FEDERAL COURT OF AUSTRALIA
Donnelly (Trustee) v Windoval Pty Limited (Trustee); In the Matter of Donnelly (Trustee) [2014] FCA 80
| IN THE FEDERAL COURT OF AUSTRALIA | |
IN THE MATTER OF DONNELLY (TRUSTEE)
| DATE OF ORDER: | |
| WHERE MADE: |
THE COURT:
1. DECLARES that the transfer of funds in the amount of $5,000,000 directed and effected by the bankrupt on 1 July 1999 from himself to the first respondent, acting in its capacity as trustee of the Bonnell Family Trust, is void as against the applicant by reason of the operation of s 121 of the Bankruptcy Act 1966 (Cth).
2. ORDERS that the amount of $1,950,000 held in the solicitors’ trust account maintained by the fifth respondent or his associated solicitors’ corporation, Deutsch Miller Pty Limited, together with all interest earned thereof (if any), be forthwith paid to the applicant.
3. ORDERS that the question of costs be reserved.
4. ORDERS that the proceeding be listed for directions at 9.30 am on 19 February 2014 before Foster J.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
| NEW SOUTH WALES DISTRICT REGISTRY | |
| GENERAL DIVISION | NSD 522 of 2012 |
IN THE MATTER OF DONNELLY (TRUSTEE)
| BETWEEN: | MAX CHRISTOPHER DONNELLY, THE TRUSTEE OF THE PROPERTY OF DAVID NEIL BONNELL, A BANKRUPT Applicant |
| AND: | WINDOVAL PTY LIMITED (ACN 057 062 307) AS TRUSTEE OF THE BONNELL FAMILY TRUST First Respondent LAWJAG PTY LIMITED (ACN 086 289 590) Second Respondent SPRING COVE MANAGEMENT PTY LIMITED (ACN 095 502 798) Third Respondent BONDCALL PTY LIMITED (ACN 091 946 137) Fourth Respondent MARK DEUTSCH Fifth Respondent |
| AND BETWEEN: | LAWJAG PTY LIMITED (ACN 086 289 590) First Cross-Claimant BONDCALL PTY LIMITED (ACN 091 946 137) Second Cross-Claimant |
| AND: | MAX CHRISTOPHER DONNELLY, THE TRUSTEE OF THE PROPERTY OF DAVID NEIL BONNELL, A BANKRUPT Cross-Respondent |
| JUDGE: | FOSTER J |
| DATE: | 14 FEBRUARY 2014 |
| PLACE: | SYDNEY |
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 (now called the Federal Circuit 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. The bankrupt is the appointor and a beneficiary of that trust. At all times relevant to this proceeding, he controlled 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) and Bondcall (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 bankrupt was added as an additional plaintiff to those proceedings after they had been commenced. The title to that property was registered in the name of Leah McKenzie. Leah McKenzie was the de facto partner of the bankrupt from at least February 2000 until some time in 2004. 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 this proceeding.
7 Thus, the only respondents which have taken an active role in the proceeding are Windoval, Lawjag and Bondcall (the active respondents).
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 On 5 February 2013, after I had fixed the Application for hearing, the active respondents sought leave to file a Cross-Claim against the applicant for damages for breach of contract (viz the settlement Deeds). I granted leave to those respondents to file that Cross-Claim but declined to hear it at the same time as I planned to hear the applicant’s Application. That Cross-Claim remains on foot but the hearing of the claims made therein has been deferred.
The Applicant’s Case
The Causes of Action and Material Facts Pleaded in the Statement of Claim
10 The facts and matters which I record in this section of these Reasons are taken from the applicant’s Amended Statement of Claim which was filed on 17 September 2012 (ASC) and to some extent from the Amended Defence filed by the active respondents on 11 March 2013 (Defence). Many of the facts and matters pleaded in the ASC were either formally admitted by the active respondents in the Defence or were not seriously contested at the trial. In the course of explaining the applicant’s allegations in the ASC, I will identify those facts and matters which were truly in contest at the trial. All other facts and matters should be understood as having been either admitted or not truly contested. Those uncontested facts and matters are accepted by me as correct for the purposes of this proceeding.
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 as trustee of the property of the bankrupt which, pursuant to s 58 of the Bankruptcy Act, vested in the applicant. Between July 1987 and May 1999, and since February 2000, the bankrupt practised as a solicitor, specialising in taxation law. The active respondents say that, in the period from at least about September or October 1998 to May 1999, the bankrupt conducted his own taxation advice business (see par 20(a) of the Defence). The active respondents also contend that, for the entire period between May 1999 and February 2000, the bankrupt did not practise as a solicitor nor did he carry on any business activities. According to the active respondents, he retired in May 1999. This contention is disputed by the applicant. I do not need to resolve this dispute. It is sufficient for present purposes to note that the active respondents say that the bankrupt did “retire” within the meaning of the BSF No 2 Trust Deed and for the purposes of the relevant tax and superannuation legislation and that this proposition is quite clearly correct. The applicant, on the other hand, argues that there is considerable doubt as to the correctness of this proposition and that the bankrupt well knew that it was problematic when he put into effect the transactions which took place on 1 July 1999.
12 Windoval was incorporated on 26 August 1992. From the date when the BSF No 2 was established (which was on a date in 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 the same day, the BSF No 2 was wound up.
13 The BFT was established in December 1998 or in early 1999. From the date when the BFT was established, Windoval was also the trustee of the BFT. The BFT is a discretionary trust, the beneficiaries of which are:
(1) The bankrupt and certain specified relatives and descendants of the bankrupt;
(2) Any corporation of which any one or more of the beneficiaries specified in (a) is a member;
(3) The trustee of any trust in which any one or more of the beneficiaries specified in (a) have any interest; and
(4) 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). Senior Counsel for the active respondents emphasised these clauses in order to make good his proposition that Windoval could quite properly have made available to the bankrupt sufficient funds for him to meet any tax liability which he might ultimately have faced in respect of the 1998–1999 Tax Year.
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 Windoval, at all relevant times, the bankrupt had absolute control over Windoval, Lawjag, Spring Cove, Bondcall, Leada, Caronia and SCP. Each of Lawjag, Spring Cove, SCP and Bondcall was ultimately beneficially owned by the bankrupt. Although not alleged by the applicant in the ASC, it appeared 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 As I have already mentioned, the BSF No 2 was established in September 1998.
22 During the Tax Year 1998–1999, the bankrupt derived income from his legal practice in the amount of $5,936,606. During the same 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. The first contribution of $100,000 was made on 15 February 1999 and the last contribution of $450,000 was made on 30 June 1999. Several other contributions were made in the period between those dates.
23 At pars 22 to 37 of the ASC, 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.
Particulars of Knowledge of Media Release
(a) From at least October 1998, and at all times between 19 May 1999 and 1 July 1999 the Bankrupt was a solicitor specialising in taxation law and advising clients in that practice area;
(b) As a solicitor specialising in taxation law the bankrupt had a practice of keeping himself up to date with developments in taxation law, including making himself aware of media releases of the Australian Taxation Office both published in the press and on the website of the Australian Taxation Office;
(c) In the period 1 July 1998 to 19 May 1999 the Bankrupt had given advices to clients of his legal practice concerning the deductibility for tax purposes of contributions made to non-complying superannuation funds;
(d) In September 1998 the Bankrupt sought a private ruling from the Australian Taxation Office in relation to a scheme which he had under consideration at that time to the effect that contributions to a noncomplying superannuation fund were tax deductable;
(e) In November 1998 the Bankrupt had obtained two written opinions from senior counsel as to the possible application of part IV A of the Tax Act to the making of contributions to a non-complying superannuation fund;
(f) As at 19 May 1999 the Bankrupt had either already made or was contemplating making contributions himself to the Fund;
(g) By reason of the above matters it ought to be inferred that the Bankrupt knew of the Media Release at about the time of its issue;
(h) Further, or alternatively, the Bankrupt has admitted knowledge of the Media Release at or about the time it was published:
(i) in the affidavit of the Bankrupt sworn 22 July 2008 in Supreme Court proceedings number 6229/2006 at paragraph 15;
(ii) in the memorandum from the Bankrupt to Ms Leah McKenzie dated 26 January 2001;
(iii) in cross-examination in Supreme Court proceedings before Tamberlin AJ (proceedings numbers 260109/06, 254560/07 and 254654/07) transcript reference references:
(A) 19 April 2010 at page 40 at about 9.34 and following;
(B) Transcript 19 April 2010 at page 60 at line 40 and following;
(C) Transcript 19 April 2010 at page 59 at line 35 and following;
(D) Transcript 20 April 2010 at page 132 at line 32 and following; and
(iv) In his examination, see Transcript of the section 81 examination of the Bankrupt on 27 March 2012 at page 17.
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 [sic] 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.
Particulars
(a) Prior to 1 July 1999, and before the Bankrupt made the Transfer, the Bankrupt had the belief that the Commissioner of Taxation would ultimately not allow the Contributions he made to the Fund as deductions against his taxable income earned in the 1998-1999 income tax year (letter from Bankrupt to Leah McKenzie refered [sic] to as "The Gordian Knot" being pages 152 to 157 of the Affidavit of Leah McKenzie sworn 24 July 2009 in Supreme Court Proceedings No. 6229 of 2006, No. 2433 of 2007, 2390 of 2007 between Lawjag and others and Leah McKenzie);
(b) On 1 July 1999, by reason of the Bankrupt effecting the Transfer and thereafter moving those funds to other entities controlled by the Bankrupt, such funds would be beyond the reach of creditors, including the Commissioner of Taxation;
(c) As at 1 July 1999, the Bankrupt knew that by divesting himself of the Transferred Sum, in the event that amended assessments were issued by the Commissioner of Taxation the Bankrupt would not have sufficient funds to pay the additional tax assessed;
(d) By 2 February 2001 the Bankrupt had stated his intention to consolidate all of the assets and funds of the Bonnell Family Trust and disburse them;
(i) after paying out his first wife the amount of his Family Court settlement, being $1,500,000.00, he intended to pay the balance of the funds in the Bonnell Family Trust to the SCP Trust;
(ii) by 1 March 2011 having stripped the Bonnell Family Trust of all of its assets and funds; and
(iii) the Bankrupt intended to wind up Windoval and the SCP;
(see Memorandum from Bankrupt to Leah McKenzie dated 26 January 2001),
from which it can be inferred that as at 1 July 1999, the Bankrupt intended to prevent, hinder or delay the process of making the Transfer 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 said 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.
(f) The Bankrupt did not otherwise have funds available to him 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.
Particulars
(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.
(j) The Bankrupt did not otherwise have funds available to him 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 deductable.
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 matters pleaded in pars 23, 24 26 and 27 of the ASC are all admitted in the Defence. The essence of the allegation in par 22 is also admitted.
25 The challenged payment is the payment described in par 28 of the ASC. It is referred to in that pleading as “the Transferred Sum”. The transaction pursuant to which that payment was made is referred to in the ASC as “the Transfer”.
26 There was no movement of cash on 1 July 1999. The transactions described in pars 26 to 28 of the ASC 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.
27 The correct characterisation of the book entries made on 1 July 1999 which are described in par 28 of the ASC is put in issue by the active respondents by par 28 of the Defence. In that paragraph of the Defence, it is asserted that, on or about 1 July 1999, the bankrupt directed Windoval, as trustee of the BFT, to thereafter hold the $5,000,000 which had been given to it by the applicant as an asset of the BFT. This minor issue of characterisation is of no consequence to the outcome of the case and need not be addressed further.
28 The active respondents do not admit the matters pleaded in par 29 of the ASC and deny the matters pleaded in pars 30, 31, 32, 33, 34, 35 and 37 of the ASC.
29 Thus, although the active respondents admit that, in or about May 1999, the bankrupt formed or had formed the following intentions:
(a) to make contributions to the BSF No 2 totalling $5,000,000 by midnight on 30 June 1999;
(b) to claim deductions for those contributions against his personal income for the 1998–1999 Income Tax Year;
(c) to wind up the BSF No 2 on 1 July 1999 and to distribute all of its assets (viz the $5,000,000 of contributions made by him) to himself as the sole beneficiary of the BSF No 2 as a tax-free distribution; and
(d) immediately thereafter to give the said sum of $5,000,000 so received to Windoval in its capacity as trustee of the BFT,
the active respondents deny that the bankrupt’s main purpose in effecting the transfer of $5,000,000 from himself to Windoval on 1 July 1999 was to prevent the said sum from becoming divisible amongst his creditors or to hinder or delay the process of making the said sum of $5,000,000 available for division amongst his creditors (see par 30 of the ASC and par 30 of the Defence). They also deny that, as at 1 July 1999, the bankrupt was or was about to become insolvent (see par 31 of the ASC and par 31 of the Defence). For these reasons, the active respondents resist the applicant’s claim that the transfer of $5,000,000 from the bankrupt to Windoval was void as against him by reason of the operation of s 121 of the Bankruptcy Act.
30 In similar vein, the active respondents deny that the said transfer was made by the bankrupt with intent to defraud his creditors and also deny that the natural consequence of the transfer was to delay, hinder or defraud the bankrupt’s creditors (see par 34 of the ASC and par 34 of the Defence). For that reason, the active respondents resist the applicant’s claim pursuant to s 37A of the Conveyancing Act (see pars 33, 34 and 35 of the ASC and pars 33, 34 and 35 of the Defence).
31 Whether the bankrupt had the requisite state of mind as at 1 July 1999 in relation to the gift of $5,000,000 which he made to Windoval on that day is the principal issue of fact in the present case.
32 Although the active respondents accept that Windoval received the said sum of $5,000,000 with knowledge of the bankrupt’s intentions as pleaded in par 24 of the ASC (the substance of which is set out at [29] above), they deny that the said receipt was impressed with a trust in favour of the applicant (see par 37 of the ASC and par 37 of the Defence).
33 In pars 38 to 63 of the ASC, 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 $551,837.46 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 and incidental costs were 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 $1,455,000 (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 either $1,850.665.24 or $2,239,000 (it does not matter which), 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).
34 With the exception of the payments alleged to have been made to Spring Cove (see par 41 of the ASC and par 41 of the Defence), the active respondents admit in the Defence the payments made to Lawjag and Bondcall by Windoval (see pars 38 and 44). The active respondents also admit that each of Lawjag and Bondcall received all of the said payments with the knowledge of the bankrupt’s intentions pleaded in par 24 of the ASC (see pars 39 and 45 of the ASC and pars 39 and 45 of the Defence). They deny that the moneys received by Lawjag, Spring Cove and Bondcall are or were held on trust for the applicant (see pars 40, 43 and 46 of the ASC and 46 of the Defence). The factual dispute concerning the alleged payments to Spring Cove is whether the corporation which received the payments was Spring Cove or SCP. This dispute is of no moment and need not be resolved.
35 The active respondents also admit that the amount of $1,455,000, being the total of the amount of the purchase price paid for the Manly property and the quantum of certain incidental costs, was furnished to Leah McKenzie as follows:
(a) As to $1,000,000 from Lawjag;
(b) As to $315,000 from Bondcall; and
(c) As to the balance of $140,000 from SCP,
and that these amounts came from funds which had been paid to Lawjag, Bondcall and SCP by Windoval shortly before they were disbursed on behalf of Leah McKenzie for the purchase of the Manly property (see pars 49, 50, 51 and 52 of the ASC and pars 49, 50, 51 and 52 of the Defence).
36 The active respondents also admit that all of the funds paid to Leah McKenzie to enable her to purchase the Manly property were derived from the personal exertions of the bankrupt (see par 51 of the ASC and par 51 of the Defence). They deny, however, that the bankrupt was insolvent or about to become insolvent as at the dates when the payments were made (ie as at 3 November 2000 in respect of the deposit of $140,000 and as at 15 December 2000 in respect of the remaining funds totalling $1,315,000).
37 The active respondents also deny that Leah McKenzie received the benefit of these funds as a volunteer.
38 The active respondents admit that, in the period from about 11 January 2001 to late July 2005, Lawjag, Bondcall, Spring Cove, SCP, Leada and Caronia made payments totalling $1,474,756.60 to or on behalf of Leah McKenzie in order to enable a new house to be designed and constructed on the Manly property.
39 Once again, they accept that all of these funds were derived from the personal exertions of the bankrupt but deny that he was insolvent or about to become insolvent at any time during the relevant period (early 2001 to mid-2005).
40 The active respondents deny that the Manly property was ever charged in favour of the applicant to the extent of the payments made to or for the benefit of Leah McKenzie for the purchase price of the Manly property or for the design and construction of the new residence on the Manly property.
41 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.
42 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. This proposition is contested by the active respondents.
43 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 to Leah McKenzie by the plaintiffs in the Supreme Court proceedings; and
(b) Consequential orders for payment of the moneys claimed to be subject to those trusts and that charge.
44 Leah McKenzie cross-claimed in the Supreme Court proceedings claiming to be beneficially entitled to the Manly property.
45 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.
46 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.
47 The applicant claims that the settlement sum “… stands charged in its entirety to the benefit of [the applicant]”.
48 The applicant’s claims for pecuniary relief are, therefore, now confined to securing payment of the amount of $1,950,000 held by or under the control of the fifth respondent.
Other Relevant Uncontested Facts
49 Some additional uncontested facts and matters were established by evidence at the trial.
50 These uncontested 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) 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.
51 On 9 September 1998, the bankrupt lodged an application for a Private Ruling with the ATO.
52 On or about 29 September 1998, the bankrupt obtained a Private Ruling from the then Deputy Commissioner of Taxation to the effect that contributions which he intended to make to a NCSF established by him would be tax deductible. The Ruling was in the following terms:
WHAT THIS RULING IS ABOUT:
Question 1: Will a contribution to a non-complying superannuation fund made by Mr Bonnell having a controlling interest in a private company be deductible to that taxpayer under s.82AAE of the Income Tax Assessment Act 1936 (Cth)?
Question 2: Will a contribution made within the circumstances outlined in question 1 be assessable to tax in the hands of the non-complying superannuation fund as a “taxable contribution” under s.274(1)(a) of Income tax Assessment Act 1936 (Cth) or the Income Tax Assessment Act 997 (Cth)?
Question 3: If the contribution made within the circumstances outlined in question 1 is not assessable to tax in the hands of the non-complying superannuation fund as a ‘taxable contribution’ under s.274(1)(a) then will it be a surchargeable contribution under section 8 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997?
Question 4: Will a contribution made within the circumstances outlined in question 1 be a fringe benefit under the Fringe Benefits Tax Assessment Act 1986?
Question 5: Will a contribution made within the circumstances outlined in question 1, assuming that it is an external period residual fringe benefit under section 51 of the Fringe Benefits Tax Assessment Act 1986, have a taxable value of nil since the value of the recipient’s contribution will offset the value of the recipient’s current benefit?
THE SUBJECT OF THE RULING:
The Rulee, David Bonnell, intends to make a contribution to a non-complying superannuation fund which is yet to be established. Mr Bonnell intends to make this contribution in his capacity as a shareholder with a controlling interest in a company, being Windoval Pty Ltd.
Mr Bonnell intends to make the contribution to the non-complying superannuation fund for the purpose of making provision for superannuation benefits for an eligible employee of Windoval Pty Ltd, as a taxpayer holding a controlling interest in Windoval Pty Ltd. This eligible employee will be Mr Bonnell.
Windoval Pty Ltd is a private company with only two shares on issue. At the present time, Mr Bonnell holds one of those shares. Prior to Mr Bonnell making the contribution to the non-complying superannuation fund, the other shareholder will transfer the other issued share to Mr Bonnell.
Mr Bonnell is a director of Windoval Pty Ltd, not a PAYE employee of that company. Windoval Pty Ltd has no other employees.
To date, the only other activity of Windoval Pty Ltd has been as a trustee company. It has not derived any assessable income. It is proposed that Windoval Pty Ltd will during the current financial year derive assessable income from discretionary trust distributions.
The contributions will be made pursuant to a Deed of Contribution entered into by Mr Bonnell and the trustee of the non-complying fund. It will provide that the only person to benefit from the contribution will be Mr Bonnell subject to the terms and conditions of the Deed of Trust of the non-complying fund.
The non-complying fund will be managed to provide for Mr Bonnell’s retirement. It will invest only in assets deriving an arm’s length return and will not invest in wasting assets. Further, the fund will not make loans to either Mr Bonnell or Windoval Pty Ltd. Payments by the non-complying fund to Mr Bonnell will only be made on Mr Bonnell’s retirement, death or permanent disablement.
COMMENCEMENT OF ARRANGEMENT:
Invalid
ASSUMPTIONS:
That the fund to which Mr Bonnell will be contributing will be a superannuation fund.
That the contribution will be made for the purpose of making provision for superannuation benefits for Mr Bonnell.
That Mr Bonnell will derive income or capital gains or profits in the relevant years.
That Mr Bonnell will have a majority voting power in the general meeting of Windoval Pty Ltd.
That the fund will not be a regulated superannuation fund.
That Mr Bonnell will be an employee at common law of Windoval Pty Ltd.
That Mr Bonnell will not be, at or about the time at which the benefits will be provided, carrying on a business consisting of, or including, the provision of identical or similar benefits principally to outsiders.
RULING:
Question 1: Yes, a contribution to a non-complying superannuation fund made by Mr Bonnell having a controlling interest in a private company will be deductible to that taxpayer under s.82AAE of the Income Tax Assessment Act 1936.
Question 2: No, a contribution made within the circumstances outlined in question 1 will not be assessable to tax in the hands of the non-complying superannuation fund as a “taxable contribution” under paragraph 274(1)(a) of the Income Tax Assessment Act 1936 or under any other provision of the Income Tax Assessment Act 1936 or the Income Tax Assessment Act 1997. Note that the potential application of Part IVA has not been considered.
Question 3: No, a contribution made within the circumstances outlined in question 1 will not be a surchargeable contribution under section 8 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997.
Question 4: Yes, a contribution made within the circumstances outlined in question 1 will give rise to fringe benefits under the Fringe Benefits Tax Assessment Act 1986.
Question 5: Yes, the fringe benefits arising from a contribution made within the circumstances outlined in question 1 will have a taxable value of nil.
53 The Private Ruling assumed that the bankrupt was an employee of Windoval and an “eligible employee” within the meaning of s 82AAA(1) of the Income Tax Assessment Act 1936 (Cth) (the Tax Act) and was subject to the planned activities being carried out in accordance with the terms of that Ruling.
54 In the Explanatory Notes attached to the Ruling, this was said:
EXPLANATORY NOTES ABOUT YOUR ENCLOSED PRIVATE RULING
THE PURPOSE OF THESE EXPLANATORY NOTES
These Explanatory Notes have been designed to give you some brief and helpful details about your enclosed Private Ruling, and what the law says about your Rights of Review with regard to this ruling if you disagree with it. They are not a definitive statement of legal principles but only a helpful guide.
If you require further information about this ruling, other than that which is enclosed or Private Rulings in general, please do not hesitate to contact the Australian Taxation Office from which this ruling issued. The contact telephone number; address; and fax number are listed on the top of the enclosed letter that accompanied this ruling.
HOW THIS RULING IS LEGALLY BINDING ON THE COMMISSIONER OF TAXATION
This ruling has been issued by the Commissioner of Taxation under the law in the Taxation Administration Act 1953. This Act states how and when this ruling will be legally binding on the Commissioner.
'Legally binding' means that, even if the tax law is ultimately found to apply to your arrangement in a different way to that which is set out in this ruling, you will not be liable for any more tax' than that which would be payable under this ruling.
WHEN IS THIS RULING NOT LEGALLY BINDING?
This ruling states the Commissioner’s opinion on the way that the tax law applies to your arrangement for the particular year(s) that you described in your Application for Private Ruling.
This ruling will not be binding on the Commissioner if the law is changed or if the arrangement you actually carried out was materially different from that which you described in your application: Also, this ruling is only binding on the Commissioner in respect of you, the rulee, as named in the ruling.
WHAT IF THE COMMISSIONER WANTS TO CHANGE THIS RULING?
Even though this ruling is binding on the Commissioner, the law allows the Commissioner to change it in four situations, as follows:
1. Where you give your consent to the ruling being changed.
2. Without your consent, if your ruling is about an arrangement which you have not yet begun to carry out. This also means that if this ruling covers an arrangement you repeatedly carry out over time (eg. buying and selling a particular item), the ruling may be changed for any of the arrangements which occur after the date of the change.
3. Without your consent where the arrangement has commenced. This is limited to those circumstances where this ruling is causing another taxpayer to be disadvantaged and their disadvantage is greater than the disadvantage that you would suffer if this ruling is changed.
4. By issuing a public ruling which is inconsistent with this private ruling. However, this can only occur if your arrangement has not begun to be carried out or if it has commenced and another taxpayer would be disadvantaged to a much greater extent than you. This Australian Taxation Office can supply you with copies of the relevant public rulings.
Where the Commissioner changes this ruling you will be advised in writing except in those situations where a public ruling (as per the previous situation 4 above) is inconsistent with this ruling.
55 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.
56 The substance of the reasoning which led to that Opinion was that, once the criteria for deductibility in s 82AAE of 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 which were intended to be 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.
57 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.
58 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.
59 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.
60 On 26 January 2001, the bankrupt sent a memorandum to Leah McKenzie in which he addressed her as “Leah Schmea” (the Leah Schmea memorandum). 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 matters 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.
61 The circumstances in which and the purposes for which each of the opinions from Counsel was obtained by the bankrupt in November 1998 will be addressed later in these Reasons when I come to consider the evidence of the bankrupt and other evidence relevant to his intentions, motivations and purposes in the period from about August 1998 to 1 July 1999 (and perhaps to a as late as the last quarter of 2000 or early 2001). The impact of the two media releases issued by the Commissioner of Taxation upon the thinking of the bankrupt will also need to be considered.
The Issues
62 The issues of substance which are tendered by the parties for resolution by the Court are:
(1) Whether the bankrupt’s main purpose in effecting the transfer of $5,000,000 from himself to Windoval on 1 July 1999 was to prevent the said sum of $5,000,000 becoming divisible amongst his creditors or to hinder or delay the process of making the said sum of $5,000,000 available for division amongst his creditors (s 121(1)(b) of the Bankruptcy Act).
(2) Whether it can reasonably be inferred from all the circumstances that, at the time of the transfer of the said $5,000,000 on 1 July 1999, the bankrupt was, or was about to become, insolvent with the consequence that the bankrupt’s main purpose is taken to be the purpose described in s 121(1)(b) of the Bankruptcy Act (s 121(2) of the Bankruptcy Act).
(3) Whether the said transfer of $5,000,000 was made with intent to defraud the bankrupt’s creditors (s 37A(1) of the Conveyancing Act).
63 The active respondents have not raised any defence under s 121(4) of the Bankruptcy Act.
64 The third issue will only arise if I do not find in favour of the applicant on his claim under s 121(1) of the Bankruptcy Act.
65 The resolution of the above issues requires the Court to determine, as a matter of fact, whether, as at 1 July 1999, the bankrupt had the requisite state of mind for the purposes of s 121(1) of the Bankruptcy Act and, should it be necessary, whether, as at the same date, he had the requisite state of mind for the purposes of s 37A of the Conveyancing Act.
66 The conduct of the bankrupt which manifested itself in the period from September 1998 to late 2005 is not seriously in dispute. In particular, his actions in the period from September 1998 to 1 July 1999 are not in contest. Nor are his actions in respect of Leah McKenzie and the Manly property.
67 The process of discerning the true purpose and intent of the bankrupt as at 1 July 1999 involves assessing the direct evidence given by him as to his state of mind as at that date against other objective indications of that state of mind in order to make a judgment as to the true position. The Court is not bound to accept the direct evidence of the bankrupt but is entitled to weigh that evidence against other primary evidence and inferences to be drawn from that primary evidence in order to make a final judgment on the critical issue.
68 Before me, the bankrupt resolutely maintained that the challenged payment was made for investment, tax and asset protection reasons. He gave direct evidence of his purpose and intent and sought to support that evidence by arguments and by detailed references to other events which he contended provided an appropriate context against which the Court could and should assess his evidence. In this regard, Senior Counsel for the active respondents carefully and meticulously addressed me on the detail of the bankrupt’s dealings with officers of the ATO in the period from September 1998 to June 1999 and emphasised the bankrupt’s evidence in relation to the two opinions from Counsel which he had obtained; in relation to the ATO Media Releases of March and May 1999; in relation to the Leah Schmea memorandum; in relation to the Gordian Knot note (to which I will refer later in these Reasons); and in relation to inconsistencies between evidence given by the bankrupt at the hearing of the Supreme Court proceedings, in an endeavour to persuade me that I should accept the bankrupt’s reasons for effecting the challenged payment and reject the sinister complexion placed on events by Senior Counsel for the applicant.
69 Senior Counsel for the applicant focussed his attention on many of the very same matters in order to support his ultimate proposition that I should find that the bankrupt had the requisite purpose and intent when he effected the challenged payment on 1 July 1999.
70 In the next section of these Reasons, I will assess the bankrupt’s evidence. In doing so, I do not intend to discuss in any detail the submissions of the parties which were directed to the question of whether I should accept the bankrupt’s evidence as to his state of mind or whether I should reject that evidence and, if the latter, whether there is a sufficient basis in the evidence for finding that the bankrupt had the requisite purpose and intent. My views and my reasons for them, I expect, will be quite apparent from the matters discussed and findings made in the next section of these Reasons.
71 The conclusions which I express in the next section of these Reasons will effectively determine the outcome of the case.
72 I note that, as matters have turned out, it will not be necessary to give close attention to the question of whether the challenged payment can be traced into the hands of Lawjag, Spring Cove, SCP or Bondcall or ultimately to Leah McKenzie.
73 Leah McKenzie has abandoned all claims that she may once have had to the settlement sum. The active respondents accept that, if the applicant succeeds in his claim under s 121 of the Bankruptcy Act or his claim under s 37A of the Conveyancing Act, or both, then the Court should make an order requiring the fifth respondent to pay the settlement sum, to the applicant. The applicant, for his part, has confined his monetary claims to a claim to receive payment of the settlement sum.
74 In the event that the applicant fails, the active respondents will be entitled to the settlement sum.
75 In the Defence, the active respondents raised an argument based upon s 60(3) of the Bankruptcy Act. Their contention was that:
(a) In about September 2008, the applicant was notified of the existence of the Supreme Court proceedings and of the fact that the bankrupt was one of the plaintiffs in those proceedings;
(b) The applicant did not make an election, in writing, to prosecute or discontinue the Supreme Court proceedings within 28 days of being so notified;
(c) By dint of the operation of s 60(3), the applicant was deemed to have abandoned his claims made in the Supreme Court proceedings at the expiration of the 28 day period referred to; and
(d) Somehow these matters operate to deny efficacy to the settlement of those proceedings.
76 This argument was not developed orally and only faintly put in writing. It was answered by the applicant by a submission to the effect that s 60(3) effects only an abandonment of the proceedings but does not affect the underlying cause of action (see the Full Court decision in Freeman v Joiner [2005] FCAFC 149 at [14]; (2005) 3 ABC(NS) 332 at 336 [14]).
77 I reject the active respondents’ defence based upon s 60(3) of the Bankruptcy Act.
The Evidence of the Bankrupt
78 The bankrupt’s evidence-in-chief is contained in his affidavit affirmed on 18 January 2013 and the documents exhibited to that affidavit.
79 At par 8 of that affidavit, the bankrupt said, quoting from an affidavit affirmed by him on 22 July 2008 and filed in the Supreme Court proceedings:
[8] I am a solicitor specialising in the area of taxation law. I was admitted to practice in 1987 and have conducted my own legal practice either alone or with others since 1998.
[9] Prior to September 1998 I formed a view that s82AAE of the Income Tax Assessment Act 1936 permitted taxpayers to establish superannuation funds and make contributions to the trustee of that fund for the taxpayer's own benefit, with the amount of contribution made to the fund being a legitimate deduction for income tax purposes. I knew that the Commissioner had accepted that practice in respect of complying superannuation funds. The advantage that I saw in relation to non-complying superannuation funds was that there was no limit to the size of the contribution in respect of which a deduction could be claimed. I was interested to pursue this view, both in respect of my own taxation affairs, and in respect of advising clients of my practice.
[10] On 29 September 1998 I obtained a Private Ruling from the then Assistant Commissioner of Taxation, Nick Petroulias, to the effect that contributions to non-complying superannuation funds were tax deductible. That Private Ruling related to my own personal affairs.
…
[11] At or about that time, I set up a personal non-complying superannuation fund, the "Bonnell No 2 Superannuation Fund" for the purpose of making contributions and claiming tax deductions in accordance with the Private Ruling. I caused Windoval to be appointed the trustee of the Bonnell No 2 Superannuation Fund.
[12] In about September or October 1998 I set up my own taxation advice business. At about this time I obtained opinions, first from Lister Harrison SC and Mark Robertson, and then from AH Slater QC and Roger Hamilton which confirmed the views which I had formed.
…
At the time I worked with Rick James who directed clients to me. I had previously worked from Rick James' office in about 1994.
[13] In the period from October 1998 to May 1999 I earned very substantial fees in the order of several million dollars as a tax practitioner in assisting clients with structuring their taxation arrangements in accordance with the effect of my Private Ruling. While the Private Ruling was specifically issued to me in respect of my own personal affairs, as a tax practitioner I considered it to be a bona fide expression by the Commissioner of his considered opinion on the question as to whether or not contributions to such noncomplying superannuation funds were deductible and therefore able to be applied for the benefit of clients.
[14] I made contributions of about $5 million to the Bonnell No 2 Superannuation Fund from the fees I earned in the period from October 1998 to May 1999 for which I intended to claim a tax deduction. I caused a substantial amount of those contributions to be loaned to Lawjag and Bondcall for the purpose of purchasing shares as investments.
[15] In or about May 1999 the Commissioner of Taxation issued media releases of relevance to the taxation arrangements associated with the Private Ruling.
…
[16] As stated above I had structured my personal income taxation affairs in accordance with the Private Ruling. I submitted an income tax return for the financial year ended 30 June 1999 which claimed as deductions the total contributions to the Bonnell No 2 Superannuation Fund. In July 2000 I received an income tax assessment statement from the Australian Taxation Office allowing those contributions as deductions.
[17] On 1 July 1999 I caused the Bonnell No 2 Superannuation Fund to be wound up. The assets and cash in the fund as at 1 July 1999 were payable to me. I immediately gifted those assets to Windoval in its capacity as trustee of the Bonnell Family Trust. As stated above, the fund was a non-complying superannuation fund, which was not subject to any age limits for retirement, and whose income was taxed at the top marginal rate. I was the only beneficiary. In May 1999 I had decided to cease carrying on the business of providing tax advice, and communicated that to all of my clients.
[18] Windoval as trustee of the Bonnell Family Trust was the sole shareholder of Bondcall and Lawjag. As a result, on and from July 1999 (and into 2000) I had significant cash resources available for investment and at my personal control through Bondcall and Lawjag.
80 In the remainder of his affidavit, the bankrupt elaborated on, qualified and further explained some of the matters which he had set out in his Supreme Court affidavit. His affidavit is lengthy. I propose to refer only to those matters referred to in the bankrupt’s affidavit which I consider are relevant to the issues to be determined in the case and which have not been adequately covered in the section of these Reasons entitled: The Applicant’s Case. Some matters of “context” relied upon by the active respondents have not been mentioned as I did not find them to be of any assistance in resolving the main issues.
81 The bankrupt said that, when he received his Private Ruling, he took it as confirmation of his long-held view that a contributor to a NCSF could make unlimited contributions to that NCSF and claim a tax deduction for the entire amount of those contributions. He then proceeded to promote and market his idea which had led him to seek a Private Ruling in the first place, namely, that there were tax advantages in making significant contributions to NCSFs.
82 In October 1998, the bankrupt decided to seek further comfort by obtaining opinions from Counsel in relation to the scheme which he was, by then, heavily promoting.
83 He subsequently received the two opinions to which I have referred at [55]–[57] above. He claimed that, when he received those opinions, his views as to the deductibility of contributions to NCSFs were reinforced in his mind as being undoubtedly correct.
84 Mr Bonnell was aware that, on 14 May 1999, Business Review Weekly published an article entitled: “Roll Up for the Super Tax Dodge”. In that article, the promoters of the “Scheme” the subject of the bankrupt’s Private Ruling were described as “… relying on a legal loophole”. The author of the article said that the scheme provided four benefits: “windfall tax deductions, a way of beating the age-limits on deductible super contributions, a way of sidestepping FBT, and tax free payouts on retirement”. The author of the article recorded the fact that the Commissioner of Taxation had said he would move against the arrangements. The author also recorded a remark from the bankrupt to the effect that he (the bankrupt) did not propose to put any more clients into the NCSF schemes because the tax position was not clear enough to recommend their use. The bankrupt accepted that he said the first part of that which was attributed to him but not the latter. This was an example of the bankrupt attempting to qualify statements previously made by him which might be seen to be unhelpful to the active respondents’ case. The author of the article also warned that the Commissioner of Taxation might invoke the anti-avoidance provisions of Pt IVA of the Tax Act in order to attack the schemes.
85 The bankrupt accepted that he became aware of the second ATO Media Release (viz the Release dated 19 May 1999) shortly after it was published. He said that, after considering the contents of that Media Release, he formed the view that it did not affect his entitlement to claim deductions for contributions which he had made and intended to make to the BSF No 2. He said that he formed this view because:
(a) The arrangements covered by the Media Release extended far beyond the schemes with which he was involved. Most of these arrangements had nothing to do with those schemes.
(b) The comments attributed to the Commissioner of Taxation suggested that the ATO would stand by its private rulings.
86 On 23 June 1999, the bankrupt received a letter from the ATO, signed by Assistant Commissioner Michael O’Neill. The terms of that letter (omitting formal parts) were:
In accordance with sections 14ZAU and 14ZAV of Part IVAA of the Taxation Administration Act 1953, the Commissioner is considering the withdrawal of the Private Ruling, dated 29 September 1998, which is expressed to apply to David N Bonnell in respect of the year ended 30 June 2000. The Ruling relates to the taxation implications of a contribution to a non-complying superannuation fund by a taxpayer with a controlling interest in a private company.
87 The bankrupt testified in chief that he interpreted this letter literally in the sense that he did not believe it related to the year ended 30 June 1999 but applied only to the year ended 30 June 2000. He was challenged about this in cross-examination.
88 On 29 June 1999, the bankrupt replied to the ATO’s letter of 23 June 1999. In his reply, he took issue with the Commissioner’s entitlement to withdraw his Private Ruling. In his reply, the bankrupt did not mention his interpretation of the ATO’s earlier letter as being confined to the income tax year ended 30 June 2000.
89 The bankrupt also said that, in May 1999, he believed that all that he was required to do in order to validly retire for the purposes of the BSF No 2 was to cease conducting the business of providing tax advice. He said that it was in this technical sense in which he retired. He said that he had not intended to convey the idea that he would never resume work nor did he think that his technical retirement prevented him from working in some other business activity or for some other employer. He claimed that he decided to retire in May 1999 because he had made sufficient money during the course of that tax year to set him up for the rest of his life and that he considered that promoting and marketing the NCSF scheme would not be as lucrative in the future, in any event. He also thought that the Tax Act would be changed to close off the loophole which had permitted the schemes to flourish in the first place. He was also challenged in relation to these assertions and explanations.
90 After describing the book entries which he effected on 1 July 1999, the bankrupt said that he had given the $5,000,000 to Windoval in its capacity as the trustee of the BFT “… as a basic and general asset protection strategy on [his] part”. He denied making that gift in order to put the funds out of reach of any creditor in the event that he should later become bankrupt. He said that he had no substantial creditors and did not consider that the ATO was a creditor or would become a creditor of him. The bankrupt acknowledged that the whole issue of the deductibility of contributions to NCSFs had become a political issue within the ATO and was embarrassing to it. He said that he thought that, if an amended taxation assessment was issued to him, he would ultimately be successful in challenging it. He also accepted that he was well versed in the insolvency principles of voidable transactions and relation back. He claimed that he would not have attempted to spirit his cash away in order to put it out of the reach of creditors because he well appreciated that such an attempt would fail. He said that, as at 1 July 1999, he did not conceive that he could be made bankrupt in the future as a result of the deductions which he had claimed for the 1998-1999 Tax Year being disallowed.
91 In his affidavit, the bankrupt went on to explain that the BFT remained under his sole control in 1999 and he could have called the money back had he received an amended taxation assessment which survived challenge by him. He did not say that he would have called the money back in order to meet his increased tax liabilities.
92 By about October 1999, it had become clear to the bankrupt that the NCSF schemes which he had put in place for his clients were likely to be challenged by the ATO.
93 On 20 March 2000, the Australian Federal Police raided the bankrupt’s office.
94 At pars 104 to 109 of his affidavit, the bankrupt endeavoured to explain the Leah Schmea memorandum which I have extracted in full at [60] above. In those paragraphs of his affidavit:
(a) He said that, at no time in the period from May 1999 up to and including 1 July 1999, did he think that the Commissioner of Taxation would ultimately not allow his contributions to the BSF No 2 as tax deductions with the consequence that he would be unable to pay the tax that would otherwise become payable.
(b) His thought processes were clouded and confused about the events that had transpired after 1 July 1999.
(c) His reference in the memorandum to being unable to pay tax was not a reference to being unable to pay tax by reason of having given the $5,000,000 to Windoval.
(d) Even if he had received an amended taxation assessment soon after 1 July 1999, he had the capacity to claw back sufficient funds to pay the amount of that assessment from Windoval.
95 At pars 110 to 115 of his affidavit, the applicant addressed an undated document which he claimed was written in 2004 called the “Gordian Knot document”. Once again, he endeavoured to disown the views expressed in that document, explaining them as having been expressed at a time when he was under great stress and was depressed.
96 In the Gordian Knot document, the bankrupt said that he knew that an assessment for millions of dollars was coming. He said that he had never really believed that such an assessment would not issue.
97 The bankrupt was cross-examined for almost four hours on the first day of the hearing. I had a very good opportunity to observe him in the witness box. He was brash, arrogant, argumentative and combative in his attitude to the cross-examiner and in the answers which he gave. He presented as a reasonably intelligent lawyer. He seemed to me to be very well aware of the issues calling for consideration in this case and to be very keen to ensure that, wherever possible, his evidence assisted the active respondents. At times, I thought that the evidence given by the bankrupt was incredible.
98 The bankrupt’s attention was drawn to the fact that the Commissioner of Taxation was excepting from the protection offered by the Private Ruling which he had obtained, arrangements which could properly be challenged under Pt IVA of the Tax Act. The bankrupt repeatedly asserted with great confidence that he was not concerned about the possible application of Pt IVA.
99 The bankrupt’s attention was drawn to part of the opinion which he had been given by Messrs Harrison and Robertson to the effect that if, for example, a large sum contribution were made by a taxpayer the day before the taxpayer was due to retire and on retirement he was to receive that amount back, it could be concluded that the contribution had not been made for the purpose of providing retirement benefits. The barristers went on to say that, in such a situation, the purpose test of s 82AAE of the Tax Act would fail and there would be no tax benefit under s 177C of that Act. In his evidence, when asked about that part of the barristers’ opinion, the bankrupt said that he disagreed with it strongly. He said, by way of explanation, that Pt IVA could not be engaged. But the point being made by the barristers in their opinion had nothing to do with Pt IVA of the Tax Act, as I think the bankrupt well knew. Rather, the observation which they had made was directed to the very rationale of the bankrupt’s scheme, that is to say, the capacity of a taxpayer to claim a tax deduction for all of the taxpayer’s contributions to the relevant NCSF.
100 When pressed for the true import of the barristers’ opinion, the bankrupt again asserted that he disagreed with the opinion.
101 In answering questions about the opinion of Messrs Slater and Hamilton, the bankrupt was dismissive and disrespectful, asserting at one point that the barristers were expressing their views, not in conformity with their duties to their client but rather to “… cover their backsides …”. The bankrupt described the principal reason for obtaining these opinions as “marketing”.
102 When asked whether he considered he was an employee at common law of Windoval, at Transcript 28/30–35, the bankrupt gave the following justification for his answer that he was such an employee:
Why do you say that?---I entered into – when I entered into the arrangement I entered into a sort of serviced office – the usual solicitor's arrangement with his own practice where I hired out my administrative services to my practice for the fee of $42,000 which was paid to Windoval which then paid it back to me as director's fees and I took that to be sufficient to establish myself as a common law employee.
103 That answer did not establish the point which the bankrupt thought that he was establishing.
104 During the course of cross-examination on the contents of the second ATO Media Release, the bankrupt said that he knew that his Private Ruling would be looked at one way or another (Transcript 32/24–25). He accepted that, in the period between February and June 1999, when he made the relevant contributions to the BSF No 2, he expected that the deductions which he intended to claim would be scrutinised. He denied that he thought that litigation would be inevitable. Ultimately, he also accepted that the Commissioner might raise Pt IVA. Nonetheless, he continued to assert that, in his opinion, the Commissioner would not succeed with any Pt IVA arguments and that, therefore, he did not need to be concerned about Pt IVA.
105 The bankrupt was cross-examined on the question of his purported retirement. It is not necessary to traverse that cross-examination in any detail. It is sufficient to note the following matters:
(a) The bankrupt maintained his solicitor practising certificate throughout the period from May 1999 to February 2000;
(b) The bankrupt continued to operate from the same business premises throughout that period as he had done for some time beforehand;
(c) The bankrupt retained some employees who continued to do legal work under the banner of his practice name; and
(d) The bankrupt regularly attended at his office premises.
106 This evidence demonstrated that, to an observer looking at the bankrupt’s premises and the activities apparently carried on there, there was no change during the alleged period of retirement from the activities which had been carried on beforehand. The bankrupt asserted (accurately) that he had ceased doing tax advice work.
107 Somewhat reluctantly, at the conclusion of this section of the cross-examination, the bankrupt accepted that one of the issues that the Commissioner of Taxation would be likely to look at when considering his entitlement to a tax deduction for the contributions made by him to the BSF No 2 in the 1998–1999 Tax Year was whether or not he had genuinely retired. He also accepted that, as at 1 July 1999, the question of whether or not he had retired could possibly have been a bone of contention.
108 The bankrupt was cross-examined about the exchange of correspondence which he had with the Commissioner of Taxation in late June 1999. He was asked whether he thought that the author of the letter from the ATO had mistakenly referred to the year ended 30 June 2000 and had intended to refer to the year ended 30 June 1999. After all, the Private Ruling related to the earlier year. The bankrupt denied that he appreciated that the Commissioner had made a mistake but could not explain why he bothered to take up the issue if he had truly believed that the letter related only to the year ended 30 June 2000. I do not accept the bankrupt’s evidence about these letters. It was contrived and consisted largely of an ex post facto reconstruction put together to assist the case of the active respondents.
109 When cross-examined about his thinking as at 1 July 1999, the bankrupt accepted that he understood as at 1 July 1999 that the Commissioner of Taxation might issue an amended assessment to him although he maintained the position which he had previously outlined, namely, that he did not think that the Commissioner could successfully disallow his deductions.
110 The bankrupt was then cross-examined about certain evidence which he had given in the Supreme Court proceedings. In those proceedings, when asked the following question:
And you did that [gave the $5,000,000 to Windoval], didn’t you, to ensure or to make it as hard as possible for the tax man ever to collect the tax on the residue of the $5 million.
111 His answer to that question was:
I saw it as a prudent plan, yes.
112 In answers which he then gave before me after being confronted with the evidence which he had given in the Supreme Court proceedings, the bankrupt prevaricated and attempted to disown the evidence with which he had been confronted. This particular passage of the cross-examination constitutes a good example of the combative attitude of the bankrupt and of his willingness to offer unsatisfactory evidence if it might help the active respondents’ case.
113 By far the most telling evidence affecting the credit of the bankrupt and also providing a sound basis for drawing the inferences which the applicant urged upon me was the evidence which the bankrupt gave in an endeavour to disown the contents of the Leah Schmea memorandum.
114 I have set out the contents of that memorandum at [60] above. Obviously, he compiled the memorandum in order to explain to his de facto partner what he had done, why he had done it and what he intended to do in circumstances and at a time when he must be taken to have fully appreciated that the ATO was circling and very likely to disallow the deductions which he had claimed in respect of the 1998–1999 Tax Year for the contributions which he had made to the BSF No 2.
115 At par 3 of that document under the heading “1 July 1999”, the bankrupt noted his belief as at that date that the Commissioner of Taxation would ultimately disallow his contributions to the BSF No 2 as tax deductible with the consequence that he would be unable to pay the tax assessed under any amended tax assessment resulting from the disallowance of those deductions. These are damning admissions.
116 The bankrupt tried very hard to persuade me that the remarks which I have just summarised were not intended to be interpreted as written. At times, his explanations verged on the farcical. For example, he said that his mind “strayed elsewhere during this document and that the document strayed into somewhere it didn’t belong”. He said it was a formulation of considerations that were, as he said, in the front of his mind at the time. He claimed that the document did not reflect what he actually did in July 1999.
117 At Transcript 65 line 31 to Transcript 66 line 10, the following exchange occurred:
HIS HONOUR: Mr Bonnell, I’m having some difficulty. You agree that’s what the words say? - I do, but I
You say it’s not what you intended? - Yes.
Why did you write those words [referring to the first four paragraphs under the heading “1 July 1999” in the memorandum dated 26 January 2001] if that’s what they say, but it’s not what you intended?—The document is dated in January 2001. In – the commissioner did not disallow deductions for my clients until December 2000, and December 2000, a lot of clients start getting – 100 or so clients get assessments, some of whom have put contributions into non-compliant funds. So, for instance, someone might be working at BT and he gets a very large severance payment. He puts that straight into the non-complying fund and claims a deduction. He doesn’t have sufficient assets in his own name to pay the tax on that contribution, and then if he gets assessed, his asset that would pay the tax is trapped in the non-complying fund. So what’s happening in this document is that I’m sitting there half writing this to McKenzie and half thinking to myself about this problem, about what justifications can I use to wind up the fund to allow my clients to take the money out. I’m thinking through the kinds of explanations you could use to say, well, this deed – this document, this trust deed – sorry, this superannuation fund no longer has any utility. In fact, it’s getting in the way of the best interests of the only beneficiary of the trustee, and therefore it should be wound up. That’s probably the best explanation I can give to a client. As I’m working it through, I’m putting it down in this memo.
Mr Bonnell, is that the best answer you can give to my question? Yes, it is.
All right …
118 I find this evidence unintelligible. Furthermore, I consider it to be a deliberate attempt on the part of the bankrupt to deny the obvious.
119 The remarks which he made in the Leah Schmea memorandum under the heading “1 July 1999” clearly related to his own personal situation and to the date in the heading. He was, I find, endeavouring to inform Ms McKenzie who had been his de facto for almost a year, of the likelihood that in the near future the Commissioner of Taxation would be pursuing him for a very substantial sum of money as a result of transactions which he had carried out on 1 July 1999. I also find that the decision which the bankrupt made either on or shortly before 1 July 1999 to pay out the $5,000,000 of contributions which he had made to the BSF No 2 between February and June 1999 and the decision to wind up the BSF No 2 were both made in circumstances where, as at 1 July 1999, the bankrupt had a real apprehension that the Commissioner of Taxation would disallow the deductions which he intended to claim for the contributions which he had made to the BSF No 2 and that, as a result, he would be unable to pay the significant amount of tax that would be reassessed to him. These conclusions sensibly follow from a reasonable and fair interpretation of the words which appear at the beginning of the fifth paragraph under the heading “1 July 1999” in the Leah Schmea memorandum: “On the basis of these matters ….”.
120 I also infer that the gift to Windoval was made as the last step in his endeavour to put the $5,000,000 beyond the reach of the Commissioner of Taxation should the apprehensions felt by the bankrupt become reality.
121 After the passage of evidence which I have extracted at [117] above, the cross-examiner pursued the witness who continued to assert that the document did not record his actual beliefs as at 1 July 1999.
122 For the reasons which I have endeavoured to explain, I do not accept these denials.
123 The bankrupt was then again asked about other evidence which he had given in the Supreme Court proceedings. At one point in those proceedings, he had accepted that he believed that, as at 1 July 1999, the possibility of his going bankrupt was definitely something he thought could happen. The witness declined to accept that that was the true import of the evidence which he had given in the Supreme Court proceedings. However, I disagree. It seems to me that, in the Supreme Court proceedings, the bankrupt did accept that, as at 1 July 1999, he was concerned about going bankrupt as a result of the Commissioner of Taxation disallowing the deductions which he had claimed for the contributions which he had made to the BSF No 2. I make that finding, notwithstanding his vehement denials at the hearing before me that he had said any such thing or that he had any such belief as at 1 July 1999.
124 The evidence which I consider the bankrupt gave in the Supreme Court proceedings to which I have referred at [110] and [123] above also constitutes a sound basis for inferring that, as at 1 July 1999, the bankrupt did, in fact, believe that the Commissioner would disallow the deductions which he had claimed and that, as a consequence, he might go bankrupt.
125 The bankrupt was also cross-examined about the paragraph in the Gordian Knot document to which I have referred at [95] and [96] above. He struggled to explain why he had said what he had said. He claimed that it was an exaggeration and a generalisation. He said that the document was not a technical document yet he was unable to provide a satisfactory explanation consistent with his case as to why he had written those words. The cross-examiner put most directly that the remark which he made in the Gordian Knot document reflected his belief at all times from May/June 1999. The bankrupt denied these propositions but remained unable to explain why he had said what he said in the Gordian Knot document.
126 In the end, I am satisfied that, as at 1 July 1999, when the bankrupt caused Windoval to make entries in its books effecting the payment to him personally of $5,000,000 as a retirement benefit, when he caused Windoval immediately thereafter to wind up the BSF No 2 and when he then directed Windoval to treat the $5,000,000 which it still held in its books as a gift from the bankrupt personally to Windoval, in its capacity as the trustee of the BFT, the bankrupt believed that it was very likely that the Commissioner of Taxation would, in due course, disallow the deductions which he intended to claim for the total amount of contributions made by him to the BSF No 2 during the 1998–1999 Tax Year (viz $5,000,000) and, as a consequence, require him to pay, in addition to the tax which might otherwise be payable, approximately half of the $5,000,000.
127 I find that the bankrupt turned his mind to these matters either on or immediately before 1 July 1999 and took the steps which he took on 1 July 1999 with these matters in mind and with the intention of putting the $5,000,000 in question beyond the reach of the Deputy Commissioner of Taxation and, for that matter, beyond the reach of any other creditors who might come knocking (eg former clients who were dissatisfied with the advice which they had received from the bankrupt).
The Relevant Statutory Provisions
128 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.
129 Section 6 of the Bankruptcy Act provides:
6 Meaning of intent to defraud creditors
A reference in this Act to an intent to defraud the creditors of a person or to defeat or delay the creditors of a person shall be read as including an intent to defraud, or to defeat or delay, any one or more of those creditors.
130 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.
Decision
Section 121(1) and 121(2) of the Bankruptcy Act
131 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.
132 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.
133 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).
134 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, I find 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)).
135 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).
136 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).
137 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).
138 At 291–292 [29]–[33], 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.
139 At 292 [34], 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 294 [40], 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”.
140 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”.
141 In Prentice v Cummins (2002) 124 FCR 67, at 91 [98], 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 91 [99]. In Prentice v Cummins at 91 [99], 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).
142 In Prentice v Cummins, on the question of “main purpose”, his Honour concluded (at 100 [137]–[138]):
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.
143 In the present case, the applicant refers to the fact that the bankrupt obtained the Private Ruling and the fact that the Commissioner of Taxation issued the 19 May 1999 press release which came to the knowledge of the bankrupt. He then specifies a number of intentions which he alleges the bankrupt already had by that date or formed at or about that time (as to which see [29] above). The applicant then identifies the subsequent conduct of the bankrupt by which he is alleged to have given effect to those intentions.
144 “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.
145 I have found 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 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. This does not mean, however, that the bankrupt would have exercised that control on and after 1 July 1999 in order to procure funds to pay an additional tax debt of the order of $2.5 million. The dictum of Sackville J at 91 [99] of Prentice v Cummins is apposite.
146 I find 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) of the Bankruptcy Act. The primary focus of his attention was the Commissioner of Taxation whom he considered to be likely to become a creditor of him at some time in the future. The fact that the Commissioner did not, in fact, issue a revised taxation assessment until 29 July 2004 does not matter at all.
147 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 while at the same time be kept beyond the reach of his creditors. In particular, the funds would be beyond the reach of the Commissioner of Taxation.
148 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).
149 The applicant’s case on insolvency 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 Tax Year that might have been issued in the future. The mere fact that he could have done so is not to the point.
150 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 159 [95]). But this does not mean that the party asserting that the bankrupt was insolvent as at a particular date must always 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.
151 In the present case, the applicant contends that the bankrupt deliberately set upon a course of action which rendered him insolvent. 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.
152 I think that the applicant can also rely upon s 121(2) of the Bankruptcy Act in order to prove that the bankrupt had the requisite main purpose as specified in s 121(1).
Section 37A of the Conveyancing Act
153 Strictly speaking, given the conclusions which I have reached in relation to the applicant’s case under s 121(1) of the Bankruptcy Act, it is not necessary to deal with his case under s 37A of the Conveyancing Act. However, against the possibility that I may be wrong in the result which I have reached in respect of the applicant’s Bankruptcy Act claim and in deference to the parties’ arguments addressed in relation to s 37A, I will briefly deal with the applicant’s claim under that section.
154 I have set out the terms of s 37A of the Conveyancing Act at [130] above.
155 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 552–555 [12]–[23], 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 555–556 [24]–[25], 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]).
156 The plurality in Marcolongo v Chen (at 558–559 [32]–[34]) 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.
157 At 564–565 [56]–[58], 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.
158 The findings which I have made as to the bankrupt’s beliefs and intentions as at 1 July 1999 more than justify a finding to the effect that the challenged payment was made with intent to defraud the Commissioner of Taxation who was seen by the bankrupt as a likely creditor as at 1 July 1999. I make that finding.
The Consequential Claims for Relief
159 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 is 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. 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, however, 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. All parties accepted this. The applicant is, therefore, entitled to that sum.
Conclusions
160 The applicant has succeeded in his claim under s 121(1) of the Bankruptcy Act. I have also held that, had it been necessary to do so, I would have found for the applicant on his claim under s 37A of the Conveyancing Act. The applicant is, therefore, entitled to the relief which he has claimed.
161 Costs should follow the event. That is, the active respondents should pay the applicant’s costs of and incidental to the proceeding to date.
162 At the moment, I think that there should be no order as to costs as between the applicant and the fifth respondent. However, the fifth respondent has preserved his entitlement to argue about costs. In deference to that position, I will reserve the question of costs. However, the parties should understand that my present views about costs are as stated above.
163 There will be orders accordingly.
| I certify that the preceding one hundred and sixty-three (163) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster. |
Associate:
