FEDERAL COURT OF AUSTRALIA

Cooper v Fernihough, in the matter of the bankrupt estate of Phillip George Fernihough [2019] FCA 727

ORDERS

THE COURT DECLARES THAT:

1.    The second respondent’s interest in the property situated at 8B Salitage Link, Pearsall WA 6065 and comprising Certificate of Title Register Number 2/SP50298 vested in the applicant pursuant to s 58(1)(a) of the Bankruptcy Act 1966 (Cth) upon the second respondent becoming a bankrupt.

THE COURT ORDERS THAT:

1.    The application for declarations in terms of paragraphs 1 and 2 of the third originating application dated 4 October 2018 is dismissed.

2.    On or before 4 July 2019, the first respondent, if so advised, is to commence an application in the Family Court of Western Australia for orders providing for:

(a)    spousal maintenance against the second respondent pursuant to s 74 of the Family Law Act 1975 (Cth); and

(b)    such additional relief against the second respondent as she may claim under the Family Law Act 1975 (Cth), whether as a consequence of the reasons for judgment published today or otherwise; and

(c)    an extension of the period by which any such application(s) may be made, to the extent an extension is necessary.

3.    For the purposes of this proceeding, any application commenced by the first respondent in accordance with paragraph 2 of these orders is to be served on the applicant at his email address for service in this proceeding within two weeks of the commencement of the application.

4.    On or before 18 July 2019, the applicant is to file and serve an affidavit stating whether or not he has been served with an application in accordance with paragraph 3 of these orders.

5.    In the event that the applicant is served in accordance with paragraph 3 of these orders:

(a)    by this order, the applicant’s application for orders in terms of paragraphs 5, 6 and 7 of the third originating application dated 4 October 2018 is stayed pending the determination of the first respondent’s application; and

(b)    the parties have liberty to apply for orders lifting the stay, including for the purposes of seeking an order for the transfer to the Family Court of Western Australia of any part of the third originating application that remains undetermined.

6.    In the event that the applicant is not served in accordance with paragraph 3 of these orders, the trustee has liberty to apply for his application for orders in terms of paragraphs 5 to 7 of the third originating application to be finally determined (including at short notice and without a further hearing), such liberty to be exercised on or before 8 August 2019.

7.    In the event that the applicant is not served in accordance with paragraph 3 of these orders, and in the event that the liberty to apply granted in paragraph 6 of these orders is not exercised, the remainder of the third originating application is, by this order, dismissed as at 9 August 2019.

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

REASONS FOR JUDGMENT

CHARLESWORTH J:

1    Phillip and Christine Fernihough were married for more than 45 years. They separated on 10 April 2013. On 29 May 2013, Mr and Mrs Fernihough entered into an Agreement, expressly intended to be a “Binding Financial Agreement” made under Pt VIIIA of the Family Law Act 1975 (Cth) (FLA). Among other things, it provided for the division of the assets and liabilities of the marriage. By clause 3 of the Agreement, Mr Fernihough promised to transfer to Mrs Fernihough all of his right title and interest in the former matrimonial home, situated in Pearsall, Western Australia (the Pearsall property).

2    On 11 July 2017, a sequestration order was made against Mr Fernihough’s estate. The date of commencement of Mr Fernihough’s bankruptcy was 15 May 2017. As can be seen, the bankruptcy commenced within four years after the Agreement was made.

3    Mr and Mrs Fernihough are the respondents to this action. The applicant is Mr Fernihough’s trustee in bankruptcy. The trustee seeks (among other things) a declaration to the effect that the transfer of Mr Fernihough’s interest in the Pearsall property affected or purportedly affected by the Agreement is void against him by virtue of s 120 or s 121 of the Bankruptcy Act 1966 (Cth) (BA). In oral submissions, Counsel for the trustee confirmed that the relief is sought only in respect of the Pearsall property and not in respect of any other asset or financial resource forming the subject of the Agreement. The trustee seeks a further declaration to the effect that Mr Fernihough’s share in the Pearsall property has vested in him as the trustee of the bankrupt estate by the operation of s 58 of the BA. Orders are sought for the sale of the Pearsall property and for the net proceeds to be distributed in equal shares to the trustee and Mrs Fernihough as co-owners.

issues

4    Section 120(1) of the BA provides that a transfer of property by a person (transferor) who later becomes a bankrupt is void against the trustee in the transferor’s bankruptcy if:

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

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

5    Section 120(2) of the BA exempts certain transfers from the operation of s 120(1), including a transfer to meet all or part of a liability under a maintenance agreement or a maintenance order. The phrase “maintenance agreement” is defined in s 5(1) of the BA to exclude a financial agreement within the meaning of the FLA. It follows that s 120 of the BA is capable of applying to a transfer made or purportedly made under an otherwise valid binding financial agreement.

6    Section 120(3)(a) of the BA provides that despite subs (1), a transfer is not void against the trustee if, in the case of a transfer to a related entity of the transferor:

(i)    the transfer took place more than 4 years before the commencement of the bankruptcy; and

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

7    Mr and Mrs Fernihough are related entities for the purposes of this provision: BA, s 5(1).

8    Section 121 of the BA relevantly 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.

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

…

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.

9    Despite his promise to transfer his interest in the Pearsall property to his wife, Mr Fernihough has not done all things necessary to transfer his legal interest. As such, Mr Fernihough presently remains named on the certificate of title as a joint registered proprietor. As a consequence, Mr Fernihough submits, there has been no transfer of property upon which s 120 or s 121 can operate. Alternatively, Mr Fernihough submits that he was solvent at the time that he entered into the Agreement so that the exemption in s 120(3)(a) therefore applies. Mr Fernihough further submitted that an order for the sale of the Pearsall property could only be made by the Supreme Court of Western Australia. I reject the latter submission for the same reasons given in Weston (Trustee), in the matter of Jeffery v Jeffery [2019] FCA 554 at [41] to [54].

10    The following issues arise:

(1)    whether there has been a “transfer” of “property” within the period specified in s 120(1)(a);

(2)    to the extent that a transfer of property has occurred, whether Mrs Fernihough gave no consideration for the transfer, or otherwise gave consideration of less value than the market value for the property transferred;

(3)    whether the exception prescribed in s 120(3) in respect of Mr Fernihough’s asserted solvency applies;

(4)    for the purposes of s 121 of the BA:

(a)    whether the condition in s 121(1)(a) is fulfilled; and

(b)    whether the “main purpose” specified in s 121(1)(b) has been established on the evidence; and

(5)    whether Mr Fernihough’s interest in the property has vested in the trustee and, if so, whether the property should be sold and the net proceeds divided equally between the trustee and Mrs Fernihough.

11    The third of these issues may also be swiftly disposed of. The exemption in s 120(3)(a) has no application because, to the extent that there has been a transfer of an interest in the Pearsall property, the transfer took place less than four years before Mr Fernihough’s bankruptcy commenced: BA, s 120(3)(a)(i).

12    In respect of the fourth issue, Counsel for the trustee confirmed that the case premised on s 121 of the BA depended on the Court finding that the property forming the subject of the proceedings was transferred for no or inadequate consideration. It is submitted that the provision of no or inadequate consideration would be sufficient, in and of itself, to prove that the purpose of the transfer was to prevent the Pearsall property from becoming divisible among Mr Fernihough’s creditors.

THE LEGAL CONTEXT

13    Part VIII of the FLA is titled “Property, spousal maintenance and maintenance agreements”. A court having jurisdiction under Pt VIII may make orders for (among other things) the provision of spousal maintenance (s 74) and the alteration of property interests (s 79).

14    In considering what, if any, order should be made under s 79 in property settlement proceedings, the Court exercising jurisdiction in the matter must take into account the matters prescribed in s 79(4). The considerations include the financial and non-financial contributions made directly or indirectly by or on behalf of the parties to the acquisition or improvement of property (s 79(4)(a) and (b)) and (more pertinent to this proceeding) “the contribution made by a party to the marriage to the welfare of the family constituted by the parties to the marriage and any children of the marriage, including any contribution made in the capacity of homemaker or parent”: FLA, s 79(4)(c).

15    An order for spousal maintenance may be made if (among other things) the party to be maintained is unable to support himself or herself adequately having regard to any relevant matter under s 75(2). The matters under s 75(2) include the duration of the marriage and the extent to which it has affected the earning capacity of the party whose maintenance is under consideration (FLA, s 75(2)(k)), the terms of any order made under s 79 for the alteration of property interests (FLA, s 75(2)(n)) and “a standard of living that in all the circumstances is reasonable” (FLA, s 75(2)(g)).

16    Part VIII does not apply to financial matters or financial resources to which a financial agreement that is binding on the parties to the agreement applies: FLA, s 71A. The formation and effect of financial agreements is provided for in Pt VIIIA, in which s 90C resides. It provides:

90C    Financial agreements during marriage

(1)    If:

(a)    the parties to a marriage make a written agreement with respect to any of the matters mentioned in subsection (2); and

(aa)    at the time of the making of the agreement, the parties to the marriage are not the spouse parties to any other binding agreement (whether made under this section or section 90B or 90D) with respect to any of those matters; and

   (b)    the agreement is expressed to be made under this section;

the agreement is a financial agreement. The parties to the marriage may make the financial agreement with one or more other people.

(2)    The matters referred to in paragraph (1)(a) are the following:

(a)    how, in the event of the breakdown of the marriage, all or any of the property or financial resources of either or both of the spouse parties at the time when the agreement is made, or at a later time and during the marriage, is to be dealt with;

(b)    the maintenance of either of the spouse parties:

(i)    during the marriage; or

(ii)    after divorce; or

(iii)    both during the marriage and after divorce.

(2A)    For the avoidance of doubt, a financial agreement under this section may be made before or after the marriage has broken down.

(3)    A financial agreement made as mentioned in subsection (1) may also contain:

(a)    matters incidental or ancillary to those mentioned in subsection (2); and

(b)    other matters.

(4)    A financial agreement (the new agreement) made as mentioned in subsection (1) may terminate a previous financial agreement (however made) if all of the parties to the previous agreement are parties to the new agreement.

17    A financial agreement is “binding” if it satisfies the requirements s 90G of the FLA, including that it is signed by all of the parties to it (s 90G(1)(a)) and that each spouse party has been provided with independent legal advice about the effect of the agreement on the rights of the party and about the advantages and disadvantages of making the agreement (s 90G(1)(b)). It is not disputed that the Agreement made by Mr and Mrs Fernihough satisfies the formalities prescribed in s 90G.

18    Section 90E of the FLA is significant in this case. It provides:

90E    Requirements with respect to provisions in financial agreements relating to the maintenance of a party or a child or children

A provision of a financial agreement that relates to the maintenance of a spouse party to the agreement or a child or children is void unless the provision specifies:

(a)    the party, or the child or children, for whose maintenance provision is made; and

(b)    the amount provided for, or the value of the portion of the relevant property attributable to, the maintenance of the party, or of the child or each child, as the case may be.

19    The circumstances in which a binding financial agreement may be set aside are prescribed in s 90K of the FLA. They include the circumstance that a party entered into the agreement for the purposes of defeating a creditor or creditors of the party, or with reckless disregard of the interests of a creditor of the party (s 90K(1)(aa)) or if the agreement is void, voidable or unenforceable (s 90K(1)(b)).

20    The provisions of the FLA interrelate with the provisions of the BA in a number of ways. As previously mentioned, s 120(1) of the BA does not apply to a transfer made to meet all or part of a liability under a “maintenance agreement” or a “maintenance order”: BA, s 120(2)(b). The defined phrase “maintenance agreement” excludes a binding financial agreement made under s 90C of the FLA. The phrase “maintenance order” is defined in sufficiently wide terms to include a spousal maintenance order made pursuant to s 74 of the FLA; BA, s 5(1).

21    Jurisdiction in bankruptcy in relation to any matter connected with or arising out of the bankruptcy of a party to a marriage is conferred on the Family Court in circumstances where the trustee of the bankrupt’s estate is (relevantly) a party to property settlement proceedings in relation to either or both of the parties to the marriage or a party to spousal maintenance proceedings in relation to the maintenance of a party to the proceedings: BA, s 35(1).

22    Unsurprisingly, no proceedings under Pt VIII of the FLA were in fact commenced by Mr or Mrs Fernihough, whether in relation to a property settlement or spousal maintenance.

23    In and of itself s 35 of the BA does not preclude this Court from hearing and deciding the trustee’s originating application. Nonetheless, this Court may, on the application of a party or of its own motion, transfer proceedings in bankruptcy to the Family Court or to the Family Court of Western Australia: BA, s 35A and s 35B respectively. Upon such a transfer, the Family Court (or the Family Court of Western Australia as the case may be) has jurisdiction to hear and determine the proceeding, and may exercise powers under the BA as if references to this Court in the BA were references to those courts: s 35A(3); s 35B(1).

24    As identified earlier in these reasons, a transfer of property effected by a valid “binding financial agreement” made under Pt VIIIA of the FLA, is a transfer that may be declared void by the operation of s 120 or s 121 of the BA by this Court in the exercise of its jurisdiction by s 27 and s 30 of the BA and s 21 of the Federal Court of Australia Act 1976 (Cth) (FCA Act). It nonetheless forms a necessary part of that jurisdiction to determine whether such an agreement is effective in law to transfer property at all and, if so, to assess the value of the consideration given for the transfer. The value of bankrupt’s prior interest in the property, and the value of the consideration given for it are questions of fact. For the purposes of s 120 and s 121 of the BA, the trustee bears the onus in respect of these questions.

THE AGREEMENT

25    Recital I to the Agreement states that it gives effect to an agreement reached between Mr and Mrs Fernihough in relation to a property settlement and spousal maintenance. Recital J expresses Mr and Mrs Fernihough’s desire to “contract out of” the provisions of Pt VIII of the FLA which would otherwise have governed the division of their property and the payment of spousal maintenance. Clause 13 states:

13.    This agreement is intended to be a binding financial agreement:-

13.1    under Section 90C of the Family Law Act 1975 (Cth) and deals with the rights and responsibilities of the parties with respect to existing and future property and resources of the parties both individually and jointly and to the entitlement of the parties for spousal maintenance.

26    The Recitals to the Agreement contain statements of facts which are agreed to be true by the parties to it. The asserted facts are that, as at the date of the Agreement, Mr Fernihough was employed on an income of $62,400 and that Mrs Fernihough was “a home duties person” with “nil” income and no superannuation, but with the capacity to earn $20,000 per annum (Recital H).

27    Subject to what is said below, the intended distribution of the assets and liabilities of the marriage is described in Schedule A, upon which the trustee heavily relies. It is necessary to extract the Schedule in full:

SCHEDULE ‘A’

Client & other party’s Current Assets and Liabilities

28    Clauses 3 to 8 make provision for the transfer of assets and the granting of indemnities as follows:

3.    Phillip transfers to Christine all his right title and interest in the former matrimonial home of the parties at 8b Salitage Link Pearsall, (Pearsall).

4.    Phillip shall continue to meet all instalments of principal and interest with respect to the mortgage to Bankwest secured against the Pearsall property and shall indemnify Christine in relation to the same.

5.    Phillip shall transfer to Christine all his right, title estate and interest (if any), in all bank accounts, motor vehicles, and all other property in Christine’s possession.

6.    Phillip shall assume sole liability for the debt to Bendigo Bank and indemnify Christine in relation to the same.

7.    Christine shall transfer to Phillip all her estate and interest in all bank accounts, motor vehicles, superannuation entitlements and all other property in Phillips possession.

8.    Christine and Phillip acknowledge that they may not be able to register a transfer of the Pearsall property in the foreseeable future but both will do all things necessary to achieve that when able to. In the event Christine wishes to sell the property and the mortgage remains, then Christine shall receive the entire net proceeds of sale and Phillip shall pay to Christine the ‘mortgage balance’ as at settlement of sale in no less than monthly repayments equivalent to the monthly mortgage payments as at settlement.

29    Clause 21 provides that each party shall sign such further documents and do such further things as are necessary to give formal effect to the agreement’s provisions.

30    By clause 10 and clause 11 Mr and Mrs Fernihough abandoned and relinquished any claims they may have against each other in respect of:

(1)    in the case of Mr Fernihough, all other property in the possession and/or control of Mrs Fernihough except as otherwise set out in the agreement (clause 10);

(2)    in the case of Mrs Fernihough;

(a)    all other property in the possession and/or control of Mr Fernihough except as otherwise set out in the agreement (clause 11.1); and

(b)    “all and any right that she may have to claim spousal maintenance against [Mr Fernihough] either now or in the future” (clause 11.2).

31    Clause 20 of the Agreement is titled “Severability of Provision”. It reads:

20.    In the event that any provision or any part of any provision of the agreement is found invalid or unenforceable:-

20.1    such provision or part of that provision is to be severed;

20.2    the remaining provisions of the agreement remains operative and effective or are otherwise not in any way impaired, and

20.3    it is in any event the intention of the parties that the agreement is to be construed to reflect their intention for which the agreement was originally executed.

Facts

32    Mr and Mrs Fernihough appeared self-represented in the proceeding. They each relied on affidavits briefly deposing to the circumstances in which the Agreement was made and their financial affairs at that time. Counsel for the trustee did not cross-examine them. I make the following findings on the basis of their unchallenged evidence.

33    The Pearsall home was purchased by Mr and Mrs Fernihough as joint tenants in February 2012 for a purchase price of $420,000. They paid a deposit of $150,000, sourced from the proceeds of the sale of a former matrimonial home. They took out a loan for the remainder. It is reasonable to infer that the outstanding loan is that identified at item 16 of Schedule A to the Agreement. I will refer to it as the home loan. On the unchallenged evidence of Mr Fernihough, annual repayments on the home loan were $26,000.00. That is $6,000 more than the annual earning capacity attributed to Mrs Fernihough in Recital H of the Agreement.

34    Mr and Mrs Fernihough had three children, two of whom are now deceased.

35    In 1995, Mr and Mrs Fernihough separated when their son was killed. When Mr Fernihough returned to the marriage, he agreed that if they were to separate again, he would transfer his interest in whatever residence he owned to Mrs Fernihough in recognition of the financial and non-financial contributions she had made to their marriage.

36    Mrs Fernihough made financial contributions by supporting Mr Fernihough when he was unemployed and by making mortgage repayments on a former family home. Mrs Fernihough made non-financial contributions by raising their grandchild from the age of three months, performing all of the duties necessary to maintain the household, handling the financial affairs of the marriage and supporting Mr Fernihough “during [and] after he was in a Part X” (presumably proceedings under Pt X of the BA).

37    Mr Fernihough entered into the Agreement because he believed it reflected the agreement he had made with Mrs Fernihough earlier in their marriage and because he believed it reflected the contributions Mrs Fernihough had made to the marriage. I find these beliefs to be genuinely held.

38    The loan owing to Bendigo Bank appearing at item 15 of Schedule A to the Agreement related to an investment made by Mr Fernihough in relation to a tree plantation scheme. As at the date of the Agreement, Mr Fernihough was involved in litigation with Bendigo Bank and had received legal advice that he had good prospects of success. There is inconsistency between the recitals of the Agreement and the affidavit evidence of Mrs Fernihough as to whether she was aware that Mr Fernihough had invested in the tree plantation scheme. Nothing of substance turns on that inconsistency.

39    The evidence concerning Mrs Fernihough’s non-financial contributions to the marriage is consistent with the facts stated in the recitals to the Agreement, particularly in relation to Mrs Fernihough’s reduced earning capacity (relative to that of Mr Fernihough) and her lack of superannuation. I find that the circumstances of the marriage, albeit sparsely described in the affidavits, support the finding that there was a prima facie factual basis upon which Mrs Fernihough could have made a claim for spousal maintenance. Clause 11.2 of the Agreement gives recognition to that. It is notable that there is no equivalent relinquishment given by Mr Fernihough in clause 10. On the facts Mr Fernihough had no prima facie basis to make a maintenance claim. Their evidence does not support an inference that the Agreement was entered into with the actual intention of defeating Mr Fernihough’s creditors. No such allegation was put to either respondent in any event.

NO Transfer

40    It is convenient at this juncture to deal with Mr Fernihough’s submission that there has been no transfer because he has not done all things necessary to effect a transfer of the legal title in the Pearsall property to Mrs Fernihough. I will consider that issue on the assumption that the Agreement is otherwise valid and binding on the parties to it.

41    It is true that, notwithstanding clause 3 of the Agreement, there has been no transfer made in an approved form in relation to the Pearsall property, and no such transfer has been registered in accordance with s 82 of the Transfer of Land Act 1893 (WA). Until a transfer is signed and registered, there can be no transfer of Mr Fernihough’s legal interest: Transfer of Land Act, s 85.

42    The word “property” is defined in s 5(1) of the BA to mean:

… real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.

43    There is no suggestion that the consideration promised by Mrs Fernihough under the Agreement has not been paid or executed. Accordingly, the Agreement (if valid) effected an equitable assignment of Mr Fernihough’s interest in the Pearsall property. As Meagher, Gummow, Lehane said in their text Equity Doctrines & Remedies (5th ed, Lexis Nexis, 2015) at p 237 [6-050]:

The effect of a valid equitable assignment of a legal interest in property after payment or execution of the consideration is to constitute the assignor a trustee of the property for the benefit of the assignee. It is not relevant in that case to ask whether the contract (or the purported immediate assignment, treated as a contract) is one of a kind which specific performance would be ordered. Whether it is or not, equity, once the assignee has done what is required of the assignee, regards that as done which ought to be done by the assignor.

(Footnotes omitted)

44    Accordingly, and again assuming the Agreement to be valid and binding, Mr Fernihough’s equitable interest in the Pearsall property was assigned to Mrs Fernihough as at 10 April 2013 even if his legal interest in the property was not transferred. As such, a constructive trust arose to prevent Mr Fernihough from exercising the rights of a joint registered proprietor, including his prior concurrent right to possession of the whole of the land, and his right to apply on his own account for its division, partition or sale.

45    If the Agreement is valid, what has occurred is either the transfer of Mr Fernihough’s beneficial interest in the property in favour of Mrs Fernihough, or the creation of an interest in the Pearsall home in favour of Mrs Fernihough that did not previously exist. The latter circumstance would amount to a “transfer” as defined in s 120(7) of the BA which provides that a person who does something that results in another person becoming the owner of property that did not previously exist is taken, for the purposes of s 120, to have transferred the property to the other person.

46    To identify and value the consideration passing from Mr Fernihough to Mrs Fernihough, it would be necessary to identify those provisions of the Agreement by which she made binding promises to him, having regard to the statutory context in which the Agreement was made.

The effect of s 90E of the FLA

47    In the course of oral argument an issue arose as to whether the Agreement was indeed valid and binding on Mr and Mrs Fernihough insofar as it affected or purported to affect a transfer of Mr Fernihough’s interests in the Pearsall property, be they legal or equitable. The issue was raised by the Court in the course of the trustee’s submissions concerning the value of any consideration given by Mrs Fernihough for the impugned transfer. The issue was whether clause 3 of the Agreement was void by virtue of any provision of the FLA, quite apart from the operation of s 120 or s 121 of the BA as it affects the interests of the trustee.

48    Having regard to s 90E of the FLA, the Court invited further written submissions from the trustee and from Mr and Mrs Fernihough as to:

(1)    whether the Agreement contains any provisions that “relate to the maintenance of a spouse party to the agreement”;

(2)    if so, whether the provisions comply with the requirement in s 90E of the FLA; and

(3)    whether, if any provisions of the Agreement are void under s 90E, there has been a transfer of property within the meaning of s 120 of the BA.

49    The trustee filed further submissions in response to these questions. Mr and Mrs Fernihough filed no further submissions.

50    I have concluded that clause 3 of the Agreement is void by virtue of s 90E of the FLA and so did not have the legal effect of transferring Mr Fernihough’s interest in the Pearsall property (whether at law or in equity) to Mrs Fernihough. I will now explain why that is so.

51    I accept that the Agreement meets the formal requirements for a binding financial agreement prescribed in s 90G of the FLA. However, it is clear that the Agreement contains provisions that directly or indirectly “relate to” the maintenance of a spouse party to the agreement within the meaning of s 90E of the FLA. The parties’ intention to deal with the subject matter of spousal maintenance is made plain by Recitals I and J and clause 13, to which I have referred earlier in these reasons.

52    As the trustee properly acknowledged, clause 11.2 of the Agreement is a provision that “relates to” spousal maintenance. It was by that clause that Mrs Fernihough abandoned and relinquished “all and any right that she may have to claim spousal maintenance against [Mr Fernihough] either now or in the future”. As the trustee correctly submitted, clause 11.2 does not fulfil the requirements of s 90E of the FLA because it does not specify “the amount provided for, or the value of the portion of the relevant property attributable to, the maintenance of [Mrs Fernihough]”. Accordingly, clause 11.2 is void.

53    The trustee further submitted that clause 11.2 may be severed from the Agreement without affecting his claim for relief under s 120 and s 121 of the BA in relation to the Pearsall property. I will return to the question of severance shortly.

54    The trustee then submitted that clause 3 of the Agreement was unaffected by s 90E of the FLA. I do not agree.

55    On its proper construction, the Agreement reflects the parties’ intention to deal in an inextricable way with their rights and interests both in relation to the division of the assets and liabilities of their marriage and in relation to the provision of spousal maintenance to Mrs Fernihough. As has been observed, by clause 11, Mrs Fernihough relinquished and abandoned her entitlement to apply for a spousal maintenance order under s 74 of the FLA and to apply for a property order under s 79 of the FLA. Mr Fernihough’s promised transfers of property and other financial obligations are to be understood as having been given in consideration for both aspects of Mrs Fernihough’s promised forbearance, without specific attribution being given to either aspect.

56    Mr Fernihough’s promise to transfer his right, title and interest in the Pearsall property must be understood as having been given, at least in part, in consideration for Mrs Fernihough’s relinquishment of her right to make a claim for spousal maintenance against him under s 74 of the FLA and is not to be understood as a mere acknowledgement of the effect of s 71A(1)(a) of the FLA. Accordingly, clause 3 of the Agreement “relates to” spousal maintenance, notwithstanding that it makes no express reference to it and notwithstanding that it may also relate to the division of the assets and liabilities of the marriage of the kind that might form the subject of a property settlement order under s 79.

57    I have not overlooked Mr Fernihough’s assumption of responsibility to continue to meet the monthly home loan repayments, an obligation which resembles a form of income maintenance. Construed as a whole, the Agreement reflects the intention of the parties that Mrs Fernihough have the benefit of the Pearsall property without the financial burden of meeting loan repayments in relation to it. However, there is nothing in the Agreement to specify that the obligation to make loan repayments was the only promise made in consideration for Mrs Fernihough relinquishing her entitlement to make a spousal maintenance claim.

58    The words of s 90E of the FLA evince an intention that it is only those provisions of a financial agreement that “relate to” the maintenance of a spouse and that do not otherwise fulfil the requirements of s 90E that are to be void.

59    It is necessary to consider whether the provisions of the agreement that are void by virtue of s 90E of the FLA may be read down. For the purposes of what follows, I assume (without concluding) that s 90E of the FLA may be construed to permit the application of principles concerning the reading down and severance of the terms of a contract at general law. The Court’s present focus is on clause 3, as it is that clause which purports to effect the particular transfer that is impugned by the trustee in this proceeding.

60    In my judgment, clause 3 is not capable of reading down in accordance with general law principles for two reasons. First, the Agreement contains, by clause 20.3, an expression of the parties’ intention that the Agreement be construed to reflect the intention for which the Agreement was originally executed. That intention, as stated in Recitals I and J and clause 13, was for the Agreement to deal compendiously with all of their financial affairs. Construed as a whole, it was not the intention of the parties that Mr Fernihough make transfers of property such as that provided for in clause 3 in consideration for Mrs Fernihough’s abandonment of such claims for the division of property she may otherwise have made under s 79 of the FLA and nothing else. As concluded, by the express terms of the Agreement, the transfers of property were given for Mrs Fernihough’s forbearance in respect of claims under s 79 of the FLA and in respect of claims under s 74. Secondly, the words of clause 3 are not amenable to reading down in a semantic sense: they are not amenable to an interpretation by which the promised transfer is to be given in consideration for one kind of forbearance but not for another. It follows that the whole of clause 3 is void by the operation of s 90E of the FLA.

61    For the purposes of the present proceeding, no question of severance arises. It is sufficient to conclude that clause 3 and clause 11.2 of the Agreement are void. Whether they are capable of severance so as to leave other parts of the agreement operative may be a question of importance for Mr and Mrs Fernihough, but it is not necessary for this Court to decide the question in order to determine the trustee’s claim for relief under s 120 and s 121 of the BA. My conclusion that clause 3 of the Agreement is void has the consequence that the trustee’s application for declaratory relief in connection with s 120 and s 121 of the BA should be dismissed on the basis that there has been no transfer of property upon which those provisions can operate.

VALUE

62    If I am wrong in my conclusion that clause 3 of the Agreement is void, I would in any event have dismissed the trustee’s application for declarations in connection with s 120 and s 121 of the BA on a different basis.

63    I have already made some observations about the consideration passing between the parties to the Agreement. It follows from those observations that Schedule A to the Agreement cannot be, and was not intended to be, a complete statement of the monetary value of the consideration passing between the parties. It cannot be so regarded because Mrs Fernihough’s promised forbearance in clause 11 is not included and nor is a monetary value (or a means of assessing its monetary value) attributed to it.

64    Two further observations may be made of the monetary values ascribed in Schedule A to the Agreement. The first is that Mr Fernihough’s liability for the home loan was an obligation to indemnify Mrs Fernihough in respect of the monthly loan repayments (clause 4) or to make payments to her in equivalent amounts should the Pearsall property be sold (clause 8). It was not an obligation to pay to Mrs Fernihough a lump sum amount representing the balance of the home loan or to discharge the loan by the immediate payment of $270,000.00. Its practical effect was to require Mr Fernihough to make monthly payments totalling $26,000.00 each year. Second, by Recital F of the Agreement it is acknowledged that the debt owing to Bendigo Bank was contingent in the sense that Mr Fernihough might have succeeded in a legal action by which the existence of the debt was challenged. Mr Fernihough deposed (and I accept) that at the time of entering the agreement he had received advice that his prospects of succeeding in the litigation were good. The ascribed value of that debt does not make provision for Mr Fernihough’s cause of action against Bendigo Bank, as far as it could be assessed at the time.

65    These features of Schedule A illustrate the importance of construing the Agreement as a whole in order to identify the promises that have passed between the parties and to assess (as far as that may be done) their monetary value. In my view the trustee’s reliance upon Schedule A as conclusive evidence of an undervalued transaction was misconceived.

66    Whether the Pearsall property was transferred at undervalue for the purposes of s 120 or s 121 of the BA depends not only upon the market value of the transferred property, but upon the monetary value of the consideration passing from Mrs Fernihough, which included the value of her foregone claims under the FLA. The value of that consideration must be assessed in its proper legal context, including the provisions of the FLA that would have applied had such claims been made. The factual considerations include Mrs Fernihough making valuable (albeit non-financial) contributions over a 45 year marriage, which may, at least on a prima facie assessment, have culminated in her having no income, a low earning capacity and no superannuation. Also relevant is the extent to which Mrs Fernihough contributed to the income, earning capacity or financial resources of Mr Fernihough. I do not mean by these observations to postulate about the chances of Mrs Fernihough succeeding on a spousal maintenance claim or to guess at its value. Nor do I postulate about the division of property that might otherwise have occurred on an application under s 79 of the FLA in light of Mrs Fernihough’s significant non-financial contributions to the marriage.

67    The point is that on the limited evidence before me, the value of the consideration passing from Mrs Fernihough is impossible to quantify to the requisite standard of proof. That is a forensic problem for the trustee. Even on an assumption that clause 3 of the Agreement is valid and that there has been a transfer, the trustee has not discharged his evidentiary burden in respect of the alleged underpayment for it. The trustee’s claim founded on s 120 of the BA must be rejected for this alternate reason. So, too must the claim founded on s 121 as that claim depended upon proof of the transfer being made for no or inadequate consideration.

68    Before concluding on this topic, I observe that in the event that an order were to be made under s 121 of the BA, it would have been necessary for the Court to determine the amount of consideration that must be paid by the trustee by way of refund to Mrs Fernihough in accordance with s 121(5). That only serves to highlight the problem that the consideration given by Mrs Fernihough in respect of the impugned transfer is impossible to quantify on the limited evidence before me. It also reinforces my principal conclusion that clause 3 and clause 11.2 (at least) of the Agreement are void and so did not effect a transfer at all.

OTHER RELIEF

69    It remains to consider whether the Court should grant the trustee the other relief sought on the originating application, having regard to my conclusion that the Agreement did not have the effect of transferring Mr Fernihough’s interest in the Pearsall property to Mrs Fernihough.

70    The trustee seeks:

(1)    a declaration that Mr Fernihough’s prior interest in the Pearsall property has vested in the trustee pursuant to s 58(1)(a) of the BA;

(2)    an order that the Pearsall property be sold; and

(3)    orders providing for the method of sale of the Pearsall property and the distribution of the net proceeds in equal shares as between the trustee and Mrs Fernihough.

71    It is appropriate in the circumstances to make a declaration that Mr Fernihough’s interest in the Pearsall property has vested in the trustee, and I will do so.

72    As to the sale of the property, this Court in the exercise of its original jurisdiction in bankruptcy may make an order for the sale of co-owned property, although such orders cannot be made under s 30 of the BA so as to affect the rights of a non-bankrupt co-owner: Coshott v Prentice (2014) 221 FCR 450 (at [95] – [104]). The power to make orders for sale may be sourced in such laws of a State that may be picked up and applied in accordance with s 79 of the Judiciary Act 1903 (Cth). In this case, the relevant power is that conferred by s 126 of the Property Law Act 1969 (WA). It provides that on an application such as the present, the Court shall direct a sale of the property “unless it sees good reason to the contrary”.

73    At least at present, there is “good reason” not to make orders in terms sought by the trustee.

74    It is the trustee’s submission that should Mrs Fernihough assert a proprietary interest of more than an equal share, then the onus would be upon her to establish that larger proprietary interest. That may or may not be so at general law. But it does not follow that the Court should ignore the circumstance that the Pearsall home is an asset of a marriage in respect of which orders may yet be made under Pt VIII of the FLA, whatever Mrs Fernihough’s strict proprietary interests under the general law might presently be.

75    Section 74(2) of the FLA provides that if an application for spousal maintenance is made under s 74(1) and, when the application was made a party to the marriage was a bankrupt, the trustee may apply to be joined as a party to the proceedings. The relevant court must join the trustee as a party to the proceedings if satisfied that the interest of the bankrupt’s creditors may be affected by the making of the spousal maintenance order.

76    Importantly s 72(2) of the FLA provides that the liability of a bankrupt party to a marriage to maintain the other party:

…. may be satisfied, in whole or in part, by way of the transfer of vested bankruptcy property in relation to the bankrupt party if the court makes an order under this Part for the transfer.

77    The Pearsall property and the spousal maintenance claim are financial matters to which no binding financial agreement applies within the meaning of s 71A(1)(a) of the FLA. That must follow from my finding that clause 3 and clause 11.2 (at least) of the Agreement are void. Accordingly, Mrs Fernihough may make an application under s 74 of the FLA for spousal maintenance and an application under s 79 of the FLA at least in connection with the Pearsall property, whether or not Mr Fernihough’s interest in the property has vested in the trustee. The Agreement remains liable to be set aside by the Family Court in the exercise of its powers under s 90K of the FLA.

78    It may be that, outside of the FLA context, Mrs Fernihough cannot demonstrate that she presently has a proprietary interest in the Pearsall property exceeding that of an equal share. However, for the purposes of s 126 of the Property Law Act, the issues obviously arising under the FLA should not be ignored, at least whilst there remains some reasonable prospect that the proprietary rights as between the trustee and Mrs Fernihough may be adjusted by an order made pursuant to s 72(2). Their present rights may be adjusted by reference to statutory criteria that may well be irrelevant on a legal dispute about proprietary interests (at law or inequity) between co-owners of real property. More specifically, the circumstance that one spouse has made non-financial contributions to a marriage so as to make it possible for the other spouse to enhance his or her earning capacity or to personally acquire legal and equitable proprietary rights is a circumstance that may justify the adjustment of the latter’s proprietary rights in favour of the former, irrespective of the latter’s bankruptcy (as s 72(2) of the FLA makes clear). Mrs Fernihough’s non-financial contributions to the marriage may also be taken into account for the purposes of any order under s 79 of the FLA. Again, that may occur whether or not the contributions would be sufficient at general law to establish proprietary interest in any particular asset.

79    A “good reason” not to make an order for the sale of the property is the circumstance that Mrs Fernihough ought to be given a reasonable opportunity to obtain orders under the FLA affecting her rights vis a vis Mr Fernihough and, just as importantly, the trustee.

80    Weighing against these considerations is the imperative that the trustee discharge his duties under the BA to realise Mr Fernihough’s property and to distribute it among his creditors. However, those duties are themselves subject to such orders that may be made by the Family Court of Australia (or the Family Court of Western Australia as the case may be) by which all or part of the trustee’s vested interests may be transferred to Mrs Fernihough. In my view, s 72(2) of the FLA expressly contemplates that the interests of Mr Fernihough’s creditors are not necessarily superior to those of Mrs Fernihough, at least insofar as her claim for spousal maintenance is concerned. In that regard, the trustee’s submission that any claim now made by Mrs Fernihough for spousal maintenance would be “futile” because of Mr Fernihough’s bankruptcy should be roundly rejected.

81    I do not consider the delay in the administration of Mr Fernihough’s bankrupt estate of itself to justify an order for the sale of the property being made without Mrs Fernihough first being given the opportunity to have the issues under the FLA determined. I do not consider the delay in the administration to the estate to be the product of any delay or default on the part of either Mr or Mrs Fernihough and there is nothing to suggest that the legal effectiveness of the Agreement arose as an issue at any time prior to the hearing of this application.

ORDERS

82    Orders will be made to afford Mrs Fernihough a reasonable opportunity to make an application to the Family Court of Western Australia for orders under Pt VIII of the FLA in respect of spousal maintenance and/or in connection with the Pearsall property or in relation to any other subject matter arising under the FLA having regard to these reasons for judgment. Should Mrs Fernihough make such an application, the trustee would be entitled to apply under s 74(2) of the FLA to be joined as a party. In that event, it may be expedient for the trustee’s application for orders under s 126 of the Property Law Act to be transferred to the Family Court of Western Australia. The parties will be granted liberty to apply with a view to having the originating application before this Court either transferred to the Family Court of Western Australia or otherwise finally determined by this Court, having regard to the outcome of any FLA proceedings that may be commenced.

Associate:

Dated:    23 May 2019