp 558–559)) went on to say that it was unnecessary to show that the debtor wanted creditors to suffer a loss or that the debtor had a purpose of causing loss. All that was necessary was to demonstrate the existence of an intention to hinder, delay or defeat creditors. It was only in that sense that it was necessary to show that the debtor had acted dishonestly.

89    At [56]–[58] (pp 564–565), the plurality expressed their conclusions as follows:

56    Three things should be said here. First, the reference to “defraud”, in the light of what has been said earlier in these reasons, includes the hindering or delaying of creditors, in particular of Mrs Marcolongo in the exercise of her legal remedies, whether by an assets preservation order in respect of Project 2 pending determination of her District Court action against Lym, or by execution upon Project 2 to recover her verdict and costs were she to be successful. No doubt, the transaction was not expressed as voluntary and Lym was to receive some value in exchange. But the provision in special condition 33(b) for application of the balance of the proceeds to debts owed by Lym and related entities of Lym, and the evidence as to the lack of arrangements for Mr Chen to pay that balance, shows the deterioration to the position of Mrs Marcolongo that inevitably ensued. It is no answer, as it was no answer in In re Fasey; Ex parte Trustees ([1923] 2 Ch 1 at 13, 15, 17), that there had been no delay and hindrance occasioned by the transaction because eventually she might have had some recovery for any judgment she recovered and costs.

57    The second point is that s 37A requires a finding, which Hamilton J made, of intent to achieve the proscribed prejudice. The section does not postulate a mixture of motives from which there must be extracted what is identified as a predominant intent to defraud. Further, as Stephen J indicated in his discussion in Barton v Deputy Federal Commissioner of Taxation ((1974) 131 CLR 370 at 375), a provision such as the Elizabethan Statute does not require for its operation that the proscribed intent to defraud be the sole intent. Nor is it an answer to an application under the section that the transferor formed the intent of which it speaks by reason of the misconduct of another or, as here, of the transferee; the transferor, as in this case, will have remedies against that party but that does not deny success on the application made under the section by the person prejudiced. Counsel for Lym was unable to point to any line of authority in the extensive case law upon the Elizabethan Statute which would confine s 37A in this fashion.

58    The final point is that the limiting effect which Lym sought to place upon s 37A would be to deny it the liberal construction which the Elizabethan Statute has long been held to require.

90    At par 34 of his Statement of Claim, the applicant pleads the facts, matters and circumstances from which he will contend that the Court should conclude that the challenged payment was made with the necessary intent on the part of the bankrupt. It was submitted on behalf of the applicant that these facts and matters, if made out, more than justified a finding that the challenged payment was made with the intention to defraud creditors within the meaning of s 37A of the Conveyancing Act. I agree with that submission.

The Consequential Claims for Relief

91    The applicant claims that, as a consequence of relief being granted to him either pursuant to s 121(1) of the Bankruptcy Act or pursuant to s 37A of the Conveyancing Act, the way will be opened up for him to trace the $5 million paid by the bankrupt to Windoval into the hands of Lawjag, Spring Cove, Bondcall, SCP, Leada and Caronia, and ultimately to Leah McKenzie. The circumstances pleaded by the applicant which he contends are sufficient to found his entitlement to the trust remedies which he claims are more than sufficient to withstand a summary dismissal challenge. All of the above corporations and Leah McKenzie were volunteers vis-à-vis the bankrupt. There is a sound basis for the Court to conclude that all of the corporations controlled by the bankrupt and Leah McKenzie were recipients of the amounts which they received out of the challenged payment knowing that those amounts had come from the bankrupt via the BFT and knowing that they were tainted because they were made in order to defeat or hinder the bankrupt’s creditors. As matters presently stand, the only fund against which the applicant can claim is the amount of $1,950,000 held by the fifth respondent in accordance with the terms of the deed between the plaintiff parties in the Supreme Court proceedings and him dated 21 April 2010.

92    I am not satisfied that the active respondents have demonstrated that the tracing pathways relied upon by the applicant to arrive at the sum of money held by the fifth respondent have no prospect of succeeding.

Generally

93    The reasons which I have given for refusing summary dismissal apply a fortiori to the active respondents’ claims that the whole proceeding be struck out pursuant to r 16.21(1)(e) because no reasonable cause of action is disclosed.

Conclusions

94    The power to terminate proceedings summarily should be exercised with caution. There must be a high degree of certainty that the applicant/plaintiff cannot succeed if the proceeding is allowed to go to trial. In the present case, for all of the reasons discussed above, I am not satisfied that the applicant has no reasonable prospect of succeeding on the causes of action relied upon by him in his Application and Statement of Claim.

95    I am, therefore, not prepared to dismiss the proceeding summarily pursuant to s 31A of the Federal Court Act.

The Pleading Points

96    In my judgment, the causes of action which I have distilled at [73]–[90] above are adequately pleaded in the Statement of Claim.

97    Nonetheless, I think that the applicant should provide particulars of the knowledge of the second press release which he asserts that the bankrupt had (par 23) as required by r 16.43 FCR and that the applicant should also set out by way of particulars to par 30 all of the facts, matters and circumstances upon which he will rely as the basis for the inference which he will ask the Court to draw that the bankrupt’s main purpose in making the challenged payment was to defeat or hinder his creditors within the meaning of s 121(1) of the Bankruptcy Act. That conclusion may be established by direct evidence or by inference. Although, in this area, there is a fine line between particulars and evidence, I think that, in order to make clear to the active respondents the substance of the case which they have to meet on this point and to avoid their being taken by surprise at the trial, such particulars ought to be provided.

98    In addition, I propose to give leave to the applicant to amend and to supplement the particulars upon which he proposes to rely in establishing that the bankrupt was insolvent as at 1 July 1999 or was about to become insolvent as at that date including by adding the foreshadowed additional particular (f) to par 31 and also to amend and to supplement the particulars upon which he proposes to rely in seeking to prove the requisite intention for the purposes of s 37A of the Conveyancing Act (par 34).

99    I am of the view that the pleading is otherwise adequate.

Costs

100    The principal claim for relief sought by the active respondents by means of their Interlocutory Application was summary dismissal of the whole proceeding. The active respondents have failed to secure that relief. Furthermore, they have failed to secure an order striking out any part of the Statement of Claim. However, although not specifically sought by the active respondents, I have thought it necessary to order the applicant to provide further particulars of some of the allegations made by him. Therefore, the applicant, on the one hand, and the active respondents, on the other hand, have each had some success although each have also suffered some defeats. Overall, I think that the applicant has had much the better of the argument with which these Reasons for Judgment deal.

101    For those reasons, I propose to order that the costs of and incidental to the Interlocutory Application filed by the active respondents on 6 June 2012 be the applicant’s costs in the proceeding.

Relief

102    I propose to order the applicant to provide further particulars of the allegations made by him in par 23 and par 30 of his Statement of Claim and to grant leave to him to amend his Statement of Claim insofar as he alleges that the bankrupt was insolvent or about to become insolvent as at 1 July 1999 and that the challenged payment was made with intent to defraud creditors within the meaning of s 37A of the Conveyancing Act. The active respondents’ Interlocutory Application will otherwise be dismissed.

103    There will be orders accordingly.

Associate:

Dated:    31 August 2012