Federal Court of Australia

Aravanis (Trustee) v Kapp, in the matter of the Bankrupt Estate of Kapp [2023] FCA 702

ORDERS

THE COURT ORDERS THAT:

1.    The parties provide a minute of order giving effect to these reasons within 14 days.

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

ORDERS

THE COURT DECLARES THAT:

1.    The Applicants are entitled to 35.94% of the proceeds of sale of the Swan Bay property.

THE COURT ORDERS THAT:

2.    Mr Kapp, in his capacity as the trustee of the Twin Trust, pay to the Applicants out of the proceeds of sale of the Swan Bay property and, if necessary, the Main Beach property any shortfall between that 35.94% share and the sum of $151,250.01.

3.    The Applicants’ entitlement under Order 2 be secured by a charge over the proceeds of sale of the Swan Bay and Main Beach properties.

4.    The Applicants’ proceeding be otherwise dismissed.

5.    Each party pay their own costs.

6.    The First Respondent be removed as a party to the proceeding.

7.    The name of the Third Respondent be changed to ‘Philip James Kapp, as trustee of the Twin Trust’.

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

REASONS FOR JUDGMENT

PERRAM J:

1    These reasons deal with two different suits brought by the trustees in bankruptcy of Philip Kapp. The first suit Aravanis (Trustee) v Kapp, in the matter of the Bankrupt Estate of Kapp concerns the bankruptcy trustees’ claims on the sale proceeds of a home at Wahroonga held in the name of Mrs Maryann Kapp. The second suit concerns the same trustees’ claims on the sale proceeds of some properties held by a family trust associated with Philip Kapp. The second was argued sometime before the first. There are issues concerning issue estoppel arising from the existence of these two parallel proceedings which I resolve in these reasons. In order to avoid the prospect of two appeals and given that both cases arise out of the bankrupt’s insolvency and are interrelated, I have handed them down together.

Aravanis (Trustee) v Kapp, in the matter of the Bankrupt Estate of Kapp

NSD 928 of 2021

Introduction

2    Mr Philip James Kapp is married to Mrs Maryann Kapp although they are now separated. Without any disrespect intended, I will refer to Mr Kapp as Philip and Mrs Kapp as Maryann. On 4 March 2019 Philip became bankrupt on his own petition. The trustees in bankruptcy of Philip's bankrupt estate now sue Maryann. Their suit concerns the proceeds of sale of the former family home at Boundary Road in Wahroonga, a suburb of Sydney. That property was sold on 11 August 2021 for $4,150,088.00. Out of its proceeds of sale, and following the payment of some other debts, $616,819.00 is presently being held in the trust account of Maryann's solicitors. There are undertakings in place which limit further disbursal of these funds pending the outcome of this litigation.

3    The bankruptcy trustees' case has two limbs. The first relates to their claim on $232,433.60 of the sale proceeds. The manner in which they pursue this claim turns on their ability to trace that sum through a number of property transactions back to a disposition of Philip's property to Maryann in 2010. The bankruptcy trustees submit this disposition is void against them either pursuant to s 121 of the Bankruptcy Act 1966 (Cth) (‘Bankruptcy Act’) or s 37A of the Conveyancing Act 1919 (NSW) (‘Conveyancing Act’). In chronological order, the transactions are:

(a)    Philip's transfer to Maryann of a 50% interest in a property in Leura in the Blue Mountains on 18 May 2010 (the impugned transaction);

(b)    the purchase of a family home in Turramurra on 3 May 2011 in Maryann's name using funds which included a bridging loan in the amount of $230,700.00;

(c)    the sale by Maryann of the Leura property on 12 September 2011 and the use of part of the proceeds of that sale to repay the bridging loan of $230,700.00 on the Turramurra home;

(d)    the sale by Maryann of the home at Turramurra on 21 June 2013 and the realisation of net proceeds of that sale of $362,340.64;

(e)    the purchase of another family home at Wahroonga in Maryann's name on 23 August 2013 for $2,400,000.00 funded, in part, from the proceeds of the sale of the Turramurra home; and

(f)    the sale by Maryann of the home at Wahroonga on 11 August 2021 and the realisation of the proceeds of sale now subject to the bankruptcy trustees’ claims.

4    Both Turramurra and Wahroonga were registered in the sole name of Maryann. It is this fact which gives rise to the second limb of the bankruptcy trustees' case, which is that they are entitled to 50% of the net proceeds of sale of Wahroonga. The first reason advanced for this claim is that Maryann held her interest in Wahroonga subject to a constructive trust in favour of Philip. The constructive trust was itself pursued on two bases: (i) it was Philip and Maryann's common intention at the time she acquired Wahroonga (and, before it, Turramurra) that she would hold the property for their mutual benefit; or (ii) Philip and Maryann were engaged in a relationship, Philip provided the financial contributions which resulted in the property being in Maryann's name, the relationship had now ended and it would be unconscionable for Maryann thereafter to maintain that the property was entirely hers without recognising the role of Philip's contributions: Baumgartner v Baumgartner (1987) 164 CLR 137 (‘Baumgartner’).

5    The second reason for which the bankruptcy trustees claim a 50% interest in Wahroonga (and, if it be relevant, Turramurra) is that Philip's intention in arranging to put Turramurra, and then Wahroonga, into Maryann's name was to defeat the claims of his creditors. They submit that by doing so, Philip disposed of his property to her and that these dispositions are void against them by reason of s 121 of the Bankruptcy Act and s 37A of the Conveyancing Act. The bankruptcy trustees did not articulate in their written or oral submissions any claim against Maryann other than that the sale proceeds in her hands belong in equity to them. For example, they did not suggest that Maryann had breached her duties as constructive trustee by using the trust funds for her own benefit.

6    Whilst the bankruptcy trustees' claims have these two broad limbs, it is to be observed that as a matter of private law they may be seen to fall into two different categories. The first consists of claims that Philip has in equity against Maryann. These claims arise independently of his bankruptcy and only because Philip's rights against Maryann in relation to them happen now to have vested in the bankruptcy trustees in consequence of the sequestration of his estate. The second category consists of rights arising out of the administration of his bankrupt estate which relate not to pre-existing substantive rights of his but, rather, as an aspect of the bankruptcy itself; that is to say, as part of the mechanism for collective execution against the property of a debtor by creditors whose rights are admitted or established: Cambridge Gas Transport Corporation v Official Committee of Unsecured Creditors of Navigator Holdings plc [2007] 1 AC 508 at [14]-[15].

7    It is therefore useful to distinguish those claims which Philip has against Maryann in equity (now vested in the bankruptcy trustees) from those claims which the bankruptcy trustees have in their own right under s 121 of the Bankruptcy Act and s 37A of the Conveyancing Act. Another way of putting this is to distinguish between those claims the bankruptcy trustees have as a result of Philip's own rights devolving upon them and those they have which have not devolved in that fashion.

8    Maryann disputes the existence of Philip's claims in equity against her. In relation to the bankruptcy trustees’ statutory claims under s 121 and s 37A, Maryann submits that those provisions are not enlivened. Put in very general terms, the applicability of those provisions turns on the ability of the bankruptcy trustees to demonstrate that Philip either intended to defeat the claims of his creditors or was insolvent when the three dispositions of property which they attack – Leura, Turramurra and Wahroonga – occurred. The bankruptcy trustees submit that, at these times, Philip had significant current or prospective debts to the Commissioner of Taxation which make it more likely than not that Philip was seeking to defeat the claims of his creditors or that he had become insolvent.

9    For her part, Maryann submits that no property of Philip's may be traced into her hands. She says that previous family homes long before those at Turramurra and Wahroonga had been in her name and that this reflected an intention on the couple's part that the family home was for her and the children. There was evidence that an early decision was made to put the family home in her name to guard against unexpected partnership liabilities that might be incurred by Philip. Turramurra and Wahroonga were simply repetitions of that practice funded by Maryann's ownership of previous family homes. No property of Philip's was therefore disposed of when Turramurra and Wahroonga were purchased in her name. She notes that the bankruptcy trustees do not seek to attack her ownership of the family homes which preceded Turramurra and Wahroonga and that this means that the case against her in relation to Turramurra and Wahroonga makes no sense.

10    Leura was not a family home and was in their joint names until Philip transferred his half interest to her. Maryann says that Philip already held his half for her so his transfer of it was not a disposition of his property. Alternatively, she submits that she paid consideration for that transfer.

11    If any of the three transactions involved dispositions of Philip's property which, if void, can be traced into her hands, Maryann then submits that they are not void. This she does on the basis that Philip was not insolvent at the relevant times and that it was his intention to provide for his family rather than to defeat his creditors. The determination of Philip's intentions is complicated by the fact that at the time when some of the transactions occurred he was living with a diagnosis of a terminal condition from which he was not expected to recover. As it happens, he did recover. The determination of his intentions is also complicated by the fact that Philip did not give evidence in these proceedings.

12    The bankruptcy trustees submit that Philip was in Maryann's camp for the purposes of these proceedings and that her failure to call him to give evidence about what his intentions had been should redound to her disadvantage in the Court's assessment of his intentions. Maryann, on the other hand, says that her relationship with Philip has broken down and that it is not reasonable to expect her to have called him.

13    If any of the bankruptcy trustees' claims on the Wahroonga sale proceeds should find their mark, Maryann pursues two freestanding defences. First, she says that she is entitled to have brought to account for her benefit the fact that, as Philip's surety, she paid some of his tax debts and legal fees out of her interest in Wahroonga and if, contrary to her primary case, Philip (and now the bankruptcy trustees) owned some part of Wahroonga, then she is entitled to be repaid those expenses by Philip (now the bankruptcy trustees) out of his share in Wahroonga. As such, she asserts that she is entitled to a charge on any interest the bankruptcy trustees establish in the sale proceeds to secure Philip's obligation to indemnify her; that is to say, she claims an equity of exoneration in the proceeds of sale. She also claims a right of exoneration out of the Wahroonga proceeds because, as surety, she paid some legal expenses of Philip’s which his solicitors had secured against Wahroonga.

14    Second, she submits that the bankruptcy trustees have already sued her once in separate proceedings they brought against a family trust (known as the Twin Trust) without at that time raising these claims. She contends that it was unreasonable for the bankruptcy trustees not to have raised their present claims in the Twin Trust proceedings so that they are now estopped from bringing them in this proceeding: Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 (‘Anshun’). In response, amongst other matters, the bankruptcy trustees submit that at the time of the Twin Trust proceedings it was not known that there would be any equity in the Wahroonga property after the claims of the mortgagees were met and it was therefore not unreasonable for them not to bring claims which, at that time, appeared pointless.

15    In their written submissions, the bankruptcy trustees pursued personal claims against Maryann for sums which exceed the remaining proceeds of sale for Wahroonga. The rights asserted on Philip's behalf against Maryann give rise only to proprietary remedies; in this case, the property is the proceeds of sale for Wahroonga. Likewise, the attempt by the bankruptcy trustees to void particular transactions of Philip's may have the result that some property of Maryann's should belong to them. But on no view do either set of claims give the bankruptcy trustees in personam rights against Maryann extending beyond her rights to the proceeds of sale for Wahroonga. This aspect of the bankruptcy trustees' claims is misconceived and need not be mentioned again.

16    A useful order in which to consider the issues which arise is as follows:

(1)    First, to give an account of the history of Philip and Maryann's relationship including the property transactions into which they entered and to consider the issues of tracing which underpin the bankruptcy trustees' claims relating to Leura.

(2)    Second, to examine Philip's (and subsequently Maryann's) relationship with Philip's principal creditor, the Commissioner of Taxation. These events conclude with the settlement of some litigation between Maryann and the Commissioner at the time at which Philip and Maryann separated. The litigation concerned the Commissioner's attempts to obtain possession of the Wahroonga property under a second mortgage in his favour which secured, as against Maryann, a large part of Philip's very considerable tax debt. It was the settlement of this litigation in June 2021 on terms largely favourable to Maryann that gave rise to surplus funds in Maryann's hands upon the sale of Wahroonga.

(3)    Third, to make findings about the reasonableness of the bankruptcy trustees' decision to commence their current proceeding against Maryann in relation to the surplus only after the sale of Wahroonga.

(4)    Fourth, to make findings about Philip's intention in alienating to Maryann his half interest in Leura on 18 May 2010 and Philip and Maryann's intentions in placing Turramurra and Wahroonga in her sole name.

(5)    Fifth, to determine the bankruptcy trustees' claims for a constructive trust over the sale proceeds of Wahroonga.

(6)    Sixth, to determine the bankruptcy trustees' claims under s 121 of the Bankruptcy Act and s 37A of the Conveyancing Act in relation to each of Leura, Turramurra and Wahroonga.

(7)    Seventh, to assess the extent to which Maryann is entitled to an equity of exoneration out of the sale proceeds for the sum of $480,000.00 which she says was contributed by her to the payment of Philip's tax debt, and $110,000.00 which she contends was paid by her for his legal fees in the Twin Trust litigation.

(8)    Lastly, to examine Maryann's submissions concerning Anshun estoppel.

The history of Philip and Maryann's household

17    In what follows, I sketch the important features of their relationship from its commencement to its end. Although an important part of the case turns on Philip's relationship with the Commissioner of Taxation, it is convenient, at least at this stage, to leave the Commissioner out of the picture and only to overlay his role once a complete account of Philip and Maryann's transactions has been given.

18    Maryann first met Philip in 1995 when she worked as his secretary at Anderson Legal where he was then the managing partner. In 1999, Philip moved to Minter Ellison as the senior partner of their private equity group and Maryann went with him. At this time, Maryann was in a de facto relationship with another man and, in around 2000, she resigned from Minter Ellison to move to Western Australia with that man. There she began working in temporary secretarial roles. She returned to Sydney in about 2001 where she continued to work in temporary secretarial roles.

19    She and Philip then began to see each other in 2001. Philip had previously been married to Ms Shelley Kapp (who, with no disrespect, I will refer to as Shelley) but I infer that that marriage had ended by this time. During her formal examination by the bankruptcy trustees, Maryann gave evidence that she and Philip had begun to cohabit in January 2002. At that time, she did not have any assets of significance of her own.

20    In 2002 Andersen Legal closed following the collapse of Arthur Andersen in the wake of the Enron scandal. At this time Philip did not work there, having moved to Minter Ellison some years before in 1999. The significance of the closure of Arthur Andersen relates to evidence which I later discuss about protecting Philip's assets from partnership liabilities such as those generated by the Enron scandal.

21    Early in 2003, Maryann ceased working.

22    In September 2004, prior to the purchase of any properties by Philip and Maryann, Philip purchased a property at Belrose for his former wife, Shelley, and agreed with Shelley that he would make all the repayments on the loan for that property.

23    The first property purchased by Philip and Maryann was a property in Leura which they purchased as joint tenants. This occurred on around 22 November 2004 for a purchase price of $585,000.00. Of that purchase price, some $525,000.00 was provided by the Commonwealth Bank of Australia by way of a loan secured by a registered first mortgage.

24    Maryann gave evidence that her principal reason for wanting to purchase a property in Leura was that her brother and mother lived there. Her father had died in July 2004 and she said that she wanted to be able to spend as much time as she could with her family and, I would infer, to be near her mother following the death of her father. I accept this evidence. It is unclear to me the complete extent to which Philip and Maryann lived at this property. Philip's work would not have permitted him to commute from Leura and I incline to the view that it was a property used on an intermittent basis, possibly on the weekends or during vacations. This conclusion is consistent with Maryann's evidence that between September 2006 and March 2007, her brother and his family lived in the Leura property whilst renovation work was done at their own property.

25    On 18 February 2005 Maryann and Philip were married. By this time, Philip had left Minter Ellison to join Clayton Utz as a senior partner and was in receipt of substantial remuneration. Whilst it is unclear on the evidence where Philip and Maryann were living from early 2002, it appears that from 31 October 2005 until their separation in April 2021 they lived in a succession of properties each of which served as their home. Two of these homes do not appear to have been owned by them and I infer were rental properties. Although only Leura, Turramurra and Wahroonga are directly relevant to these proceedings, these other homes are significant for they throw light on the way in which the couple went about owning property.

26    The first of these homes was in Shadforth Street, Mosman, which was acquired by the couple on 31 October 2005 as tenants in common in equal shares. Philip and Maryann stayed there for just over a year, selling it for slightly more than they had purchased it on 23 November 2006. Five days later on 28 November 2006, Maryann purchased a new home at Harnett Avenue, Mosman for $1,425,000.00 in which I infer they lived. Unlike Shadforth Street, which had been equally owned by them both as tenants in common, Harnett Avenue was in Maryann's sole name. The date of 28 November 2006 is therefore significant in this litigation for it marks the time at which the family home ceased to be owned by them in equal shares and became owned by Maryann in her sole name.

27    The bankruptcy trustees do not claim in this proceeding that the purchase by Maryann in her sole name of Harnett Avenue was an alienation of Philip's property to her and therefore void against them under s 121 of the Bankruptcy Act or s 37A of the Conveyancing Act. Whilst the bankruptcy trustees suggest that Maryann did own these properties for Philip’s and her mutual benefit and that they are hence subject to a constructive trust in his favour, they do not claim that Maryann's subsequent disposal of Harnett Avenue and purchase of the next family home in her name involved a disposition by her of Philip's property.

28    Not very long after the move to Harnett Avenue, Maryann gave birth to their twin sons on 27 April 2007. The children are presently 16 years old. The family was not destined to stay put for long. On 23 October 2007, when the boys were only 6 months old, Harnett Avenue was sold for $1,700,000.00 for a tidy profit. At this time, it is apparent that there were several loans in existence. They are referred to in an email from the Commonwealth Bank to Philip explaining the manner in which the sale proceeds had been disbursed. It is explained there that the net sale proceeds from Shadforth Street, which had been solely in Maryann's name, had been $1,670,642.46 (which included the deposit released from the agent). These proceeds were then used to pay off a small amount which still remained owing under the loan in relation to Shadforth Street ($76,068.04), a large amount of $500,000.00 under a loan called the Mosman portfolio loan and $454,574.42 to reduce the loan on the Leura property. This last repayment resulted in the loan on Leura having available in it the sum of $429,666.42 by way of redraw.

29    At this point, it appears the family moved to premises at Sharland Avenue, Chatswood, which they did not own. They did not stay long at Sharland Avenue either. On 22 September 2008, Maryann purchased, again in her sole name, an apartment at Badham Avenue, Mosman, in which they then lived. The purchase price was $912,000.00. Again, the bankruptcy trustees do not contend that placing Badham Avenue in Maryann's name was void against them.

30    In about 2009, according to Maryann, Philip was diagnosed with a tumour in his right mandible and had to undergo a course of chemotherapy and radiation therapy. There is evidence which suggests that the diagnosis may have been in October 2008, just after the purchase of Badham Avenue. This evidence consists of records kept by officials within the Australian Taxation Office (‘ATO’) of conversations which Philip had with them. On 17 November 2009 there is an entry which records 'Taxpayer was diagnosed with cancer in Oct 2008 and was undergoing treatment which saw him falling behind with all his personal affairs'. Another entry in these notes for 30 August 2010 records 'Client has been ill and endured cancer battle since late 2008'. Similar references may be found in the entries for 24 November 2011 including that Philip 'was sick and recovering for most of 2009'.

31    I conclude that Philip was diagnosed with cancer in his jaw in October 2008. The ATO notes also suggest that a large tumour was removed from his jaw which I would infer occurred in late 2008. I find that Philip was sick for most of 2009 as a result of chemotherapy and radiation therapy but was beginning to recover by the beginning of 2010.

32    On 12 February 2010, Badham Avenue was sold for $1,112,000.00.

33    At this stage, Philip suffered a serious setback when, in April 2010, he was diagnosed with stage 3 multiple myeloma, an incurable form of blood cancer. His doctor told him that he only had a few months to live. The ATO notes record that at this time Philip told the tax authorities that he had been given a 50/50 chance of surviving for four months. I accept that, at this time, Philip expected to die.

34    Maryann gave evidence that around this time Philip told her that he had to get his affairs in order and that as part of that he was going to transfer his half interest in the Leura property to her. She also said that Philip said that the reason he was doing this was so that she and the boys would have somewhere to live when he died.

35    On its face, this evidence is plausible. The imminence of death has a clarifying effect on many people and a desire to put one's affairs in order seems understandable. However, there are problems with this evidence. The Leura property was owned by Philip and Maryann as joint tenants. The effect of Philip's death would be that the property would become fully vested in Maryann by reason of the right of survivorship attaching to her as a joint tenant. The possibilities are:

(a)    Philip thought that he owned Leura with Maryann as tenants in common as to 50%;

(b)    Philip did not know that on the death of one joint tenant, an estate in fee simple vests in the survivor and that he genuinely thought he had to transfer his half to her to provide a home for the family;

(c)    Philip did know about the right of survivorship but in the midst of chemotherapy, radiation therapy and a terminal diagnosis became confused about it and thought that his family's best interests required him to transfer his half interest to Maryann notwithstanding that this was wrong;

(d)    Philip did know about the right of survivorship but decided to lie about it to Maryann; or

(e)    Philip did not say the words attributed to him by Maryann.

36    Proposition (b) may be dismissed as implausible given Philip was a lawyer of some aptitude. Proposition (a) is possible in light of his situation and receives some support from the fact that Shadforth Street had been owned as tenants in common. Proposition (c) is plausible. Proposition (d) is possible but it is difficult to identify any motive for Philip to lie about this. The evidence does not support (e).

37    Maryann gave evidence before me and I accept her as a witness of truth. As such, to embrace (e) I would need to find that she was mistaken. Whilst the lapse of time is significant, so also is the significance of the conversation from her perspective. I therefore accept the words were said. I also accept the bankruptcy trustees' submission that what Philip was saying did not make any sense because the transfer was unnecessary to achieve what Philip sought to do. If he died, the property would become hers by operation of law. I therefore conclude that (a) or (c) is the case but I do not choose between them.

38    In any event, regardless of what Philip's intentions were in making the transfer, there is no debate that by a transfer instrument dated 18 May 2010 Philip transferred to Maryann a one half share in the estate in fee simple in Leura. The effect of that transfer was to sever the joint tenancy which had existed, to vest in both a 50% interest as tenants in common and simultaneously to transfer Philip's 50% interest to Maryann. The result was that Maryann became the owner of Leura in her own right. The instrument of transfer does not appear to have been lodged for registration until 16 June 2010 but is expressed to be for consideration of $300,000.00. One of the bankruptcy trustees, Mr Aravanis, gives evidence which I accept that the sum of $300,000.00 does not appear to have been either paid by Maryann or received by Philip.

39    Maryann submitted that she had provided consideration for this transaction in two ways. First, she reminded me that on the sale of Harnett Avenue in October 2007 (which had been in her sole name), a sum of $454,574.42 had been used from its proceeds of sale to reduce the loan on Leura. This led to a submission that this sum represented the price paid by her for Philip's half of Leura.

40    I do not accept this submission for three reasons. First, the sale of Harnett Avenue occurred two and a half years before the transfer. Second, it is not referred to in the Commonwealth Bank's email dated 30 November 2007 (or the emails from Philip preceding that email) explaining the flow of funds following the sale of Harnett Avenue. A review of those emails suggests that Philip was moving funds between various loans to allow for the purchase of a property in Queensland. Whilst these emails are to some extent difficult to follow, they provide no support for the proposition that Maryann was purchasing Philip's half of Leura. Third, it is not consistent with Maryann's evidence that Philip told her in May 2010 that he wanted to give her his half of Leura to provide for her and the boys. If he had sold his half to her in October 2007 for $454,574.42, as she now contends, he would not have said this to her. I do not therefore accept that Maryann purchased Philip's half of Leura for $454,574.42.

41    The second submission from Maryann, in her amended defence at [26], was that Philip had held his interest in Leura at all times on a constructive trust in her favour. This was said to be a common intention constructive trust arising because Leura had been purchased using Maryann's funds. If this constructive trust arose then it would entail that the transfer of his half to her was no more than an adjustment of the title to reflect her true beneficial interest in the whole property. If this were correct it would imply that the transfer had not involved any disposition of Philip's property at all so that the bankruptcy trustees' claims under s 121 of the Bankruptcy Act and s 37A of the Conveyancing Act would have no disposition upon which to attach.

42    I do not accept that Leura was acquired by the couple with such an intention for it is inconsistent with Philip's statement to Maryann in about April 2010.

43    In those circumstances, I do not accept either that Maryann provided consideration for the transfer of Philip's half of Leura in the form of $454,574.42 or that the transfer simply reflected the fact that the property had always been hers.

44    Shortly after the transfer, Maryann says that she took steps to look for day care facilities for the two boys with the intention of moving to Leura on Philip's death. I accept this evidence.

45    No doubt because of the mortal condition in which he found himself, Philip signed a letter dated 29 July 2010 entitled 'Letter of Wishes'. The letter of wishes was attached to a trust deed which established a discretionary trust known as the James Trust. One curiosity is that the deed is dated 12 July 2010 whereas the letter of wishes annexed to it is dated 29 July 2010. By cl 10, the trustees of the James Trust were to take into account the contents of the letter of wishes in the exercise of their discretionary powers. The letter of wishes revealed the existence of multiple life insurance policies. The proceeds of the policies were to be contributed to the corpus of the James Trust. It was Philip's desire that the James Trust should use some of the proceeds to pay off the outstanding loan on Leura which the letter indicates Philip then understood to be in the order of $400,000.00. The letter contained this statement: 'I note that this is in effect a repayment of a loan of $400,000.00, which I borrowed from Maryann to settle a debt to the Australian Taxation Office.' It is not in dispute that $400,000.00 of the proceeds of sale for Harnett Avenue was, indeed, used to pay off some of Philip's tax debt. Maryann submits, but the bankruptcy trustees deny, that the existence of a loan of $400,000.00 demonstrates that Harnett Avenue was not only in her sole name but was treated by the couple as having been owned by her since a loan out of the sale proceeds is only consistent with her owning the funds in question. I return to this issue later in these reasons.

46    The letter of wishes also reveals that Philip made provision for his three daughters, Lauren, Kirsty and Michelle, from his first marriage to Shelley.

47    At some point, most likely in the second half of 2010, Philip undertook an experimental therapy for his multiple myeloma which included a stem cell bone marrow transplant. According to the ATO notes, Philip told the tax authorities that this treatment consisted of expensive chemotherapy and a cocktail of steroids and was accompanied by serious side effects including nerve damage, loss of memory, inability to think or concentrate, loss of the use of his limbs and damage to his immune system. There is evidence in the ATO's notes of conversations its officials had with Philip that this treatment included travelling to the United States for a period. Despite its asperity, the therapy was successful and, according to Maryann, Philip went into remission in the first few months of 2011. The cancer, however, remains incurable and Philip has to undertake blood tests every three months and an annual bone scan but, subject to these and other inconveniences, remains alive.

48    I saw Philip on more than one occasion during the Twin Trust litigation and was addressed by him when, from time to time, he sought to appear in that proceeding. It was obvious from these encounters that he has undergone a scarifying health experience which has left him very much diminished and, to an extent, has impacted on the soundness of his judgment. However, I accept that from early 2011 Philip has been in remission. I conclude that between October 2008 and early 2011 Philip was in a grave state of health which impaired his ability to administer his affairs as he would have liked.

49    On 4 February 2011, Maryann exchanged contracts to purchase a property at Fairlawn Avenue, Turramurra for $1,550,000.00 for the family to live in which was to settle on 3 May 2011. A deposit of $77,500.00 was paid, leaving a balance due on settlement of $1,472,500.00. There is, to my mind, a question about where the family lived between Badham Avenue being sold on 12 February 2010 and Turramurra being acquired on 3 May 2011. In her evidence, Maryann said that the family lived between Badham Avenue and Leura until the property at Turramurra was acquired. This would entail that they lived at Leura between 12 February 2010 and 3 May 2011. Corporate records of entities associated with Philip suggest that, during this time, he recorded his residential address as being 26 Wyalong Street, Willoughby, a property that does not appear to have been owned by either Philip or Maryann. There is other evidence to this effect: in the loan application for the Turramurra property (dealt with in more detail shortly), Philip and Maryann's residential address is listed as that address and in the ATO's notes dated 30 August 2010 the same address is recorded.

50    If it were necessary to decide, I would prefer this contemporaneous documentary evidence to Maryann's evidence. This was, no doubt, a stressful time in her life. Her husband had terminal cancer, her family's future was in doubt, she was moving house and she had to look after two young children. Further, as will be apparent from these reasons so far, the Kapp family was always on the move so that a precise recall of which home they lived in at a particular time might easily involve error.

51    Philip and Maryann completed a loan application with the Commonwealth Bank for the purchase of the Turramurra house. The proposed loan was to be for $1,470,900.00 and was to comprise three separate loan accounts in Philip’s name guaranteed by Maryann, with her guarantee secured by mortgage. The documentation appears to have been completed and submitted by Philip and Maryann sometime in March 2011 although, as will be seen, the loan was only extended on 3 May 2011.

52    One of these accounts was for a loan of $230,700.00. The consumer credit contract schedule in relation to this loan account provided by the bank to Philip dated 3 March 2011 indicates that it was to be serviced with 11 monthly interest-only payments and a bullet repayment of the principal and, I surmise, a small amount of interest by a twelfth and final payment in the sum of $232,003.23.

53    The consumer credit contract schedule states that ‘the amount of [$230,700.00] includes bridging finance’. The same document indicated that the loan was initially to be secured by mortgages over the Turramurra and Leura properties and a guarantee by Maryann. However, this security was to be replaced on the repayment of 'the bridging finance content of the Loan'. The bankruptcy trustees invited me to infer that the bridging finance was the interest-only one-year facility of $230,700.00. In my view, so much is plain from the terms of the consumer credit contract schedule in relation to this loan account.

54    Whereas during the pendency of the bridging loan the security consisted of mortgages over the Turramurra and Leura properties and a guarantee by Maryann, the new security was to consist only of a mortgage over the Turramurra property and a guarantee by Maryann. So once the bridging loan had been repaid, the bank’s mortgage over the Leura property would be discharged.

55    However, that conclusion must be considered in light of another matter. The consumer credit contract schedule also imposed a condition in relation to the bridging facility to the effect that the Leura property was to be sold within 12 months of its advance. The likely intent of this arrangement was that the proceeds of sale of the Leura property would be used to repay or reduce the bridging loan. If that occurred, and the sale proceeds proved sufficient, then the mortgage on the Leura property would necessarily be discharged. If, on the other hand, the sale proceeds were insufficient then Maryann would remain liable for the unpaid balance of the bridging facility under her guarantee.

56    Thus, the evidence supports the drawing of an inference that, probably in March 2011 and certainly by 3 May 2011, a decision had been made that in order to purchase Turramurra, the Leura property would need to be sold to pay down the bridging loan of $230,700.00.

57    The purchase of the Turramurra property settled on 3 May 2011 at which time I infer the bridging loan was advanced. Consequently, Maryann was obliged under the terms of the bridging loan to sell the Leura property by no later than 3 May 2012. The bankruptcy trustees submitted that as at March 2011 Philip and Maryann had already borrowed about $214,000.00 against the Leura property. The evidence for this was p 7 of the loan application. It is unclear to me what to make of this page. It records that Leura was subject to a 'prior charge' to the bank with a 'balance' of $153,883.35 and a 'subsequent charge' to the bank of $60,005.00. What exactly this means is unclear but I do accept that if these entries are to be read as recording the existence of loans then those loans do total $213,888.35. The significance of these loans, if they existed, to the issues in this case is not apparent to me and I do not mention them again.

58    Consistently with her obligation under the bridging facility, on 7 September 2011 Maryann sold the Leura property for $690,000 which sale price is broadly consistent with the valuation obtained in January of that year of $725,000. The bankruptcy trustees submit, and Maryann accepts, that 'all of the net proceeds of $620,463.08 were paid to the [Commonwealth Bank]'. The bankruptcy trustees also submitted that on that day the mortgage over Leura was discharged. This may be inferred from the fact that the property could not be sold without a discharge being tendered and I accept that this must be so.

59    The bankruptcy trustees then submitted that $232,433.60 of the sale proceeds was used to repay the bridging facility. This submission requires clarification. The bridging facility was only for $230,700.00. Whilst there were monthly interest payments due under it together with some other minor fees and charges, payment of these did not result, indeed could not result, in any reduction of the principal due under the facility there being no suggestion that interest or any other charge was to be capitalised. Thus whilst $232,433.60 may finally have been paid into the loan account constituting the bridging facility when Leura was sold, the principal debt has only ever been $230,700.00 and only that amount of principal can possibly have been repaid. This matters because on the bankruptcy trustees' case, only the repayment of the principal debt can serve to have increased the net proceeds of sale subsequently realised on the disposal of the Turramurra property; that is to say, the payment of interest and bank charges on the bridging facility are irrelevant to the tracing exercise that the bankruptcy trustees must undertake.

60    Further, the bankruptcy trustees’ submission does not constitute an accurate statement of what the single bank statement for the bridging loan actually shows. Prior to September 2011 Philip had been making monthly interest repayments on around the 15th of each month. Immediately prior to its repayment on 7 September 2011 the facility was in debit by an amount of $230,700.00. On 7 September 2011 there was a credit in the sum of $76,655.19 and a second credit in the sum of $232,433.60 (the figure now claimed by the bankruptcy trustees) which I infer came from the sale proceeds of the Leura property. This placed the account in credit by an amount of $78,388.79. However, the deposit of $76,655.19 was immediately reversed on 8 September 2011 for reasons which neither party explored. It appears appropriate to proceed on the basis that the credit for $76,655.19 should be treated as not having been made. Making that assumption, the reversal left the loan account in credit to the amount of $1,733.60 which was then consumed by a deferred establishment fee and some interest on 9 September 2011. As such $1,733.60 of the $232,433.60 was not used to repay the principal on the loan and the amount of principal repaid is the difference between these two sums which is $230,700.00, which, as might be expected, is the principal originally extended under the bridging facility.

61    I therefore find that the proceeds of the sale of Leura were used, in part, to repay the whole of the bridging loan of $230,700.00 to reduce Philip's debt which was secured by Maryann's guarantee and the mortgage she had given over Turramurra. I will treat the bankruptcy trustees’ submissions about the sum of $232,433.60 as being submissions about the sum of $230,700.00.

62    The family had moved to the Turramurra property on, or shortly after, 3 May 2011 when its purchase had been completed. I accept that during this time it was Philip who met the payments due under the loan facilities and that it was he who paid for the maintenance of the property. Whilst the bankruptcy trustees have demonstrated that the sale of Leura resulted in a repayment of principal on the bridging loan they did not seek to prove the extent of any of Philip's principal repayments under the other two loans extended to him in respect of Turramurra. They did submit that Philip had, in effect, paid for everything to do with Turramurra. But their tracing case is not concerned with Philip's payment of everything but rather with his payments of principal. Apart from the sale proceeds of Leura, no attempt was made to prove what elements of his repayments under the bank loans had been interest and what had been principal. In the absence of such an exercise, I do not find the submission that Philip paid for everything very helpful.

63    They remained in the Turramurra home until about 21 June 2013 when it was sold. The sale price was $1,650,000.00. Between 21 June 2013 and 24 June 2013 two amounts were paid into Maryann's account with the National Australia Bank (‘NAB’) which totalled $362,340.64 ($238,567.15 on 21 June 2013 and a further $123,773.49 on 24 June 2013). Maryann says that this sum was paid into her account with the Commonwealth Bank but, in this, she is in error (although she subsequently did pay these funds into her account with that bank, as will be seen). Those credits brought her account with the NAB to a credit balance of $371,051.32.

64    The bankruptcy trustees seek to trace the $230,700.00 from the proceeds of sale of Leura through the sale of Turramurra and into the purchase of the next property to be considered, Wahroonga. That purchase was completed on 23 August 2013 for $2,400,000.00. The thesis of the bankruptcy trustees' claim is that the net proceeds of sale of Turramurra were $362,340.64 and that the sale proceeds of Leura had contributed $230,700.00 to that sum. This is true inasmuch as the repayment of the bridging facility with a payment of that amount had extinguished that loan leaving only the two-year fixed loan and the variable home loan to be repaid. I therefore accept that the sale of Leura increased the net proceeds of Turramurra by $230,700.00. I therefore also accept that of the $362,340.64 that was deposited into Maryann's account with the NAB on 21 and 24 June 2013, some $230,700.00 of this represented the proceeds of sale of Leura.

65    The exercise in tracing, however, perhaps calls for more attention to detail than was necessarily implied in the bankruptcy trustees' submissions. Maryann's account with the NAB had been in credit immediately prior to the deposit of the Turramurra proceeds in the sum of $9,060.68 and the deposit brought the account to a credit balance of $371,051.32 (noting that this also included a debit of $350.00 as a settlement fee). As at 24 June 2013, therefore, the sale proceeds of Turramurra represented 97.65% of the contents of the account. On 19 August 2013, the sum of $380,000.00 was transferred out of the account and, as I will shortly explain, used to fund the purchase of the Wahroonga property. Between 24 June 2013 and 5 July 2013 Maryann's account balance drifted downwards as it was debited with the cost of various household living expenses which totalled $497.02. These expenses stopped after 5 July 2013. The balance was then increased by the deposit of a cheque for $1,444.85 on 11 July 2013 and a transfer from Philip of $10,000.00 on 5 August 2013 at which point the account stood in credit in the sum of $382,001.59. It remained in credit at that balance until a debit of $380,000 on 19 August 2013.

66    The sum of $382,001.59 therefore represented a blend of different funds. These were Maryann's initial credit balance of $9,060.68, the credit of $362,340.64 from the sale of Turramurra and the deposits of $1,444.85 and $10,000.00. The household expenses were debited immediately prior to the two deposits but after the crediting of the sale proceeds. The question at hand then is what amount of the $380,000.00 is to be seen as representing the sale proceeds of Turramurra.

67    Although where a fund is insufficient the application of the rule in Devaynes v Noble (1816) 1 Mer 529; 35 ER 767 is often displaced, I do not think that should happen in the case of the household expenses: Caron v Jahani (No 2) [2020] NSWCA 117; 102 NSWLR 537 at [78]-[84] per Bell P. I therefore conclude that the sale proceeds of Turramurra were reduced by the debiting of the household expenses because they immediately followed it. On this view, by 5 July 2013 the sale proceeds had been reduced to $361,843.62. Immediately prior to the transfer of the $380,000.00 on 19 August 2013 the account stood in credit in the amount of $382,001.59 and what was left of the sale proceeds after the household expenses – $361,843.62 – therefore represented 94.723% of the contents of the account. I would therefore conclude that of the $380,000.00 transferred from Maryann's NAB account on 19 August 2013, 94.723% of that figure ($359,947.65) should be apportioned to the sale proceeds of Turramurra.

68    The figure of $380,000.00 was deposited in Maryann's account with the Commonwealth Bank on 20 August 2013. At the time it was deposited, this account was in credit in the amount of $3,763.49. Immediately after the deposit it stood in credit in the amount of $383,763.49. Three days later, on 23 August 2013, the sum of $330,784.72 was debited from the account. The bank statement records that this was for 'SHORTFALL'. As will shortly be seen, this amount was contributed to the purchase of Wahroonga.

69    The next question is whether the whole of the $230,700.00 derived from the sale of Leura is to be treated as a fixed portion of the sum of $359,947.65 or whether it is to be treated as a proportion. In my view, it should be treated as a proportion. The net sale proceeds of Turramurra were $362,340.64 of which $230,700.00 represented the sums derived from the sale of Leura. This is 63.67%. That figure should be applied to the funds of $359,947.65 which I am satisfied found their way into the Wahroonga property. This is $229,176.40.

70    As I have said, the Wahroonga property was purchased on 23 August 2013 for $2,400,000.00. The conveyancer's file records that a deposit of $120,000.00 was paid.

71    The source of funds for the purchase were, according to the bankruptcy trustees, as follows:

(a)    a part payment of the deposit by means of a cheque drawn on Philip’s account with the NAB in the sum of $70,000.00;

(b)    a part payment of the deposit by means of a cheque drawn on Maryann's account with the Commonwealth Bank in the sum of $50,000;

(c)    $330,784.72 from Maryann's account with the Commonwealth Bank; and

(d)    $1,980,000.00 borrowed from the Commonwealth Bank.

72    These figures are not quite correct. The Commonwealth Bank extended three loans on 23 August 2013 which totalled $1,920,000.00, not $1,980,000.00. A cheque was drawn by Philip on 8 March 2013 for $70,000.00. I have not sighted the corresponding bank statement but Maryann accepted in her submissions that Philip had paid this sum. There was a debit on Maryann's account with the Commonwealth Bank on 11 March 2013 of $50,000.00. There was also a debit of $117,510.00 on her NAB account on 6 June 2013 which Mr Aravanis says, and I accept, was for stamp duty. Recourse to the conveyancer's file confirms this and demonstrates that on settlement the bank provided an amount of $2,250,784.72 to the vendors.

73    I am therefore satisfied of the following matters:

(a)    a full deposit of $120,000.00 was paid consisting of $70,000.00 from Philip and $50,000.00 from Maryann;

(b)    $330,784.72 was transferred from Maryann's account with the Commonwealth Bank on 23 August 2013;

(c)    $1,920,000.00 was borrowed from the Commonwealth Bank on 23 August 2013; and

(d)    the Commonwealth Bank provided the vendors with $2,250,784.72 on 23 August 2013 which consisted of Maryann's funds and its loan funds.

74    With the deposit, the total amount paid to the vendors was $2,370,784.72 which is less than the purchase price of $2,400,000.00. The difference is $29,215.28. This appears to be accounted for by adjustments on the day of the usual kind together with a large adjustment for a licence arrangement with the vendors, and some other adjustments for curtains and a swimming pool pump. As a side note, the bankruptcy trustees do not claim that Philip's payment of the deposit gave rise to a resulting trust in his favour. They do submit that Philip met the loan repayments but, as with Turramurra, they do not seek to identify any subsequent payments of principal made by him.

75    What does matter is that of the $2,400,000.00 purchase price, $380,784.72 was contributed with funds provided by Maryann. As I have explained above, $229,176.40 of that sum should be treated as having been derived from the sale proceeds of Leura. I therefore accept that 9.55% of the value of Wahroonga should be regarded as being derived from Leura being the proportion that $229,176.40 bears to $2,400,000.00.

76    From sometime in September 2013, the family resided at the Wahroonga property. Leaving aside Philip's (and subsequently, Maryann's) entanglements with the Commissioner, the picture from Maryann's perspective is nearly complete save for five matters. The first of these is Philip's bankruptcy which occurred on 4 March 2019 on his own petition.

77    The second is the commencement of a proceeding by the bankruptcy trustees against Maryann and the trustee of the Twin Trust on 31 May 2019. The third event is the separation of Philip and Maryann in April 2021 while remaining under the same roof and their complete separation in November 2021 when she locked him out of the house.

78    The fourth event is the sale of Wahroonga on 11 August 2021 for $4,151,252.81. The net sale proceeds following the discharge of two mortgages and other expenses were $1,233,639.07. In the result, half of that sum, $616,819.00, is being held by her solicitors in a trust account. The fund in dispute is therefore the amount of $616,819.00.

79    It will follow from the above that if the bankruptcy trustees are entitled to treat Philip's transfer to Maryann of his half share in Leura as void then I accept that 9.55% of the Wahroonga sale proceeds should be regarded as being derived from the sale of Leura and half of that, 4.775%, may be traced to Philip's interest in Leura.

80    The fifth event is the commencement of the current proceeding on 8 September 2021.

Philip's relationship with the Commissioner of Taxation

81    The bankruptcy trustees seek to establish three propositions. The first is that Philip intended not to pay his tax debts from at least April 2010. It was at this time that he understood himself only to have a few months to live and it was in May 2010 that he transferred his half interest in Leura to Maryann. The second is that everything Philip did after April 2010 was coloured by an ambition to ensure that his property did not fall into the hands of the Commissioner. This motive explained the transfer of his half share in Leura to Maryann and it provided the explanation for why the legal title to first Turramurra and then Wahroonga were placed in her sole name. The third is that Philip was insolvent from at least April 2010 (just before the transfer of his half interest in Leura).

82    It would be fair to say that Philip has lived for a long time under significant financial stress. The sources of this stress appear to be four in number. The first is his ambition to own properties on Sydney's north shore for his family. This was achieved using increasingly large amounts of bank debt which required servicing. In addition to the family homes, as I explain in my other reasons for judgment, the family owned two other properties at Swan Bay and Main Beach through the Twin Trust which were also encumbered with bank loans at various times. Leaving aside the question of who precisely owned these properties, there is no doubt that the person who was servicing the associated debt was always Philip. The same was also true of Shelley's home at Belrose. Thus, at all times, Philip has been obliged to meet the repayments on several substantial loans. I do not think, in principle, that this would have been beyond his means given the income he was earning as a lawyer.

83    The second concerns Philip's unresolved financial issues arising from his first marriage to Shelley. These were not finally resolved until 11 June 2015. The terms of Philip's property settlement with Shelley dealt with a number of matters. However, the bottom line of them was that Philip transferred to Shelley his interests in the property at Belrose and was to pay her $135,000.00.

84    The third concerns Philip's habit of not paying his tax debts in full. The bankruptcy trustees produced a table of Philip's unpaid tax debts and a graph which illustrated what it showed. The table was in these terms:

85    The graph depicting these figures is thus:

86    The fourth relates to the third (and the graph which embodies it) and concerns Philip's diagnosis with cancer in October 2008, his year of chemotherapy and radiation therapy in 2009, his diagnosis with terminal cancer in early 2010, his experimental treatment in the second half of 2010 and the remission of that cancer in early 2011. As can be seen from the graph, until 2010 Philip's accumulated tax debt was about half of his income. In itself, this is not an ideal position in which to find oneself although by no means is it necessarily irretrievable.

87    However, from the commencement of his health travails Philip's tax debt began to soar. The decision to borrow heavily to purchase the Wahroonga property on 23 August 2013 when his accumulated tax debt exceeded his income set him on the course to bankruptcy. It was not ultimately possible to service his secured debts and to pay his tax. Ultimately, Philip chose to prioritise the servicing of his secured debt and the consequences can be seen in the graph above.

88    The final stressor is the fact that Philip retired as a law firm partner on 30 June 2016 and took up employment as a consultant and businessman. As the graph shows, this was not as remunerative for him. I do not think that this drop in income was material to the final outcome although it may have accelerated it to some extent. I return later to the question of when Philip became insolvent.

89    Philip's decision to prioritise the servicing of his secured debts over the payment of his tax debt generated predictable friction with the tax authorities. The bankruptcy trustees submitted that Philip was unwilling to pay his tax debt. I think the position is more nuanced. Until his diagnosis with cancer in October 2008, a better description of the situation would be to say that Philip prioritised the servicing of his secured debts over the payment of his unsecured tax debt. But throughout the period from 30 June 2005 to October 2008 he made intermittent, although insufficient, payments to the ATO in service of his income tax debt. These included the payment of $400,000.00 out of the Harnett Avenue proceeds.

90    I do not by any means intend to suggest by this that Philip was tax compliant or that his approach to tax obligations was other than inappropriate. Two competing hypotheses explain his behaviour up until October 2008. The first is that Philip was careless in his personal affairs and that he moved money and his family around largely to meet the exigencies of events over which he could have had, but largely did not have, control. Under this hypothesis, which is the hypothesis of chaos, the family's ownership of increasingly expensive houses and Philip's steadily growing tax debt generated a series of financial spot fires for Philip which he was constantly putting out. There was no time for planning of any kind and Philip was reacting to events of which, it is true, he was the author but in which there was no clear narrative except that he was living beyond his means.

91    The second hypothesis is that Philip was in fact very careful in his affairs and appreciated that the fact that a tax debt could be accrued at interest meant that his income tax liability could, in effect, be borrowed from the Commissioner. Since the interest paid on tax debt was deductible against income, the nature of the credit arrangement thus extended made it attractive from Philip's perspective. All that was necessary to maintain this facility was that he should, from time to time, make sufficient payments of tax to ensure that neither recovery nor criminal proceedings were commenced against him. Under this hypothesis, which is the hypothesis of the agile juggler, Philip gave just enough to the Commissioner to keep him at bay but no more so that he could continue his family's adventures in the rich (and capital gains tax free) bounty of family home ownership in Sydney.

92    The evidence concerning Philip's tax affairs until October 2008 is consistent with both of these hypotheses. If it were necessary, I would prefer the hypothesis of chaos because the moving of his wife and two young children through a succession of seven houses (with five payments of stamp duty) signals turmoil rather than cunning. In the event, I do not think it is necessary to choose between them. Neither is consistent with an intention on Philip's part not to pay his tax. The latter involves an intention to utilise the ATO as a source of deductible debt which he otherwise would have had to borrow but certainly no intention not to pay the debt well before the falls, if not the rapids.

93    The former involves no intention on Philip's part at all beyond a wish somehow to keep it all together until present circumstances – admittedly alarming – improved. Regardless of which is the correct hypothesis, until his diagnosis with cancer in October 2008, I do not think that Philip expected or intended that he would not ultimately pay his tax debt.

94    In any event, whatever Philip's motivations were in being behind in his income tax payments prior to October 2008, between October 2008 and early 2011 Philip lost control of his tax situation as his health dramatically deteriorated. It is clear that from 17 November 2009, the ATO understood that Philip was facing a grave health crisis. It appears that at that time there were two case officers involved. One was minded to defer Philip's immediate tax payments given his health situation but his case had already been referred by this time to another official for 'firmer action'. This firmer action consisted of a formal demand for $434,271.65 issued on 14 April 2010 which required a response by 27 April 2010. The timing of this was unfortunate since it was around the same time that Philip was told that he had a terminal illness and had only a 50% chance of surviving for four months. This demand was the first such demand that the ATO had issued.

95    It was only a month after this mensis horribilis that Philip transferred his half interest in Leura to Maryann on 18 May 2010. Throughout his illness, Philip continued to be in receipt of his partnership income and reported substantial amounts of income when he filed returns. At the time of the transfer of his half interest to Maryann, Philip had not filed his tax returns for 2008 and 2009. Whilst the ATO had just demanded payment of $434,271.65 he would have appreciated, even through the fog of his treatments, that he was going to have a tax liability for those two years and also, when, 30 June 2010 arrived, a liability for the 2010 financial year. These liabilities did not exist yet because no notice of assessment had been issued in respect of them but Philip would have been aware of their impendency. It is also likely that he would have been aware that his tax liability would for each year be for hundreds of thousands of dollars since he knew what his drawings as a partner had been.

96    Given what he was going through at this time, these matters would not have been at the forefront of his mind and it may be accepted that the gruelling treatment he endured would have made these matters seem distant concerns. Nevertheless, even allowing for that, I am satisfied that Philip knew in broad terms what was happening with his relationship with the Commissioner.

97    That he was aware of the gravity of the situation is borne out by the fact that he did attempt to deal with it. On 23 July 2010, he entered into a payment agreement with the ATO under which he would pay certain sums and a lump sum on 23 January 2011. By 30 August 2010, however, Philip had defaulted on this arrangement. At this point, he was subject to a demand for $434,271.65 which he had not met, had defaulted on a payment agreement and must have been aware that further income tax assessments, likely to be in the vicinity of $750,000.00, were imminent for the years 2008, 2009 and 2010. He was also desperately unwell and for a time undergoing experimental treatment in the United States as the ATO notes reveal.

98    At this point, Philip and Maryann were living at Wyalong Street, Willoughby. It was in the midst of the financial chaos in which Philip was then enmeshed that the decision was taken to purchase the property at Turramurra which I have described above. The purchase was settled on 3 May 2011. It involved Philip borrowing $1,470,900.00 from the Commonwealth Bank. At this time, his tax debt was around $293,116.31. He did not disclose this debt to the Commonwealth Bank as his loan application form shows. Further, as the bankruptcy trustees correctly submit, he had an unassessed liability for the 2008, 2009 and 2010 years. When his returns for those years were finally lodged they resulted in an income tax liability of $750,398.50.

99    The upshot of this was that after the purchase of Turramurra Philip was saddled with debts approaching $3 million, $1 million of which was being borrowed from the ATO at the general interest charge. This statement leaves out of account the debts on Belrose and in the Twin Trust. His debts would be reduced by the size of the bridging loan when Leura was subsequently sold but even the existence of that arrangement tells one that Philip was rather too leveraged for the bank's taste (and it did not know about his tax problem). I have included in this assessment Philip's tax liabilities for the 2008, 2009 and 2010 years. Of course, because these returns had not been filed no such tax debts existed. However, in the real world of Philip's finances, I do not think that one can treat substantial tax liabilities as not existing through the device of not filing the tax returns for the years in which the relevant income was earned. In any event, authority confirms that a taxpayer does have a liability to tax on the earning of income which does not crystallise and become payable until the issue of a notice of assessment: Binetter v Commissioner of Taxation [2016] FCAFC 163; 249 FCR 534 at [148] per Perram and Davies JJ (Siopsis J agreeing at [1]); Commissioner of Taxation v H [2010] FCAFC 128; 188 FCR 440 at [39]-[42] per Downes, Edmonds and Greenwood JJ. See also Trustees of the Property of Cummins v Cummins [2006] HCA 6; 227 CLR 278 (‘Cummins’) at [30].

100    Following the purchase of Turramurra on 3 May 2011 Philip's financial condition inevitably deteriorated. The Commissioner issued garnishee notices to third parties on 28 October 2011 without apparent success and, on 16 November 2011, Philip’s tax agent was told that if he did not resolve his tax situation by 21 November 2011, recovery action would be commenced against him. This request arrived 6 days after he had returned from the United States on 15 November 2011 where he had undergone the experimental treatment. Unless at this point Philip had decided that Turramurra should be sold, there was no prospect of his tax debt being paid. I do not think he was minded to sell Turramurra, however wise that might have been. In notes made by an ATO official on 24 November 2011, it is recorded that a letter from Philip's tax agent received around that time says that Philip 'did not have the capacity to pay the debt in full'. I am not sure this was necessarily correct. Had both properties in the Twin Trust and the Turramurra property been sold, I think it is likely that the debt could have been paid in full and, if not in full, sufficiently to reduce the intensity of the ATO's demands. Instead, by his tax agent’s letter, Philip sought the ATO's agreement to a payment plan. This suggestion was rejected. The case officer making that decision noted that whilst it would be ‘unfortunate’ if Philip ceased to be a solicitor by reason of his bankruptcy at the hands of the Commissioner, it was 'unacceptable to expect the ATO to wait until death to pursue the debt'. It is clear by this point that the ATO's patience had run out.

101    Matters then took their course. On or after 29 May 2012, a Deputy Commissioner of Taxation issued a notice of intended recovery action. The tax debt nominated was $1,759,670.79. Philip had earlier sought hardship relief on 24 April 2012 but this was rejected. An objection to this decision was lodged and rejected and Philip then sought a review in the Administrative Appeals Tribunal but this was withdrawn. Throughout 2012 and 2013 Philip unsuccessfully sought to persuade the ATO to reach an agreement with him. Some of these efforts centred on persuading the ATO of the value, from its perspective, of his life insurance policies (thought by Philip to be worth around $7,000,000.00). But the ATO was unpersuaded since his death was not a near term certainty and the policies had no surrender value which could be borrowed against. Further, as the ATO notes in December 2013 show, it was concerned about the impact that Shelley's proceedings in the Family Court against Philip might have on his position including in relation to the proceeds of any life insurance policy.

102    It was against the backdrop of this tumult that the Turramurra property was sold in June 2013 and the Wahroonga property purchased in August 2013. This increased Philip's bank debt from around $1,240,000.00 (the size of the Turramurra loans less the repaid bridging facility) to $1,920,000.00. At this time, his accumulated tax debt was $1,930,284.68, the ATO was refusing all of his entreaties and, through his tax agent, he had told the ATO that he could not pay the tax debt even as it stood in November 2011. Philip's actions in taking on the burden of secured bank debt of $1,920,000.00 at this time show that he was living in two different worlds, only one of which was real. His separation from reality is borne out by the fact that in the application for the loan for Wahroonga he did not disclose the existence of his tax debt. Had he done so, I do not doubt that the bank would not have extended him the loan.

103    On 18 December 2013, an officer of the ATO suggested to Philip that bankruptcy might be his best option. But the night is darkest just before the dawn and, on 3 October 2014, there was a breakthrough in Philip's relationship with the Commissioner. On that day a deed was entered into between the Commissioner, Philip and Maryann. Philip and Maryann acknowledged that Philip's tax debt was $2,249,208.00 (cl 2(a)) and that whilst it remained unpaid it would continue to compound at the general interest charge (cl 2(b)). By cl 5.1 he agreed that he would pay the tax debt in full by 30 June 2019 or within nine months of his dying. This was subject to some minor relief of 30 days were he to be hospitalised for more than seven days. He also agreed to comply with his future obligations under taxation laws.

104    By cl 3.1 Maryann irrevocably and unconditionally assumed liability for the tax debt, guaranteed its full payment and agreed that if Philip did not pay any of it she would immediately pay the outstanding amount as if she was a principal obligor. By cl 3.10, Maryann agreed her guarantee was a principal obligation and was not to be treated as ancillary or collateral to Philip's obligations. Maryann's obligations were to be secured by a registered second mortgage in favour of the Commissioner over Wahroonga: cl 4. I mention these matters because they are relevant to Maryann's contention that she became entitled to an equity of exoneration against Philip when she subsequently paid part of this debt out of the proceeds of sale for Wahroonga.

105    In practical terms, the terms of the deed meant that if Philip failed to comply with a tax law before 30 June 2019, Maryann would become primarily liable for the whole of Philip's tax debt. Unfortunately, Philip failed to comply with his obligations under the taxation laws when, on 23 November 2015, he failed to file his income tax return for the year ended 30 June 2015. From this point the operation of the deed meant that Maryann had become liable for all of Philip's tax debt which was subject to the deed (there were, in fact, other tax debts owed by Philip but these are not material for present purposes).

106    On 19 May 2016, Philip attended a meeting with the ATO where it was noted that he was in default under the terms of the deed. Maryann did not attend this meeting. During its course Philip is recorded as having made three statements of significance:

(a)    Maryann's equity in the Wahroonga property had been earned by her;

(b)    the Wahroonga property came to be in her name 'under what is essentially an asset protection scheme'; and

(c)    Maryann felt that she had been forced into providing the mortgage over Wahroonga.

107    The statements in (a) and (b) are relevant to an assessment of what Philip and Maryann intended by putting Harnett Avenue, Badham Avenue, Turramurra and Wahroonga in her name. I return to this issue below.

108    The next significant event is the commencement by the Commissioner of proceedings in the New South Wales Supreme Court against Philip for tax debts which were not covered by the deed of 3 October 2014 and which were, at that time, $1,610,831.28. This occurred on 10 May 2017. With his liabilities under the deed, his total debt to the Commissioner was now $4,480,367.77. Philip continued thereafter fruitless, one might say quixotic, negotiations with the Commissioner. On 12 July 2017, the Commissioner obtained default judgment against Philip in the sum of $1,452,918.89 (including costs). Further efforts by Philip to persuade the ATO to enter into yet another agreement yielded nothing. A bankruptcy notice was issued sometime before 2 April 2018 and served on Philip that day. On 23 April 2018, he failed to comply with the notice and thereby committed an act of bankruptcy. On 22 August 2018 the Commissioner issued a creditor's petition. Before that petition was determined Philip filed his own debtor's petition and became bankrupt on 4 March 2019.

109    Meanwhile, the Commissioner was pursuing Maryann under the terms of the deed. Although I have not sighted it, the parties agree that he served a notice of default on her on 26 March 2019. Shortly afterwards, on 10 April 2019, he appointed receivers under his second mortgage to the Wahroonga property and on 8 May 2019 those receivers issued a further notice to Maryann seeking payment of $3,376,941.20. On 22 July 2019, the Commissioner commenced proceedings against Maryann seeking payment of the amounts due under the deed and possession of the Wahroonga property. Maryann cross-claimed against the ATO seeking relief in relation to the deed and second mortgage granted under it on the basis that she had entered the deed under duress.

110    At around the same time, Philip and Maryann defaulted under the terms of the loan agreements with the Commonwealth Bank which were secured by a first mortgage over Wahroonga. This occurred on 28 April 2020. By October 2020, it had been determined that Wahroonga had to be sold and Maryann reached an agreement with the Commonwealth Bank to forbear on the enforcement of its rights until 30 August 2021 to permit this to occur.

111    On 1 April 2021, Maryann attended a mediation with the ATO. Maryann did not agree to Philip being present at this mediation other than on the end of the phone. As I have mentioned, Philip and Maryann became separated under the one roof during April 2021 and it may be inferred that the financial mayhem then besieging Maryann played its part in this. The mediation did not result in an agreement on the day. However, on 29 June 2021, Maryann entered into a contract to sell Wahroonga. The sale price was $4,150,088.00. The next day Maryann did reach an arrangement with the ATO which was reflected in a deed of that date. Under the deed, the Commissioner agreed to accept $480,000.00 from the net proceeds of sale of Wahroonga in full settlement of her obligations under the deed. The sale was completed on 11 August 2011. The net proceeds of sale in Maryann's hands after the discharge of the mortgages of the Commonwealth Bank and the Commissioner and the payment of other expenses was $1,233,639.07. Half of that balance is presently being held in the manner I have previously explained.

What the bankruptcy trustees knew in 2021 about the existence of net equity in Wahroonga

112    It was after it became clear that there was net equity in the Wahroonga property that the bankruptcy trustees say that it became apparent to them that they should commence the current proceeding. Wahroonga was purchased for $2,400,000.00 with bank debt of $1,920,000.00. From 21 November 2014, however, Wahroonga was also encumbered by a second mortgage which secured, by 8 May 2019, at least the sum of $3,376,941.20. The property was therefore encumbered by debts in excess of $5,000,000.00.

113    Unless Maryann was successful in escaping or reducing her liability under the deed, it was apparent that there would be no equity left in the Wahroonga property if it were sold. It is easy to understand that Maryann's defence to the Commissioner's possession proceeding was by no means without substance. This may be reflected in the Commissioner's settlement of the proceeding for the comparatively modest sum of $480,000.00. An alternative view is that the Commissioner was aware that the bankruptcy trustees' were going to claim on any sale proceeds left after its settlement with Maryann and, as the largest creditor, that it might obtain the benefit of any proceedings by them. Viewed that way, the actions of the ATO might seem a little disingenuous.

114    It is not necessary to determine which of these is the correct interpretation. The question is whether it was unreasonable for the bankruptcy trustees not to make the allegations they now make at any time prior to Maryann's settlement with the ATO. I do not think that it was. From their perspective, such a proceeding appeared pointless. Even if one allows an awareness on their part that there was some prospect that the Commissioner's proceeding might settle on terms that provided for some equity in the Wahroonga proceeds, this possibility cannot have been apparent at any time prior to the mediation on 1 April 2021. The Twin Trust proceeding was heard on 28 July 2021 with final submissions being received on 23 August 2021. For the bankruptcy trustees to have raised these claims against Maryann in that proceeding they would have needed to apply to re-open shortly after the sale was completed on 11 August 2021 (when the possibility of surplus equity became a reality). The bankruptcy trustees were, I accept, aware of that settlement because they sought orders in the Twin Trust proceedings to prevent the dissipation of the sale proceeds.

115    Had they thereafter sought to re-open the Twin Trust proceeding, I think it is likely that that application would have been refused. Those proceedings were between the bankruptcy trustees and the trustee of the Twin Trust. Maryann was named as a respondent but took no part in the case since no substantive relief was ultimately claimed against her. A re-opening application to pursue claims against a respondent against whom no substantive relief had, until that time, been sought so as to raise claims of an entirely different kind unrelated to the Twin Trust would have been met with the observation that the two claims had little do with each other apart from Philip's insolvency. I do not think, in that circumstance, that it can be said that the bankruptcy trustees unreasonably failed to raise their present claims in the Twin Trust proceeding.

116    Until the completion of the sale on 11 August 2021 it had not become clear that there would be surplus funds and a decision to launch proceedings against a surplus which did not yet exist would quite possibly have invited criticism of the bankruptcy trustees' use of creditors' limited resources. After 11 August 2021, the better view is that any attempt to raise the claims in the Twin Trust proceeding would have been refused.

The intentions of Philip in relation to Leura

117    For the reasons I have given, I am satisfied that on 18 May 2010 Philip thought that he was going to die and knew that his financial affairs were careening out of control. I have explained above that Philip did tell Maryann he was effecting the transfer to her so that she and the boys would have somewhere to live after he died. I have also explained that such a transfer was unnecessary and proceeded either from legal confusion on Philip's part most likely caused by his condition or a misconception that Leura was held by the couple as tenants in common.

118    Nevertheless, the statement is evidence of Philip's intentions. Whatever else it proves, it is impossible not to accept that it demonstrates a desire on his part to provide for his wife and children. Consequently, I accept that one of Philip's purposes in making the transfer was the purpose for which Maryann now contends in her submissions.

119    Being satisfied that this was one of Philip's intentions, the presumption of advancement in favour of Maryann has no work to do. Maryann's case was that Philip's half of Leura had become hers and this was the bankruptcy trustees' case too since they sought to avoid that transfer (I have rejected Maryann's case that Leura was always entirely hers and that Philip had held his half on constructive trust for her).

120    However, I am also satisfied that Philip was not solely actuated by that purpose and that he had another purpose, too. This purpose was to prevent his property from being available to meet the claims of the Commissioner. That Philip had this purpose is, I think, clear. Philip's relationship with the ATO was, by this time, toxic and distressing to him (although largely of his own making). The ATO's decision in April 2010 to demand from him the payment of his full income tax debt at the same time as he had been diagnosed with terminal cancer must have seemed incomprehensibly harsh to Philip. As the ATO notes show, the official who made the demand appears not to have been aware of Philip's condition whereas the official with whom Philip had been dealing was plainly of the view that a halt on recovery action should be called at this time. The miscommunication within the ATO was, perhaps, unfortunate.

121    Whilst not condoning Philip's approach to his income tax liabilities, I nevertheless consider it inevitable that, facing death and what probably appeared to him inhumane behaviour from the ATO, he resolved that whilst he could not take his wealth to the grave with him, he could at least take his debt. That he had such an intention at this time is underscored by Philip's life insurance policies which, shortly afterwards, he was careful to ensure went to the James Trust and not his estate. In the ATO notes there is evidence that these policies were likely to result in a benefit of around $7 million (at least that is what Philip said). This was more than enough to discharge all of his secured debt, pay his unsecured creditors including the Commissioner and still leave a substantial surplus. If he had died, the bounty of the James Trust would have been very deep indeed. Ring fencing the life insurance proceeds in it demonstrates on Philip's part a dogged intention to punish the Commissioner by ensuring that his tax debt was not paid even though there would have been more than enough funds to do so.

122    I therefore accept that when Philip made the transfer to Maryann one of his purposes was to defeat the claims of his creditors. The existence of this intention is not inconsistent with his other intention of providing for Maryann and his children. Whilst the parties approached this question on the basis that the competing motives for which each contended were mutually inconsistent so that proof of one disproved the other, I do not think this approach was correct. The relationship between these purposes was of the same nature as that which exists between means and ends. The difficulty in this case is therefore to identify which of Philip's two purposes was the end to be achieved and which was the means to that end. Did Philip intend to frustrate the claims of his creditors by providing for Maryann and the boys or, was it the obverse, so that his intention was to provide for Maryann and the boys by frustrating the claims of his creditors?

123    Deciding which it was is not easy and, if the law did not require it, I would not. But s 121 of the Bankruptcy Act requires the Court to identify Philip's 'main purpose' in making the transfer and there can only be one such purpose. It is true that by s 23(b) of the Acts Interpretation Act 1901 (Cth) 'words in the singular number include the plural' in any Act. However, s 23(b) is subject to s 2(2) which states that 'the application of this Act or a provision of this Act to an Act or a provision of an Act is subject to a contrary intention'. The Bankruptcy Act evinces such an intention. In using the language of 'main purpose', s 121 contemplates that a person may have more than one purpose and requires the choice from amongst those purposes of that single purpose which can be said to be 'main'. 'Main' means predominant or, perhaps, leading and, in its nature, requires the identification of the purpose which exceeds in its significance the other purposes. As such, whilst there may be many purposes in making a transfer, there can be only one 'main purpose'.

124    Section 121(1) therefore requires the Court to ask, as between the two purposes I have identified, which predominated or was the larger in Philip's mind. On this topic, the bankruptcy trustees have elicited evidence from which it may be inferred that Philip's main purpose was to defeat his creditors. Their case that this was his main purpose is not conjecture and is, in my view, an inference which is rationally open to be drawn from the decision of the ATO to demand in full his outstanding tax debt in April 2010, his terminal diagnosis the same month and the establishment of the James Trust in July 2010.

125    As such, to use the language of Kitto J in Jones v Dunkel (1959) 101 CLR 298 (‘Jones v Dunkel’) at 305, the bankruptcy trustees have passed from the realm of conjecture into the realm of inference. In deciding whether that inference should be drawn, it is permissible to take into account that Philip's evidence about this would have assisted in determining which of the two purposes predominated.

126    Philip did not give evidence. If Philip is to be regarded as being in Maryann's camp for the purpose of these proceedings then her failure to call him would permit an inference to be drawn that Philip's evidence would not have assisted her in proving that defeating his creditors was not Philip's main purpose: Jones v Dunkel at 308 per Kitto J, 312 per Menzies J and 320-21 per Windeyer J. Maryann's evidence about the mediation with the ATO on 1 April 2021 shows that, by then, Maryann was not finding Philip's continuing involvement in her financial affairs conducive to the orderly conduct of those affairs. The relationship between Philip and Maryann had ended either by then or shortly afterwards, and by that November they had ceased cohabiting after she locked him out of the house. The nature of their ongoing relationship is 'tense, uncomfortable and unpredictable'. If it were feasible, I accept that Maryann would prefer to have nothing to do with Philip and to move on with her life.

127    However, it is not feasible. They continue to have some contact because they are the parents of two teenage boys and they remain chained together by this gruesome litigation and its companion suit, the Twin Trust litigation. In that litigation, Philip was the respondent in his capacity as the trustee of the Twin Trust and was, eventually, represented by the same lawyers who are conducting Maryann's defence in this litigation. This is sensible and represents a rational deployment of limited resources. It also suggests some degree of co-operation between Philip and Maryann in the conduct of the two sets of proceedings although it is not possible to speculate on how deep that co-operation runs beyond what is formally visible to me.

128    There are good reasons for them to co-operate. Both are motivated by a common purpose to promote the best interests of their children and to provide for a roof over their heads. In Maryann's case this is clear from her role as their mother. But it is just as clear in Philip's case for it is plain on the evidence that it has always been his desire to protect Maryann and the two boys from the consequences of his mistakes. Philip has not always made good decisions in his pursuit of that desire but that does not detract from its centrality in his thinking. I do not think that this intention is in any way likely to have subsided in relation to the boys just because his relationship with Maryann has now ended. Whatever his intentions are towards Maryann, I am satisfied that he is anxious to ensure that his sons are provided for.

129    For those reasons, the better view is that Philip is in Maryann's camp for the purposes of the rule in Jones v Dunkel. The next question is whether Maryann has demonstrated that it was reasonable for her not to have called him as a witness. One may speculate about Maryann's reasons for this. Having encountered Philip at several case management hearings in the Twin Trust litigation and having read a number of documents composed by him, one may understand a certain anxiety on the part of those representing Maryann about how he might fare under cross-examination. But, even assuming this were correct (and I make no such finding), concern that a witness might be a disaster in the witness box is not a sufficient reason for not calling that witness for the purposes of the rule in Jones v Dunkel. Indeed, it is in some senses the very purpose at which the rule is directed.

130    It is not likely that Philip was unwilling to give evidence to assist Maryann (and through her, his sons) if that were necessary. To the contrary, it may be inferred that Philip remains enthusiastic to proffer that assistance. Further, no witness was called by Maryann to prove that Philip had indicated that he would not co-operate to give evidence.

131    Thus I do not accept that it was not open to Maryann to call Philip. He was, in my view, in her camp for the purposes of the rule in Jones v Dunkel and it is not shown that he was not available. In that circumstance, the failure of Maryann to call Philip permits me to infer that Philip's evidence on this question would not have assisted her. I draw that inference.

132    Once that point is reached, it seems to me that I should infer that Philip's main purpose in transferring his half share in Leura to Maryann was to defeat the claims of his creditors and that the means by which he decided to achieve this purpose was by making provision for Maryann and his children.

133    The transfer was therefore one which, in principle, falls within the grasp of s 121 of the Bankruptcy Act. For the same reasons that the transfer was made for this main purpose, I am also satisfied that it was also done with the ‘intent to defraud creditors' within the meaning of s 37A of the Conveyancing Act so that that provision is likewise, in principle, applicable.

The intentions of Maryann in putting Turramurra and Wahroonga in her sole name

134    The property at Shadforth Street was purchased on 31 October 2005 by Philip and Maryann as tenants in common in equal shares. When Shadforth Street was sold on 23 November 2006 and Harnett Avenue purchased on 28 November 2006 the latter was placed, by contrast, in Maryann's sole name. The practice of putting the family home in Maryann's name then continued with Badham Avenue, Turramurra and Wahroonga.

135    The bankruptcy trustees' case is that Philip and Maryann intended with each property that it would be held in Maryann's name but for their mutual benefit. If this is correct, then their fraudulent disposition case in relation to Wahroonga makes no sense since it relies on the premise that, by placing the property in her name, some disposition of his property took place. But if he was entitled to 50% of Wahroonga due to a common intention constructive trust, no such disposition ever took place.

136    On the other hand, if the bankruptcy trustees fail to prove their common intention constructive trust case, then it is difficult to see how treating the acquisition of Wahroonga as a void disposition of Philip's property is useful unless it can be shown that, by that acquisition, some identified portion of Philip's property was actually disposed of. Leaving aside Leura, the only property the bankruptcy trustees point to is Philip's constructive trust interest in Turramurra. Yet on the hypothesis that the bankruptcy trustees have failed to make good their case that the various family homes were purchased by Maryann in her sole name with the intention of holding it for her and Philip's mutual benefit, Philip would have no such interest. Thus, where the bankruptcy trustees have failed to make good their constructive trust claim, their fraudulent disposition case has no property on which it can operate and is pointless.

137    It follows that whether the constructive trust claim succeeds or not, the claims about voidable dispositions relating to Turramurra and Wahroonga make no sense (leaving aside the funds flowing from Leura). In the case of Leura, this is not so. In its case, the bankruptcy trustees can identify property which Philip disposed of and they can trace that property to some extent into the sale proceeds of Wahroonga. But, as I have noted, they do not identify any other property of Philip's as traceable in that fashion.

138    Once this is appreciated, then apart from their claim arising from Leura, the central question in the case is this: have the bankruptcy trustees demonstrated on the balance of probabilities that it was Maryann's intention in acquiring Wahroonga in her own name that she would hold it for her and Philip's mutual benefit?

139    The evidence relevant to whether the bankruptcy trustees can discharge their legal burden to prove this consists of:

(a)    Maryann's evidence that she did not intend to hold Wahroonga for her and Philip's mutual benefit;

(b)    evidence suggesting that Maryann was accustomed to acting on Philip's intentions so that the decision to put the family homes in her name might be seen as proceeding from his intentions;

(c)    the fact that Harnett Avenue, Badham Avenue, Turramurra and Wahroonga were all held in Maryann's sole name;

(d)    evidence suggesting that Philip had intended Harnett Avenue to be in Maryann's name as an element of protection against unexpected partnership liabilities;

(e)    evidence suggesting that Philip had intended that Wahroonga would be held in Maryann's name for the same purpose;

(f)    evidence suggesting that after the sale of Harnett Avenue (which had been in Maryann's name) and before the purchase by her of Badham Avenue, Philip had used $400,000.00 of the proceeds of sale of Harnett Avenue to pay some of his tax liabilities; and

(g)    evidence suggesting that this payment was a gift from Maryann to Philip.

140    As to (a) and (b), in relation to all of the properties, I am satisfied that it was Philip who decided which name or names would appear on the title to the family home and that it is his intentions which are to be understood as significant. In my view, Maryann acted in accordance with Philip's wishes on such matters. Whilst I do not think that Maryann's views were irrelevant to Philip, at this time it was he, as the high earning mergers and acquisitions partner, who made the ultimate financial decisions for the family. That continued to be the case until Maryann's mediation with the ATO on 1 April 2021 when she refused to permit him to attend other than by phone and, in the same month, their relationship ended. By that time, the spell of Philip's authority over the family was broken but before then, and certainly between 2005 and 2013, I do not think there can be any doubt about who was making the decisions.

141    Whilst I accept that she gave evidence that she did not intend to hold Wahroonga for her and Philip’s mutual benefit, I think that evidence is better seen as a statement about what Maryann understood Philip's intentions to be. Thus I accept that if the bankruptcy trustees' can prove that Philip intended Maryann to hold the family homes in her name for their mutual benefit, then I would accept that I should also infer that this was Maryann's intention, despite her evidence to the contrary.

142    As to (c)-(d), common sense suggests, and I would infer, that the purpose which actuated Philip to put in Maryann's name the four successive family homes ending in Wahroonga, was the same purpose. In relation to the first property owned solely by Maryann, Harnett Avenue, there are two competing views of what occurred: (a) it was a gift from Philip to Maryann of what had been his interest in Shadforth Street with the intention that the family home would be owned by Maryann; or (b) it was not a gift but instead Philip intended that Harnett Avenue would be held by Maryann for their mutual benefit. The bankruptcy trustees seek to prove (b).

143    I am satisfied for the reasons I have given that it was Philip's decision which led to Harnett Avenue being placed in Maryann's name. This does not mean that Maryann had no views herself; only that she deferred to what she understood to be Philip's. Maryann gave evidence that she understood Philip's intention to have been that she should own Harnett Avenue for herself and the boys. I do not think that I should act on this evidence about Philip's intentions. This is not because I am not satisfied that Maryann was a truthful witness. Rather, it relates to the lapse of time since these events occurred, her interest in the outcome of the proceeding and the natural tendency of all people to remember events in a way which is favourable to them. This is especially so in litigation of the present kind which, from Maryann's perspective, will likely determine the nature and quality of the rest of her life and the future which she can provide for her sons. Further, there are evidentiary problems where a witness gives direct evidence about another person's state of mind. I therefore put aside Maryann's evidence about what she understood Philip's intentions to be as evidence of Philip’s intentions.

144    There is some evidence that Philip later put the property at Wahroonga in Maryann's name with the purpose of asset protection in mind. This evidence consists of notes of a meeting he had with ATO officials on 19 May 2016. The subject matter of this discussion was the Wahroonga property and not Harnett Avenue or Badham Avenue. The notes record that:

Mr Kapp stated that his wife feels she has been unfairly treated by the ATO. He advised that the property belongs to his wife, and any equity in the property was earned by his wife; however he went on to explain how the property came to be in his wife's name under what is essentially an asset protection scheme.

145    I am prepared to accept that Philip said words to this effect notwithstanding that the notes, particularly the last line, have passed through the filter of an ATO official. The words attributed to Philip are consistent with Maryann's case that Wahroonga was intended by Philip to be held by Maryann for her own benefit and not his. This is both as to his statement that she had earned the equity in Wahroonga and the reference to asset protection. The purpose of asset protection would hardly be served were Philip to maintain any beneficial interest in the family home.

146    Maryann gave evidence which provides some support for this asset protection purpose although it was about Harnett Avenue and not Wahroonga. Whilst she was clear that Philip's intentions in placing Harnett Avenue in her name had been so that it would be hers and the boys' (evidence upon which I will not act) she was cross-examined about this and gave some additional evidence about what Philip said rather than what he had thought:

Did Mr Kapp tell you that the reason why he put it in your name was to ensure that it was in your name only if he went bankrupt?---No, he did not. I think if anything, it had more to do with your earlier reference to HIH - - -

I see?---and partners in law firms.

I see. That if Mr Kapp had liabilities through his being a partner of a law firm, that he wouldn't wish to lose the family home if he was stuck with a liability of that kind; is that right?---I suspect that’s what - - -

Well, when you say you suspect, did Mr Kapp say that to you?---It was a long time ago.

Okay?---Philip and I had conversations, but I – I can't recount to you from a very long time ago the exact conversation or the exact words that Philip used. But I know what we discussed; I know what his intentions were.

147    The reference to 'HIH' is erroneous on Maryann's part. What she had previously been cross-examined about was the collapse of Arthur Andersen. But the point of the evidence remains the same which was the need for a partner of a professional firm to protect family assets from unexpected external partnership liabilities such as those arising from the collapse of Arthur Andersen after the Enron scandal.

148    I accept that Maryann's evidence about this was understandably fuzzy given the lapse of time. Nevertheless, one may discern from it an intention on Philip's part to put Harnett Avenue in her name so as to provide a measure of protection for the family against unexpected partnership liabilities. This is consistent with his subsequent statements to the ATO on 19 May 2016 about the reason Wahroonga had been put in Maryann's name. Subject to the next matter, I would not infer from (a)-(e) that Maryann's intention in putting in her name Harnett Avenue, Badham Avenue, Turramurra and Wahroonga was that she would hold each for her and Philip's mutual benefit.

149    As to (f)-(g), the bankruptcy trustees submit that it is significant that when Harnett Avenue was sold, some $400,000.00 of the sale proceeds had been used to pay down Philip's tax debt. That this occurred is not in dispute. There are two views which may explain this occurrence. The first is that Harnett Avenue was a gift from Philip to Maryann and that when Maryann subsequently sold it she decided to lend Philip $400,000.00 to pay his tax debt. The second, which the bankruptcy trustees contend for, is that the putting of Harnett Avenue in Maryann's name was never a gift in the first place and that Philip always intended that it would remain his to deal with. I have explained that the facts in (a)-(e) would not persuade me to this view but I do accept that the payment of this $400,000.00 may assist the bankruptcy trustees in discharging their burden of proof.

150    The nature of the $400,000.00 payment is perhaps revealed by the terms of Philip's letter of wishes dated 29 July 2010. It will be recalled that in this letter Philip indicated that he desired the trustees of the James Trust to use the proceeds of his life insurance policies to repay the outstanding loan on Leura, then understood to be in the order of $400,000.00. The letter contained this statement: 'I note that this is in effect a repayment of a loan of $400,000.00, which I borrowed from Maryann to settle a debt to the Australian Taxation Office.' This I take to be a reference to the $400,000.00 paid by Maryann from the proceeds of Harnett Avenue towards Philip's tax debt.

151    The letter supports the existence of an intention on Philip's part that the $400,000.00 was a loan to him out of Maryann's proceeds of Harnett Avenue. That intention is inconsistent with the idea that Philip had intended Maryann to hold Harnett Avenue for both their benefits because it implies that the $400,000.00 would not have been hers to lend.

152    I have already explained that one of the purpose of the James Trust and the letter of wishes was to prevent the proceeds of the life insurance policies from ever being available to pay Philip's creditors even though there would have been more than enough to do so. As with the transfer of his half interest in Leura to Maryann on 18 May 2010, I am satisfied that Philip, in July 2010, was actuated by a desire to punish the ATO for what he perceived to be its pitiless pursuit of him whilst he was terminally ill.

153    That conclusion would not, itself, be entirely free from problems. I have also accepted that Philip was sufficiently in extremis at this time that his transfer to Maryann of his half interest in Leura rested on a misconception on his part caused by the course of his treatment or a misunderstanding that Leura was held by them as tenants in common. The same lack of mental acuity might suggest that not too much should be read into the letter of wishes. However, I would not accept this view. Despite his confusion about the need for the transfer of his half interest in Leura, I have accepted that it was done to ensure that the Commissioner did not have access to that interest. Despite the mental difficulties associated with his treatment, I am satisfied that Philip did have that intention. The same is true of the letter of wishes. I am satisfied that the same purpose underlay it and that this purpose was not vitiated by his infirmities at the time.

154    There are, therefore, good reasons to approach what is said in the letter of wishes with a degree of scepticism insofar as the contents of the letter impact on the Commissioner. Whilst I accept that the letter does suggest that Maryann lent Philip $400,000.00 out of the proceeds of Harnett Avenue, I am not prepared to act on this evidence. Further, whilst I do not doubt the honesty with which Maryann gave her evidence, I do not think that her evidence that it was a loan counts for very much either given that Philip was making the decisions.

155    Returning then to the significance of the fact that Maryann paid $400,000.00 from the sale proceeds of Harnett Avenue to reduce Philip's tax debt, it was Maryann's case in her defence that the $400,000.00 was a loan. The evidence to which I have referred does not satisfy me on the balance of probabilities that it was a loan for the reasons I have given. I also do not think that Philip's evidence would have assisted Maryann in establishing that the $400,000.00 payment was a loan. It is therefore not shown by Maryann that the payment was a loan.

156    Having surveyed the available evidence, it is then necessary to consider whether the bankruptcy trustees have discharged their burden of proving that Maryann's intention in acquiring Wahroonga was to hold it for her and Philip's mutual benefit. I do not accept that they have proved this. In relation to Harnett Avenue the bankruptcy trustees' common intention allegation cannot be reconciled with the evidence that Philip intended the family home to be in Maryann's name for asset protection purposes. Whilst the evidence shows that when Harnett Avenue was sold, $400,000.00 of the sale proceeds had been used to pay Philip's tax debt, all that I would infer from this is that the sale proceeds of the family home had been used by Philip for his benefit.

157    The bankruptcy trustees need to take that one step further and submit that the fact that it may be inferred that Philip treated the proceeds of sale of the family home as if they were his own allows a further inference that when there was a family home in Maryann's name it would be owned by her for her and his mutual benefit.

158    I would not draw this inference. There was a considerable hiatus between the sale of Harnett Avenue on 23 October 2007 and the purchase of Badham Avenue on 22 September 2008. During that time, there was no family home to be owned so Philip's purpose of protecting the family home by putting it in Maryann's name was not relevant. The question then becomes whether one should infer from the fact that Philip used the funds for his own purposes during this hiatus, that, outside the hiatus, he intended that Harnett Avenue, Badham Avenue, Turramurra and Wahroonga would be held in Maryann's name for their mutual benefit. I am not prepared to infer such an intention on his part. It would involve the conclusion that from Badham Avenue onwards, Philip had ceased to be actuated by a desire to protect the family home from unforeseen partnership liabilities and that this loss of desire on his part was caused by the fact that he had used $400,000.00 of the sale proceeds to pay his own tax liability during a period in which no home was owned. This seems to me unlikely.

159    Thus on the evidence, I would not infer that Philip's intention was that the family homes from Harnett Avenue onwards were to be owned by Maryann for his and her mutual benefit. Consequently, I would not find that this was Maryann's intention either. Accordingly, the bankruptcy trustees fail to make good their claim for a constructive trust over each family home from Harnett Avenue onwards and, in particular, they fail to make good the claim in relation to Wahroonga.

160    The bankruptcy trustees submitted that they were assisted by Jones v Dunkel. Whilst they have benefited from Jones v Dunkel in relation to an allegation for which Maryann bore the burden of proof (that the $400,000 payment was a loan to Philip), it does not avail them in this part of the argument. The bankruptcy trustees bore the burden of proving that Maryann's intention in holding Wahroonga in her name was that she would hold it for her and Philip’s mutual benefit. I would not draw that inference on the evidence. The rule in Jones v Dunkel cannot solve that problem. Had I been minded to draw the inference for which the bankruptcy trustees contend but was hesitant about it, I could have drawn the inference more comfortably where Philip did not give evidence. However, that is not the territory we are in.

161    For completeness, the bankruptcy trustees did not submit that Philip's asset protection purpose meant that the gift by him to Maryann of his share of the proceeds of sale for Shadforth Street (owned by him as to 50% as a tenant in common) was a transaction void against them and the case is not therefore one like Cummins.

The bankruptcy trustees' claims for a constructive trust over the proceeds of Wahroonga

162    It follows from the finding just made that I reject the bankruptcy trustees' claim that Maryann held either Turramurra or Wahroonga on a common intention constructive trust for her and Philip’s mutual benefit.

163    The bankruptcy trustees advanced a second basis for such a constructive trust under the principle in Baumgartner. Here the thinking was that Philip had made most of the contributions to the equity in the Wahroonga property and that, as such, it would be unconscientious for Maryann, now that their relationship had ended, to deny the role that his contributions had played by standing on the fact that it had formally been registered in her sole name.

164    The relevant principle was explained by Deane J in Muschinski v Dodds (1985) 160 CLR 583 at 620:

...the principle operates in a case where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in circumstances in which it was not specifically intended or specially provided that that other party should so enjoy it. The content of the principle is that, in such a case, equity will not permit that other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for him so to do (cf. Atwood v. Maude [(1868) LR 3 Ch App at 374-375], and per Jessel M.R., Lyon v. Tweddell [(1881) 17 Ch D 529 at 531]).

165    Mason J agreed with this passage (at 598-99) and it was cited with approval by Mason CJ, Wilson and Deane J in Baumgartner at 148. For the principle to apply there must be established a joint relationship or endeavour. For the constructive trust to arise the bankruptcy trustees must therefore show that Maryann's ownership of the family homes was an aspect of their joint relationship or a joint endeavour between them. I have found the bankruptcy trustees' allegation that Maryann held her interest in the family homes for her and Philip's mutual benefit is unproven. The question then becomes whether the bankruptcy trustees have shown that Maryann's ownership of the family homes was an aspect of their joint relationship or a joint endeavour. In my view, they have established this. Whilst Maryann was to own in her own right the last four family homes so as to protect against unexpected claims on Philip arising from his practice as a solicitor, it was nevertheless a family home in which they both lived a shared life.

166    As the passage quoted in Baumgartner shows, the constructive trust will not arise if it be shown that the parties specifically intended or specially provided that the property in the name of one partner should remain in that partner's name in the event that the substratum of the joint relationship was removed. Couched in those terms, this is a matter on which Maryann bears the onus of proof.

167    The evidence satisfies me that Maryann has demonstrated this. Whilst I have to this point only considered the bankruptcy trustees’ case that she held the property for her and Philip's mutual benefit, it becomes necessary here to consider her case that she held it for her own benefit. Largely for the reasons I have already given, I accept that Maryann held the property in her own name as an asset protection measure. My earlier reasons related to what the bankruptcy trustees had failed to prove and I did not regard Philip's failure to give evidence as being relevant once I concluded that I would not draw the inference of common intention for which the bankruptcy trustees contended. The situation now is different because the burden lies on Maryann to show that she and Philip intended that she would keep the property for herself even if their relationship ended.

168    Since Maryann bears the burden of proving that, her failure to call Philip is relevant. I therefore infer that any evidence given by Philip would not have assisted Maryann in this regard. Nevertheless, I am going to draw the inference that her ownership of the family homes was intended to ensure that Philip's future creditors (in the form of unexpected partnership liabilities) never had any claim on the family home. I would infer in the absence of Philip that his use of the $400,000.00 shows that he understood that he could use the sale proceeds of Harnett Avenue for his own benefit. However, I continue to be of the view that this fact throws no real light on his intentions (and by extension Maryann's intentions) when it comes to understanding what was intended by her ownership of the family home. As such, I am satisfied that the purpose with which Maryann was placed in sole ownership of the family homes is as I have said.

169    Once it is accepted that Philip (and Maryann) intended that his future creditors (in the form of unexpected partnership liabilities) should have no claim on the family home, it can be seen that this was an intention that Philip should have no such claim. The future creditors' claims would be on Philip who, in this scenario, would be bankrupt at their suit. What Philip and Maryann were therefore intending was to protect the family home from claims made by Philip's bankruptcy trustees using his rights. The question then becomes whether Philip (and Maryann) intended that the family home should be available to these creditors if his relationship with Maryann should end. I do not see how such an intention could be held simultaneously with an intention that he should have no interest in the family home. He was either putting the family homes beyond the reach of his future creditors or he was not. I do not accept that there is a halfway house where he sought to put his assets beyond the reach of his creditors unless his relationship with Maryann ended. I do not find such an intention. I therefore find that Maryann and Philip not only intended that the family home should be in her name to protect the family from unexpected claims made on Philip arising from his practice as a solicitor, but that they intended that this state of affairs would continue even if their relationship ended.

170    Consequently, I do not accept that a Baumgartner trust could arise. Maryann did not therefore hold Turramurra or Wahroonga on either a common intention or Baumgartner constructive trust.

The bankruptcy trustees' claim under s 121 of the Bankruptcy Act in relation to Leura

171    Section 121(1)-(3) provide:

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.

172    I am satisfied as at 18 May 2010 that Philip's main intention in effecting the transfer to Maryann of his half interest in Leura was to prevent his half interest becoming divisible amongst his creditors (s 121(1)(b)(i)). It is not necessary therefore to rely upon the deeming provision in s 121(2). Were it necessary, I would have accepted that Philip was insolvent on 18 May 2010. At that time he had failed to pay the ATO the $434,271.65 it had demanded on 14 April 2010 and had no means of paying it. On that day he was not able to meet his debts as and when they fell due.

173    I have explained above that 9.55% of the net proceeds of sale of Wahroonga represent proceeds of the sale of Leura. Philip's interest in those proceeds of sale is therefore 4.775% which is the sum of $58,900.20. If Philip's transfer of his half interest to Maryann in Leura is void against them then I accept that the bankruptcy trustees are entitled to claim this sum out of the sale proceeds of Wahroonga.

The bankruptcy trustees' claim under s 37A of the Conveyancing Act in relation to Leura

174    Section 37A 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.

175    In light of my earlier findings, it follows that Philip's intention in making the transfer was to defraud his creditors and the bankruptcy trustees are therefore entitled to treat the disposition of his half of Leura as void as against them. I therefore accept for the same reasons I have given in relation to s 121 that the bankruptcy trustees are entitled to 4.775% ($58,900.20) of the sale proceeds of Wahroonga.

The claims on the sale proceeds of Wahroonga under s 121 of the Bankruptcy Act and s 37A of the Conveyancing Act

176    The bankruptcy trustees submitted that the putting of Wahroonga in Maryann's sole name had effect as an alienation of Philip's property for the purposes of s 37A and a transfer of his property for the purposes of s 121.

177    Wahroonga was purchased in August 2013. As I have explained above, Philip's financial affairs were out of control by this point and the purchase was irrational from his perspective in that it made his future bankruptcy quite likely. At this time, any reasonable appraisal of the objective circumstances indicates that Philip had no prospect of meeting his tax debts. I have already concluded that by 18 May 2010 he had decided that he would ensure that his property did not fall into the hands of the Commissioner. I do not think that this purpose was reduced as his financial position grew worse. Further, I am satisfied for the purposes of s 121(2) that from April 2010 Philip was, at all times, insolvent so that his main purpose in putting both Turramurra and Wahroonga in Maryann's sole name is taken to be the main purpose of defeating his creditors.

178    Correspondingly, if the registration of Turramurra and Wahroonga in Maryann's sole name were dispositions of Philip's property to which s 37A can attach, I am satisfied that Philip's intention was to defraud the Commissioner of the debts owed by Philip to him and that the provision is otherwise satisfied.

179    I have already explained why I do not think that these claims make any sense. However, it is useful to expand upon this. One begins with this question: what property of Philip's was it, on this hypothesis, of which he defrauded his creditors? It is tempting to say that the subject of the fraud was his interest in Turramurra. But Turramurra was held in Maryann's sole name and beneficially. Consequently, what Philip defrauded his creditors of in this scenario was not any interest of his in Turramurra.

180    It was no doubt for that reason that the bankruptcy trustees submitted that the putting of Turramurra in Maryann's name was also a disposition caught by s 121 of the Bankruptcy Act and s 37A of the Conveyancing Act. If that were correct, however, the same question would then simply be repeated; that is to say, what interest of Philip's was thereby alienated? It can therefore only be whatever Philip's interest in the previous property, Badham Avenue, had been. But Badham Avenue had also been owned by Maryann in her name and beneficially. As I have noted, the bankruptcy trustees did not contend for a constructive trust over the proceeds of Badham Avenue and they did not argue that the putting of it into Maryann's sole name was a fraudulent disposition. Configured that way, I am unable to identify what property of Philip's was disposed of by him when Turramurra was put into Maryann's name and, by parity of reasoning, I likewise cannot discern any property of his which was disposed of when Wahroonga was then placed in Maryann's name. The exception to this is Philip's contribution of $70,000.00 towards the deposit on Wahroonga. However, Philip would have an interest arising by reason of that payment only if he had intended that Maryann should hold Wahroonga for his benefit as to that part. I am not satisfied that he or Maryann had any such intention.

181    The difficulty is that in order for the fraudulent disposition case to make sense it must be taken back to the time when Philip did own some property. That was Shadforth Street which was acquired by the couple as tenants in common. To connect their case to that property the bankruptcy trustees must seek to treat the intermediate properties – Harnett Avenue and Badham Avenue – as void which they do not do. Consequently, I am unable to see what treating as void the putting in Maryann's name of Turramurra and Wahroonga achieves.

182    It is possible, of course, that there was other property of Philip's involved such as payments of principal on the Turramurra and Wahroonga properties. However, the bankruptcy trustees did not seek to explore that possibility and I do not need to consider it. Assuming therefore that putting Turramurra and Wahroonga in Maryann's name could in principle involve a fraudulent disposition of Philip's property, the bankruptcy trustees have failed to prove what that property was. The claims under s 121 and s 37A fail for that reason.

183    It is not necessary therefore to consider whether the putting of the registration of Turramurra or Wahroonga in Maryann's sole name could be a disposition of Philip's property. There was debate between the parties about the application of what was said by Palmer J in Hall v Poolman [2007] NSWSC 1330; 215 FLR 243 at [542]-[555]. I would prefer not to enter on that debate. Because the bankruptcy trustees have not demonstrated that putting Turramurra and Wahroonga in Maryann's name caused any subtraction from Philip's assets, there is no point in considering whether the various ingenious ways in which such a subtraction may be embodied are caught by s 37A or, for that matter, by s 121.

Conclusion on bankruptcy trustees' claims

184    Maryann was the legal and beneficial owner of Wahroonga and the proceeds of sale belong to her. However, Philip's transfer to her of his half interest in Leura is void against the bankruptcy trustees and the sale proceeds of Leura may be traced into the sale proceeds of Wahroonga. The bankruptcy trustees are entitled to 4.775% of those proceeds which is $58,900.20.

Does Maryann have an equity of exoneration?

185    As it was finally pressed, Maryann contended that whatever property interest Philip had in the net proceeds of sale was itself subject to a charge in her favour to secure her equity of exoneration. Philip's interest in the proceeds of sale of Wahroonga is limited to $58,900.20 representing his half interest in Leura. The equity of exoneration was described in these terms by the Full Court in Parsons v McBain [2001] FCA 376; 109 FCR 120 (‘Parsons’) at [20]-[21] per Black CJ, Kiefel and Finkelstein JJ:

The equity of exoneration is an incident of the relationship between surety and principal debtor. It usually arises where a person has mortgaged his property to secure the debt of another, whether or not that other has covenanted to pay the debt. However, it will also arise in a case where, although not an actual suretyship, the relationship is treated as one of suretyship. This is Lord Selbourne's third class of suretyship mentioned in Duncan, Fox & Co v North and South Wales Bank (1880) 6 App Cas 1 at 10. For the doctrine to apply in this class, the following facts will usually exist. First, a person must charge his property. Where the person is the beneficial owner of the property it will be sufficient if the charge is by his trustee. Secondly, the charge must be for the purpose of raising money to pay the debts of another person or to otherwise benefit that other person. Thirdly, the money so borrowed must be applied for that purpose. See generally Re Berry (a Bankrupt) [1978] 2 NZLR 373.

An equity of exoneration operates in the nature of “a charge upon the estate of the principal debtor by way of indemnity for the purpose of enforcing against that estate the right which [the beneficiary] has, as between [the beneficiary] and the principal debtor, to have that estate resorted to first for the payment of the debt”: Gee v Liddell at 72. Thus, where co-owners mortgage their property so that money can be borrowed for the benefit of one mortgagor, the other has an interest in the property of the co-mortgagor whose property is to be regarded as primarily liable to pay the debt.

186    Maryann points to two secured transactions which she says give rise to her equity. The first is that she paid $480,000.00 of Philip's tax debt when she settled the Commissioner's proceedings against her and that sum was paid to him to secure the release of his second mortgage. She says that this was not her tax debt and that her liability to pay it only arose from the liability she acceded to by the deed by which she agreed to guarantee Philip’s payment of his tax debt as it stood on 3 October 2014 with interest. It was that liability which was secured by the Commissioner's second mortgage over Wahroonga. Thus, so she submits, she is entitled as against Philip to be exonerated out of his share of the proceeds of sale under that mortgage and to be secured for that exoneration by a charge over his interest.

187    The second transaction concerns Philip's legal fees arising from his defence of the Twin Trust proceedings in his capacity as the trustee of the Twin Trust. Maryann agreed with Philip's lawyers that her property in Wahroonga would be charged to secure the payment of the fees due by him. She also says that she paid these fees from the proceeds of sale in the sum of about $110,000.00. Consequently, she submits that she is to be treated as a surety in relation to his legal fees and submits that her suretyship was secured by a charge on the sale proceeds from which she has now paid those fees. (It was strictly a charge on Wahroonga but I would treat the proceeds as being subject to the same charge by means of the principle of conversion.) I note for clarity that the undertakings to which the proceeds of sale are subject did not prevent the payment of legal fees.

188    It is useful to consider these two claims separately.

Maryann's guarantee of Philip's tax debt and the second mortgage in favour of the Commissioner

189    The background to the transaction was recited under the heading 'Background' in these terms:

A.    The Taxpayer is indebted to the Commissioner for the Taxation Debt.

B.     The Guarantor has agreed to guarantee and indemnify payment of the Taxation Debt and to provide the Securities.

C.    The Commissioner has agreed to forebear from taking steps to recover the Taxation Debt in a court of competent jurisdiction in accordance with the terms set out in this Deed.

D.    The Commissioner has agreed to accept the Securities in accordance with the terms of this Deed.

190    Maryann's identified obligations were to guarantee and to indemnify. By cl 2 Maryann acknowledged Philip's tax debt:

The Taxpayer and the Guarantor acknowledge that:

(a)    The Taxpayer is liable to pay the balance of the Taxation Debt.

(b)    GIC [General Interest Charge] will continue to accrue on a compounding daily basis on:

(i)    the unpaid balance of the Taxation Debt, and any GIC from previous days in respect of which the balances of the Taxation Debt have been altered in the Commissioner’s favour, in accordance with section 8AAC of the TAA 1953 [Tax Administration Act 1953 (Cth)], until the Taxation Debt and associated GIC have been paid in full.

191    Clause 3.1 set out Maryann's obligations of guarantee and indemnity in these terms:

3.1    Guarantee and indemnity

(a)    The Guarantor hereby irrevocably and unconditionally:

(i)    agrees to assume liability for, and guarantees to the Commissioner payment of, the full amount of the Taxation Debt and any GIC to which the Taxpayer is, or becomes, liable to pay pursuant to the TAA 1953 in respect of the Taxation Debt as detailed in clause 2(a); and

(ii)    undertakes to the Commissioner that whenever the Taxpayer does not pay any amount when due under or in connection with any Transaction Document (or anything which would have been due if the Transaction Document or the amount was enforceable, valid and not illegal), the Guarantor shall immediately on demand pay that amount as if it was the principal Obligor; and

(iii)    indemnifies the Commissioner immediately on demand against any cost, loss or liability suffered by the Commissioner if any obligation guaranteed by it (or anything which would have been an obligation guaranteed by it if not unenforceable, invalid or illegal) is or becomes unenforceable, invalid or illegal. The amount of the cost, loss or liability shall be equal to the amount which the Commissioner would otherwise have been entitled to recover.

Each of paragraphs (i), (ii) and (iii) is a separate obligation. None is limited by reference to the other.

(b)    Despite the Guarantee from the Guarantor, the Taxpayer remains primarily liable for the balance of the Taxation Debt, and any GIC which becomes payable in respect of the Taxation Debt as detailed in clause 2(a).

(c)    In support of the Guarantee of the Taxpayer’s obligations under this Deed, the Guarantor provides the Securities.

192    There is a tension between cll 3.1(a) and 3.1(b). Clause 3.1(a) suggests that Maryann assumed primary liability for the payment of the tax debt. But cl 3.1(b) suggests that the liability was primarily to be Philip's. Clause 3.1(b) must be read as cutting across cl 3.1(a) because it begins with the words 'Despite the Guarantee from the Guarantor' which can only be a reference to cl 3.1. Cl 3.10 is also relevant:

3.10    Principal obligation

This Guarantee is a principal obligation and will not be treated as ancillary or collateral to any other obligation and this Guarantee is enforceable although this Deed or any other obligation arising between the Commissioner and the Taxpayer or any other person becomes in whole or part unenforceable, invalid or illegal for any reason.

193    I would read this clause as directed to ensuring that any compromise with Philip of his tax debt did not impact on Maryann's liability to pay it. I would not read it as altering the nature of the relationship to which cl 3.1 properly construed points. Thus, as between Philip and Maryann the relationship was one of suretyship. This is consistent with cl 2(a) which is set out above.

194    Philip's primary obligations of payment were then relevantly set out in cl 5.1(a)-(c):

5.1    The Taxpayer agrees:

(a)    to pay the costs associated with this Deed and the preparation and registration of the Securities.

(b)    to make arrangements to ensure that the Taxation Debt is paid in full on the earlier of:

(i)    Nine (9) months after the date the Taxpayer is deceased; or

(ii)    30 June 2019, unless on 30 June 2019 the Taxpayer has been in hospital continuously for seven (7) or more days, in which case, the Commissioner would not exercise his rights in respect of the securities until:

(A)    if the Taxpayer is discharged from hospital, thirty (30) days after he has been discharged; or

(B)    if the Taxpayer is deceased, nine (9) months after the date the Taxpayer is deceased.

(c)    to comply with his current and future obligations under Taxation Laws.

195    It will be seen that Philip was obliged to pay the debt on 30 June 2019 or within 9 months after his death, whichever came first. He was also obliged to pay it in full if he defaulted under the deed and this included, by cl 11.1(c), if he failed to comply with the requirement of a taxation law. Thus, unless Philip defaulted under the terms of the deed, he had no obligation to pay the debt in full until 30 June 2019 (since he did not die). For the same reason, Maryann also had no obligation to pay the tax debt in full. It was only when Philip defaulted by not filing his return on time that he, and by extension she, became liable to pay the whole of the tax debt. Even then, the effect of cll 2 and 3.1(b) was that, as between Philip and Maryann, it was Philip who was primarily liable for it. Maryann's liability was secured by the second mortgage over Wahroonga: cl 4.

196    As such, the relationship between Philip and Maryann was one of suretyship and she mortgaged her property to secure her husband's tax debts. This is true as a matter of form because of cll 2 and 3.1(b) but, even if that were not so, it is also true as a matter of substance. On no view was Philip's tax debt Maryann's. As the Full Court noted in Parsons at [20] the principle will apply 'where, although not an actual suretyship, the relationship is treated as one of suretyship'. If it were necessary, this is such a case.

197    The bankruptcy trustees submit that no equity of exoneration arose for a number of reasons. The first was that Maryann had paid her own debt by making the payment to the Commissioner of $480,000.00. I accept that Maryann had this liability but I do not accept that it altered the relationship between her and Philip for the reasons I have already given.

198    Next the bankruptcy trustees submitted that Philip's tax debt had not been paid in full by Maryann. The significance of this fact concerns cl 3.7 which provides:

Until all amounts which may be or become payable by the Obligors under or in connection with the Transaction Documents have been irrevocably paid in full and unless the Commissioner otherwise directs, the Guarantor must not:

(a)    exercise any rights which it may have by reason of performance by it of its obligations under the Transaction Documents:

(i)    to be indemnified by the Taxpayer;

(ii)    to claim any contribution from any other guarantor of or provider of security for the Taxpayers’ obligations under the Transaction Documents; and/or

(iii)    to take the benefit (in whole or in part and whether by way of subrogation or otherwise) of any rights of the Commissioner under the Transaction Documents or of any other guarantee or security taken pursuant to, or in connection with, the Transaction Documents by the Commissioner; or

(b)    in any form of administration of the Taxpayer (including bankruptcy, voluntary administration, dissolution or receivership or any analogous process) prove for or claim, or exercise any vote or other rights in respect of, any indebtedness of any nature owed to it by that Taxpayer.

199    Whilst any amount remains due by Philip under the deed, the effect of this clause is that Maryann has covenanted with Philip not to seek any indemnity from him arising from her having performed any of her obligations under the deed. Two questions arise. First, does Philip have any outstanding debt under the deed so that cl 3.7 is enlivened? Second, if he does, is the assertion by Maryann of her equity of exoneration a claim by her against Philip of a right of indemnity?

200    As to the first issue, Maryann pursued no submission that there is no debt outstanding under the deed because the Commissioner has sought to prove his debt in the bankruptcy, thereby exchanging the debt for statutory rights of distribution from the estate. It is therefore not necessary to pursue this question further.

201    As to the second question, on the assumption that Philip's debt remains outstanding under the deed, Maryann has performed her obligations under the deed by paying $480,000.00 of Philip's debt. The question then becomes whether her present assertion of the equity of exoneration can be characterised as the enforcement of a right of indemnity under cl 3.7(a)(i). Maryann submitted that it could not because an equity of exoneration was an equity not an indemnity. I do not accept this submission. Quoting Gee v Liddell [1913] 2 Ch D 62 at 72, the Full Court in Parsons observed at [21] that the equity of exoneration operates in the nature of 'a charge upon the estate of the principal debtor by way of indemnity for the purpose of enforcing against that estate the right which [the beneficiary] has, as between [the beneficiary] and the principal debtor, to have that estate resorted to first for the payment of the debt'. Thus the equity of exoneration rests fundamentally on the right of the surety to be indemnified by the principal debtor. It is true that the equity itself is a security interest rather than an indemnity but it is a security interest which is necessarily premised on the existence of a right of indemnity.

202    As such, it is always open to a surety and a debtor to agree between themselves that no right of indemnity shall exist and where this occurs no equity of exoneration will arise. It was this fact which was recognised by Deane J in Farrugia v Official Receiver in Bankruptcy (1982) 58 FLR 474 at 477 where his Honour noted that the equity of exoneration in that case could be applied to the husband's sole portion but that this was 'in the absence of agreement to the contrary'.

203    In this case, Maryann has agreed with Philip that until he has paid his tax debt in full, she will not seek indemnity from him. The necessary consequence is that he, and hence the bankruptcy trustees, are entitled to rely upon cl 3.7 to resist her assertion of the equity of exoneration.

204    In those circumstances, I do not accept that Maryann is entitled to be exonerated out of Philip's share in the net proceeds of Wahroonga.

Maryann's payment of Philip's legal fees secured over the proceeds of sale from Wahroonga

205    Philip was a party to the litigation brought by the bankruptcy trustees against the Twin Trust in his capacity as trustee. He was represented by the same lawyers who appeared for Maryann in this proceeding. Philip's solicitors entered into a costs agreement with Philip and Maryann 'as third party payer' dated 13 June 2021. Philip was the client in this arrangement and the services he was obtaining related to his duties and obligations as the trustee of the Twin Trust. Maryann is a discretionary beneficiary under that trust although she has no interest in any part of the trust's property.

206    By cl 12 of the costs agreement Maryann agreed with the lawyers as follows:

In order to secure our costs, Maryann Kapp hereby charges the property known as 88 Boundary Road, Wahroonga, New South Wales with the payment of all amounts that may become due and payable to us. This entitles us to lodge a caveat on the title of the property restricting transactions with the property until our costs are paid.

207    After the sale of Wahroonga, Maryann paid the lawyers' costs in the sum of $110,000.00. On its face, the relationship between Philip and Maryann in relation to this transaction would appear to be one of suretyship. She was guaranteeing his payment of legal fees out of her property in Wahroonga. In isolation, I would accept that she therefore paid debts which were his out of property which belonged to both of them (being the proceeds of sale). Further, she did so because they were charged to secure Philip's debts by cl 12.

208    However, there is a question as to whether the payment of Philip's debts to his lawyers was solely for his benefit. It is accepted that if a surety receives a benefit from the transaction giving rise to a liability in the hands of the person with the principal obligation then the equity of exoneration may be defeated: Parsons at [23]. So, if borrowed funds are used to discharge the surety's debts, the surety cannot claim exoneration. However, before a benefit received by a surety can defeat the equity of exoneration it must not be found to be too remote: Parsons at [23]-[24]. In Parsons itself, the benefit said to have received by the wife was that, by putting money into the husband's partnership business, the business might survive and, as was put by counsel in that case, this would bring 'home money to put food on the table and clothe the children'. This possibility was found by the Full Court to be too remote.

209    I think a similar problem arises here. Before Maryann can be seen as benefitting from the Twin Trust litigation it would be necessary to foresee a distribution from the Twin Trust, presently in the control of Philip, to her. That seems to me to be speculative although not impossible. Just precisely what Philip would do with any money left in the Twin Trust is difficult to predict. He might well apply it for the benefit of his children and perhaps Maryann having regard to what I have said above in relation to Jones v Dunkel about the current state of their relationship. But, depending on the outcome of this litigation, he might equally not. As such, any benefit to Maryann is too remote to defeat her right of exoneration.

210    In that circumstance, Maryann has paid $110,000 to pay Philip's own debts to his lawyers secured by a charge over property owned by her. She is entitled to be exonerated out of his property for this $110,000.00. Since his interest in the Wahroonga sale proceeds is only $58,900.20, this means that the whole of his interest is charged to Maryann.

Anshun estoppel

211    Maryann submits that the bankruptcy trustees ought reasonably to have made these allegations in the Twin Trust proceeding and that an Anshun estoppel therefore arises against them. I have already explained that I do not accept that the bankruptcy trustees acted unreasonably in not making these allegations at any time prior to the sale of Wahroonga in August 2021. I also do not accept that they acted unreasonably in not seeking to re-open that proceeding after that time to raise these allegations. Consequently, no Anshun estoppel arises.

Conclusions

212    The bankruptcy trustees fail in their claims. Whilst they have demonstrated that they are entitled to $58,900.20 of the Wahroonga sale proceeds, that amount is fully charged to Maryann to secure the payment she made on Philip's behalf of $110,000.00 secured by Wahroonga and its proceeds of sale. The net result is that the remaining proceeds of sale should be released to her.

213    The parties should bring in appropriate orders to give effect to these reasons. My initial impression is that Maryann has won this case and the bankruptcy trustees have lost so they should pay her costs as taxed or agreed. However, I will hear the parties on this if either desires. If that course is taken, the bankruptcy trustees should file their submissions limited to five pages within 14 days and Maryann should respond within a further 14 days subject to the same limitation after which the question may be decided on the papers. The parties should bring in a short minute of order in relation to the disposition of the proceeding within 14 days which should also embody, if necessary, the timetable just mentioned.

Aravanis (Trustee) v The Trustee of the Twin Trust, in the matter of the Bankrupt Estate of Kapp

NSD 853 of 2019

Introduction

214    The trustees of the bankrupt estate of Mr Philip James Kapp sue Mr Kapp in his capacity as the trustee of the Twin Trust. The Twin Trust is a discretionary trust, the principal beneficiaries of which are Mr Kapp's wife, Mrs Maryann Kapp, and their twin boys. Without any disrespect intended, I will refer to Mr Kapp as Philip and Mrs Kapp as Maryann.

215    The Twin Trust was originally settled on 1 November 2013 by a deed of that date. Under its terms, Philip holds office as the 'appointor' in which capacity he has the power to change the trustee, to add or remove beneficiaries and to appoint another appointor. He has exercised these powers from time to time. He exercised the power to remove himself as a beneficiary early in the life of the trust on 1 December 2013 and has not been a beneficiary since. The trust's initial trustee was Kappfam Investments Pty Ltd ('Kappfam') which has since been deregistered but in October 2015 Philip replaced Kappfam as trustee with Twin Investors Pty Ltd ('Twin Investors'), also now deregistered. More recently, during the current litigation and following a vacancy in the office of trustee caused by the deregistration of Twin Investors, Philip appointed himself as trustee. There were some questions as to whether he was validly appointed but, in any event, his office as trustee was vacated for the reasons given by me in Aravanis (Trustee) v Twin Investors Pty Ltd, in the matter of the Bankrupt Estate of Kapp (Standing of Third Respondent) [2021] FCA 359. Subsequently, he appointed Maryann as an appointor who then appointed Philip as trustee again which is the current situation.

216    The trust was initially known as the Kappfam Trust but from 2015 became, as it remains, the Twin Trust. In the interests of clarity I will refer to it as the Twin Trust. The affairs of the trust have not been conducted with perfect orderliness. It has only filed one income tax return for the 2016 financial year and there are no financial statements for the period 2014-2018. It had two bank accounts, one with the National Australia Bank (‘NAB’), the other with the Commonwealth Bank of Australia.

217    Between November 2006 and 4 March 2019, Philip was increasingly in arrears with his income tax obligations and, on his own petition, became bankrupt on 4 March 2019. Philip's principal work until 1 July 2015 was that of a solicitor in which capacity he was a partner of Clayton Utz, Corrs Chambers Westgarth ('Corrs'), Minter Ellison and Anderson Legal. He was the chairman of the latter two firms. He practised in the area of mergers and acquisitions. From 1 July 2015, following his retirement from the partnership of Corrs, he worked as a consultant for Corrs. He has also worked for a number of companies as a company director or consultant.

218    The Twin Trust acquired two properties, one at Main Beach in Queensland (on 16 December 2013) and one at Swan Bay in New South Wales (on 16 October 2015). Both have since been sold and the proceeds held by solicitors pending the outcome of this litigation. In these reasons, for the sake of convenience, I will from time to time refer to the Twin Trust as if it were an entity in its own right. These references should be understood as a reference to the trustee for the time being of the Twin Trust.

219    By their present suit the bankruptcy trustees claim the following against the Twin Trust:

(a)    a declaration that there is a constructive trust in their favour over the proceeds of sale of the Main Beach and Swan Bay properties;

(b)    a declaration that there is a resulting trust in favour of the estate over the same proceeds;

(c)    relief under ss 139D(2) and 139E(2) of the Bankruptcy Act 1966 (Cth) (‘the Act’) in respect of payments made to the Twin Trust by third parties for the services of Philip;

(d)    relief under ss 120 and 121 of the Act in respect of payments made to the Twin Trust by third parties for the services of Philip;

(e)    relief under s 37A of the Conveyancing Act 1919 (NSW) (‘Conveyancing Act’) for the same claims made under ss 120 and 121; and

(f)    the taking of accounts for all money paid by Philip or at his direction to the Twin Trust.

220    The case has a somewhat chequered history. For some time the bankruptcy trustees sought to pursue the assets of the Twin Trust without the trust being represented by its trustee. They eventually yielded to my view that one cannot sue to recover the property of a trust without joining its trustee, which acquiescence led to the re-appointment of Philip as its trustee and the proper constitution of their suit. Although Maryann is named as the Second Respondent, no relief was sought against her and she did not enter an appearance. The other respondents are deregistered. Thus, as finally pursued, the case was a claim by Philip's trustees in bankruptcy against him in his capacity as the trustee of the Twin Trust.

The constructive trust claims

221    For present purposes it may be assumed that Philip provided part of the purchase price for both properties. The bankruptcy trustees submit that it is unconscionable for the trustee of the Twin Trust now to deny the role that his contributions to the Twin Trust played in its acquisition of the two properties. They submit that the funds used by the Twin Trust to purchase the two properties came to it only because of Philip's work as a solicitor, company director and businessman. It would be unconscionable for the Twin Trust now to retain the benefit of Philip's work, so the argument ran, because the substratum of the assumed relationship between him and Twin Trust had been removed. The basis of this relationship was that Philip would make contributions to the Twin Trust and that he would be a beneficiary of the trust. As I have noted, on 1 December 2013 Philip ceased to be a beneficiary but continued, through his work, to make substantial contributions to the trust. Thus, according to the bankruptcy trustees’ submission, all contributions made by him to the Twin Trust after that time should be held on a constructive trust in his favour (which interest had then vested in them by force of s 58 of the Act). The bankruptcy trustees likened the situation to that which occurs in a domestic relationship where one partner meets the mortgage repayments on a home held in the name of the other.

222    I do not accept this submission. It is first necessary to set out some facts about the Twin Trust and the circumstances in which Philip ceased to be a beneficiary of it. The trust was settled under a deed dated 1 November 2013. Before the trust was settled Philip had made arrangements for the purchase of the Main Beach property and this included the payment by him of $30,000.00 as a deposit. By means not necessary to recite, prior to the settlement date (which was to be on 16 December 2013) arrangements were made for the purchase of the Main Beach property to be effected by the Twin Trust. On 1 December 2013, prior to settlement, Philip caused himself no longer to be a beneficiary of the Twin Trust and at the same time entered into a deed with the trustee of the Twin Trust. Under this deed he was required to meet all the expenses associated with the Main Beach property but was also entitled to all income generated by it. To that end, the Twin Trust was to provide Philip with an 'income unit' in relation to all income received from the Main Beach property and a full accounting of the income and expenses relating to it. At the same time he waived the right to receive any capital appreciation in relation to the property and to any distribution in relation to any other assets of the Twin Trust.

223    The bankruptcy trustees rely on the principle expounded in Muschinski v Dodds (1985) 160 CLR 583 at 620 and Baumgartner v Baumgartner (1987) 164 CLR 137 (‘Baumgartner’) at 148. That principle was stated by Deane J in the first case at 620 in these terms:

Those circumstances can be more precisely defined by saying that the principle operates in a case where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in circumstances in which it was not specifically intended or specially provided that that other party should so enjoy it. The content of the principle is that, in such a case, equity will not permit that other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for him so to do (cf. Atwood v. Maude [(1868) LR 3 Ch App at 374-375], and per Jessel M.R., Lyon v. Tweddell [(1881) 17 Ch D 529 at 531]).

224    I do not think that this principle has any application to the present circumstance. One difficulty lies in identifying the joint relationship upon which the bankruptcy trustees rely. Philip was not in a domestic relationship with the Twin Trust and I have difficulty in understanding what the joint project between the Twin Trust and Philip was. At a high level of generality one might say that Philip and the Twin Trust were engaged in furthering the economic interests of Philip's immediate family including Philip. But Philip's deliberate excision of himself as a beneficiary of the Twin Trust and his continuing contribution to the Twin Trust thereafter seems to me rather more consistent with the idea that he was deciding to benefit his family over his own interests; a proposition consistent with his role in the Kapp family as the breadwinner. Further, as I will explain later in these reasons, I am satisfied that Philip's purpose in using the Twin Trust was in large part to frustrate the claims of the Commissioner of Taxation. The very point was deny to Philip a beneficial interest in the monies he was earning. Thus, the joint relationship in fact enjoyed by Philip and the Twin Trust is inimical to the constructive trust the bankruptcy trustees now assert.

225    The bankruptcy trustees submitted that the terms of the deed under which the trustee of the Twin Trust had agreed with Philip that he would derive the rental income from the Main Beach property and pay the relevant outgoings had never been observed. I do not think that matters. What Philip sought to do by removing himself as a beneficiary and obtaining the benefit and burden of those covenants was to make clear that he had no interest in the Main Beach property whilst preserving to himself the right to derive income from it. That he did not ultimately choose to collect the income does not suggest to me that some joint project failed.

226    Even if that were wrong, Philip's interest as a beneficiary under the Twin Trust was as a discretionary beneficiary and, as such, was limited to a right to have the terms of the trust properly executed. In particular, it gave him no interest in any of the assets of the Twin Trust. Further, since Philip remained the appointor under the deed it has always remained open to him, at his discretion, to restore himself as a beneficiary.

227    Another problem with the submission concerns timing. Where one partner to a domestic relationship makes loan repayments on a home which is in the name of the other partner, the ending of that relationship may make it unconscionable for the latter to deny the financial contributions of the former. That, however, is not what happened in this case even if one were to assume that the relationship between Philip and the Twin Trust was, as the bankruptcy trustees submitted, relevantly analogous to a domestic relationship. On that assumption, the relationship ended on 1 December 2013 when Philip removed himself as a beneficiary which was before any of his contributions to the Twin Trust had been made. If the factual scenario in Baumgartner is changed so that the couple ended their domestic relationship prior to the making of the financial contributions by one partner it is evident that that partner's unconscionability argument would then make no sense. It makes no sense here either.

228    As such, the relationship between Philip and the Twin Trust is not the one suggested by the bankruptcy trustees and, even if it were, it did not end on 1 December 2013 and, even if it had, this was before Philip made his contributions. I therefore do not accept that any constructive trust in favour of Philip arose on this basis.

229    Had such a constructive trust been established, it would have been necessary for the bankruptcy trustees to trace the payments made by Philip or at his behest into the Twin Trust's bank accounts into the proceeds of sale of the Main Beach and Swan Bay properties. I deal with the question of tracing later in these reasons to conclude that the bankruptcy trustees did not meaningfully attempt this exercise. Had a constructive trust arisen, I would have refused to grant relief beyond a single payment made by Corrs to the Twin Trust of $151,250.01 which I am satisfied can be traced into the proceeds of sale for the Swan Bay property.

The two resulting trust claims

230    Again it is convenient to assume that Philip's money was used to fund some or all of the purchase of both properties. The bankruptcy trustees invoke the principle that where a property is purchased with moneys provided by person A and then placed in the name of person B, in the absence of evidence to the contrary, there is presumed to be a resulting trust in favour of the contributor: Calverley v Green (1984) 155 CLR 243 at 246 per Gibbs CJ, 255 per Mason and Brennan JJ and 266 per Deane J.

231    The difficulty the bankruptcy trustees face is that Philip's actions in removing himself as a beneficiary of the Twin Trust is evidence that he did not intend to maintain a beneficial interest in any funds of his that were used for the purchases. Philip's contributions to the Twin Trust were plainly directed at ensuring that he did not have a beneficial interest in those funds. Later in these reasons I deal with Philip's contention that he lent the funds to the Twin Trust but that it had now repaid him by meeting a number of his expenses. I reject that argument, concluding instead that Philip intermingled his affairs with those of the trust but intended by its use to achieve a measure of protection against his creditors, principally the Commissioner of Taxation. For present purposes, what is clear is that Philip's use of the trust was precisely intended not to leave with him any beneficial interest in the contributions he caused to be made to it.

232    The bankruptcy trustees pursued the resulting trust claim on a second basis (although they referred to it as a constructive trust). This basis was the principle in Black v S Freedman (1910) 12 CLR 105 (‘Black v S Freedman’). In that case, O'Connor J said at 110:

Where money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character. If he pays it over to another person, then it may be followed into that other person's hands. If, of course, that other person shows that it has come to him bonâ fide for valuable consideration, and without notice, it then may lose its character as trust money and cannot be recovered. But if it is handed over merely as a gift, it does not matter whether there is notice or not.

(See also at 108-109 per Griffith CJ and 110 per Barton J.)

233    Gordon and Edelman JJ described Black v S Freedman as an example of a resulting trust arising by operation of law where there is a transfer of a person's legal rights without their consent or knowledge: Bosanac v Commissioner of Taxation at [2022] HCA 34; 96 ALJR 976 at [94].

234    The bankruptcy trustees submitted that funds obtained by the Twin Trust were 'tainted by a fraud analogical to a theft'. The submission did not distinctly identify the person who was to be treated as being in an analogous position to the thief mentioned in Black v S Freedman. But it did identify the Twin Trust as a recipient of the funds and it did assert that the trust was Philip's alter ego. Assuming all that to be correct (without finding it to be so), it becomes necessary then to identify the person from whom Philip, in his capacity as a quasi-thief, stole the money. I have difficulty with the proposition that he stole it from himself. Although I am not altogether sure, I rather apprehended that the bankruptcy trustees submitted instead that the funds had been stolen from the Commissioner of Taxation if not in law then certainly in what might euphemistically be called its vibe. However, the relationship between the Commissioner and Philip was one of creditor and debtor and this submission can only succeed if one accepts, which I do not, that the Commissioner owns unpaid income tax in the hands of a taxpayer. This is not the case. I therefore do not accept that a resulting trust could arise on this basis either.

235    Thus I am unable to accept that there could be a resulting trust. Even if there could in principle be such a trust, the bankruptcy trustees failed to pursue a case of tracing and I would not have found such a trust to exist except in relation to the single payment of $151,250.01 to which I have referred.

Relief under ss 139D and 139E

236    By the time of their reply submissions the bankruptcy trustees’ claims under these provisions had been narrowed to a claim for payments which had been made to the Twin Trust by:

(a)    Corrs in return for Philip's services as a consultant; and

(b)    a litigation funding company that has been variously known as JustKapital Litigation Partners Ltd, JustKapital Ltd and LawFinance Ltd (and to which I will refer as 'JKL') in return for Philip's services as its executive director and as a consultant.

237    These provisions are contained in Division 4A of Part VI of the Act. Section 139A relevantly provides:

139A    Trustee may apply to Court

The trustee of a bankrupt’s estate may, at any time within 6 years after the date of the bankruptcy, apply to the Court for an order under this Division in relation to an entity (in this Division called the respondent entity).

238    The definition of 'entity' in s 5 is as follows:

entity means a natural person, company, partnership or trust.

239    Section 139D provides:

139D    Order relating to property of entity other than a natural person

(1)     Where, on an application under section 139A for an order in relation to a respondent entity other than a natural person, the Court is satisfied that:

(a)    the bankrupt supplied personal services to, or for or on behalf of, the respondent entity at a time or times, during the examinable period and before the end of the bankruptcy, when the bankrupt controlled the entity in relation to the supply of those services;

(b)     either:

(i)     the bankrupt received for those services no remuneration in money or other property; or

(ii)    the remuneration in money or other property that the bankrupt received for those services was substantially less in amount or value than a person supplying those services in similar circumstances might reasonably be expected to have received if the person had dealt with the entity at arm’s length in relation to the supply of those services;

(c)    during the examinable period, the entity acquired an estate in particular property as a direct or indirect result of, or of matters including, the supply by the bankrupt of those services;

(d)    the bankrupt used, or derived (whether directly or indirectly) a benefit from, the property at a time or times during the examinable period when the bankrupt controlled the entity in relation to the property; and

(e)     the entity still has an estate in the property;

subsections (2) and (3) have effect, whether or not the bankrupt has ever had an estate in the property.

(2)    The Court may, by order, vest in the applicant:

(a)    the entity’s estate in the whole, or in a specified part, of the property; or

(b)     a specified estate in the whole, or in a specified part, of the property, being an estate that could, by virtue of the entity’s estate in the property, be so vested by or on behalf of the entity.

(3)    The Court may make an order directing:

(a)    the execution of an instrument;

(b)    the production of documents of title; or

(c)     the doing of any other act or thing;

in order to give effect to an order under this section made on the application.

240    Section 139E provides:

139E    Order relating to net worth of entity other than a natural person

(1)    Where, on an application under section 139A for an order in relation to a respondent entity other than a natural person, the Court is satisfied that:

(a)    the bankrupt supplied personal services to, or for or on behalf of, the respondent entity at a time or times, during the examinable period and before the end of the bankruptcy, when the bankrupt controlled the entity in relation to the supply of those services;

(b)    either:

(i)    the bankrupt received for those services no remuneration in money or other property; or

(ii)    the remuneration in money or other property that the bankrupt received for those services was substantially less in amount or value than a person supplying those services in similar circumstances might reasonably be expected to have received if the person had dealt with the entity at arm’s length in relation to the supply of those services; and

(c)    the entity’s net worth at a particular time during the examinable period exceeded by a substantial amount what might reasonably be expected to have been the entity’s net worth at the last-mentioned time if those services had not been supplied;

subsection (2) has effect.

(2)    The Court may by order direct:

(a)    if the entity is a partnership—a partner or partners in the partnership; or

(b)    in any other case—the entity;

to pay to the applicant a specified amount not exceeding the amount referred to in paragraph (1)(c).

241    It is clear from ss 139D(2) and 139E(2) that the respondent entity is a necessary party to the proceeding brought under s 139A for those provisions contemplate that its property may by order be vested in the applicant or that it may be directed to pay an amount. I would not read those provisions as departing from the rules of procedural fairness with the consequence that the provisions must be read as affording the respondent entity a right to be heard prior to the making of such orders. The only way that can be achieved is if the respondent entity is made a party to the proceeding. Because 'entity' is defined in s 5 to include a trust, the statute contemplates an action under these provisions against a trust. Rather than read these provisions as departing from established principles of trust law I would interpret them to allow a claim against a trust by naming as the respondent entity the trustee for the time being of that trust. But subject only to that limitation, which is necessary since a trust cannot be sued as a respondent, the definition of a respondent entity as including a respondent trust entails that a trust is to be regarded as an entity for the purposes of ss 139D and 139E. This involves a departure from ordinary principles of trust law but one which appears to be sanctioned by s 5. It has the practical benefit of allowing the trust to be considered across time as an entity separate from its trustee for the time being.

242    Sections 139D and 139E only apply where the respondent entity is not a natural person. Since the Act contemplates that a trust is a respondent entity it would appear to contemplate the meaningfulness of the question of whether a trust is a natural person. Whilst I would ordinarily accept that a trust is not a person, s 5 gives it the personality of being a respondent entity against whom claims may be made. As such, it seems appropriate to proceed on the basis that for the purposes of ss 139D and 139E a trust is a person.

243    The next question is whether a trust is a natural person. Whilst I accept that a trust as a respondent entity can only be sued under ss 139D and 139E by joining as a respondent its present trustee to represent its interests, I do not think the nature of the person who is that trustee impacts on the question of whether the trust which that person represents is a natural person.

244    Thus in this case it is not relevant that the Twin Trust is presently represented by Philip as its most recent trustee. Having concluded that the Twin Trust is to be treated as a respondent entity for the purposes of ss 139D and 139E, it seems impossible to describe this fictional person as a natural person. Hence, I conclude that the Twin Trust is not a natural person and that ss 139D and 139E are capable of applying to it.

245    Before s 139D is enlivened its preconditions must be satisfied. These are set out in s 139D(1) and are dealt with below.

Section 139D(1)(a)

246    Section 139D(1)(a) requires the Court to be satisfied, first, that Philip supplied his personal services 'to, or for or on behalf of’ the Twin Trust and, second, that at the time that he did so he controlled the Twin Trust. Dealing with these in turn:

Provision of services to, or for or on behalf of the Twin Trust

1.    The Corrs consultancy agreement

247    Philip was a partner of Corrs until he resigned from that partnership on 30 June 2015. The next day the then trustee of the Twin Trust, Kappfam, entered into a consultancy agreement with Corrs in its capacity as trustee. Under the agreement Kappfam agreed to provide Philip's services to Corrs in return for an annual retainer payment of $500,000.00 which was to be paid by monthly instalments.

248    Whilst Kappfam was the trustee of the Twin Trust at the time it entered the agreement, it ceased to be the trustee on 1 October 2015 when it was replaced by Twin Investors. The bankruptcy trustees submitted that after the change in trustee, Kappfam held any benefits obtained under the consultancy agreement on a bare trust for the new trustee of the Twin Trust. I accept this submission. It is clear that Kappfam understood itself to be contracting with Corrs in its capacity as trustee and I therefore do not accept that, as between the Twin Trust and Kappfam, it had any beneficial entitlement to the benefits accruing to it under the agreement.

249    Thus, at all times under the consultancy agreement, Philip's services were provided to Corrs on behalf of the Twin Trust (the relevant respondent entity). This was inevitable for the short period during which Kappfam remained the trustee. After 1 October 2015, when it ceased to be the trustee, all of Philip's services were being provided by Kappfam on behalf of the Twin Trust (the relevant respondent entity). Had Kappfam incurred expenses in performing its duties under the agreement on behalf of the Twin Trust it would have been entitled to an indemnity out of the assets of the Twin Trust.

250    As such I accept that Philip's services were provided on behalf of the Twin Trust for the purposes of s 139D(1)(a).

2.    The JKL consultancy agreement

251    On 30 June 2016 JKL entered into an agreement with Kapp Consulting Pty Ltd (‘Kapp Consulting’) for Philip's consultancy services in exchange for $600,000.00 per annum plus superannuation and, apparently, GST: cl 18. Philip was also a party to this contract. Clauses 22-25 provided for discretionary benefits. The agreement had a commencement date of 1 January 2016 although Kapp Consulting was not in existence until 29 June 2016. Kapp Consulting was to provide Philip's services as a consultant and he was also to be an executive director of JKL: cll 2 and 3.

252    I do not accept that it can be said that Philip's services were being provided to, for or on behalf of the Twin Trust. His services were being provided to JKL for Kapp Consulting. Neither of these entities was the trustee of the Twin Trust. Thus I do not accept that s 139D(1)(a) is satisfied in relation to the work done for JKL by Philip on behalf of Kapp Consulting.

Philip's control of the Twin Trust

253    In the period between 1 July 2015 and 1 October 2015 the trustee of the Twin Trust was Kappfam. Philip had been a director of Kappfam until 1 February 2014 but Maryann was a director during this period. During her examination by the bankruptcy trustees she admitted that she acted under the guidance of Philip. I therefore accept that during this period Philip controlled the Twin Trust. Between 1 October 2015 and 4 March 2019 Philip was a director of Twin Investors, the then trustee. In addition, it is plain from the way that Philip has involved himself in this litigation that he controls the Twin Trust. Having once spoken with Maryann at a case management hearing, it is evident that she has nothing to do with the business affairs of the family and wishes to be as distant from them as is possible. Their two teenage boys may likewise be dismissed as plausible candidates for the control of the trust. The only other person left in the picture is Philip himself. This is consistent with the fact that Philip is now the trustee of the Twin Trust.

254    I therefore accept that so far as ss 139D(1)(a) and 139E(1)(a) are concerned, Philip controlled the Twin Trust in the period 1 July 2015 to 4 March 2019.

255    The requirements of s 139D(1)(a) are therefore satisfied.

Section 139D(1)(b)(i)

256    The requirements of this provision are satisfied if Philip was not paid for his services. Kappfam invoiced Corrs who then paid all of the various payments due into the Twin Trust's bank account with the Commonwealth Bank. As such, I am satisfied that Philip was not paid for his services and that this provision is satisfied.

Section 139D(1)(c)

257    This provision requires that the Twin Trust should have 'acquired an estate in particular property as a direct or indirect result of, or of matters including, the supply' by Philip of those services. All the payments invoiced by Kappfam were paid by Corrs into the Twin Trust's Commonwealth Bank account. As I will explain later in these reasons, some of those funds were subsequently used to service a loan on the Main Beach property and to fund the purchase of the Swan Bay property. I accept the bankruptcy trustees' submission that in that circumstance, the 'particular property' referred to in s 139D(1)(c) is these two properties and that it may be said therefore that the Twin Trust acquired an interest in them 'as a direct or indirect result of, or of matters including, the supply' by Philip of his services to Corrs. Section 139D(1)(c) is therefore satisfied.

Section 139D(1)(d)

258    This provision requires that Philip should have derived directly or indirectly a benefit as a direct or indirect result of the supply of his services to Corrs. Philip was not by this time a beneficiary of the Twin Trust. Even if he had been, the trust was discretionary in nature and his status as a beneficiary would not have afforded him any interest in the trust property. On the other hand, as I will explain later, I do accept that the Twin Trust used the funds it received from Corrs to service a loan on the Main Beach property and to acquire the Swan Bay property.

259    The bankruptcy trustees submitted that Philip obtained two benefits from the Main Beach property. The first of these was rental income due to Philip under his income unit. In another part of their case the bankruptcy trustees submitted that no rent had ever been paid under the income unit which I have accepted. Philip did however have a right to that income even if he did not exercise it. That right ceased on 30 June 2017 when the arrangement between the Twin Trust and Philip was terminated by a deed of termination of that date. However, until then Philip did have this right and I am satisfied that it was relevantly a benefit to him. The second basis was that Philip had an interest in the net proceeds of sale of Main Beach. The bankruptcy trustees did not provide any hint of why this might be so but, on reflection, it is probably a reference to the various constructive and resulting trusts they have advanced. I have rejected those claims. If the bankruptcy trustees had something else in mind they did not explain it and I cannot accept what I do not understand. In either case, the bankruptcy trustees have not shown that Philip derived a benefit from Main Beach because he has an interest in its proceeds of sale.

260    At [40] of the Twin Trust’s submissions it appeared to be accepted Philip had used Main Beach as a holiday home. I have not seen evidence to that effect. In that circumstance, I make no finding about this. It unnecessary, in any event, to do so because I accept that Philip derived a benefit from Main Beach by means of the income unit.

261    As to Swan Bay, Philip and his family used the property as a holiday home which is borne out by: (a) evidence from Maryann under examination that the home had been used as a holiday home; (b) transactions on Philip's credit card in places near Swan Bay which have the flavour of domestic purchases (for example, purchases from a butcher shop and a BP petrol station); (c) withdrawals by Philip of cash from ATMs in the same vicinity; and (d) frequent purchases by Maryann on her credit card from a nearby Woolworths. I would infer from this evidence that Philip did use the Swan Bay property as a holiday house, particularly during the January vacation and as a weekender. I draw that inference more comfortably where Philip did not give any evidence.

262    Despite the Twin Trust's submission that this use was de minimis (which I am here prepared to assume was intended to be in relation to Swan Bay), it was still a benefit which accrued to Philip indirectly from the payments made by Corrs to the Twin Trust. The value of this benefit is small and is most likely limited to the rental value of the Swan Bay property for the period in which it was used as a holiday home. Although the benefit is small, I do not accept it is de minimis and I therefore accept that s 139D(1)(d) is satisfied.

263    For completeness, the Twin Trust submitted that payments were made from the trust's bank accounts to Philip: see submissions dated 1 August 2021 at Schedule B. The bankruptcy trustees did not attempt to show for the purposes of s 139D(1)(d) that these payments were indirectly derived from the payments by Corrs. For example, they did not submit that the payment made by Corrs to the Twin Trust on 29 September 2016 of $151,250.01 was the source of funds for the payment Philip said was made to him by the Twin Trust on 10 October 2016.

Section 139D(1)(e)

264    For this provision to be satisfied the Twin Trust must still have an interest in 'the property'. The two properties have been sold and, as I have said, the net proceeds paid into solicitors' trust accounts pending the outcome of this litigation. The Twin Trust presently has a claim in equity on those funds as a beneficiary of the stakeholder arrangement under which they are being held. This is different property to the estates in fee simple in Swan Bay and Main Beach. One is an interest in a fund of money, the other an interest in land. That the former is derived entirely from the latter does not necessarily make them the same property.

265    However, the Twin Trust did not submit that I should conclude that the sale proceeds were different property to the parcels of land from which they were derived for the purposes of s 139D(1)(e). It would therefore be procedurally unfair on the bankruptcy trustees to conclude that s 139D(1)(e) has not been engaged since the bankruptcy trustees were not on notice that it was in issue. For the purposes of the present case I therefore proceed on the basis that s 139D(1)(e) has been satisfied.

Conclusion on s 139D(1)

266    The requirements of s 139D(1) are satisfied and the Court's powers in s 139D(2) are enlivened.

The exercise of the power in s 139D(2)

267    The power in s 139D(2) extends to making an order that part or all of 'the property' vest in the bankruptcy trustees. As I have noted, there was no dispute in this case that the sale proceeds were 'the property' for the purposes of s 139D(1)(e) and there is likewise no contention that the same is not true for the purposes of s 139D(2). It is not appropriate therefore to consider the correctness of that assumption. As such the power is broad enough to order that the whole of those proceeds vest in the trustees in bankruptcy. However, the bankruptcy trustees put their case on the basis that they were entitled to trace into the sale proceeds the monies paid to the Twin Trust by Corrs and JKL. Since s 139D(1) does not apply to the JKL consultancy agreement that aspect of the bankruptcy trustees' claim can be put aside. The question then is whether the payments made by Corrs can be traced into the proceeds of sale for the Swan Bay and Main Beach properties.

Tracing into the Main Beach sale proceeds

268    The purchase price for the Main Beach property was $600,000.00 and was funded in the following fashion:

(a)    Philip paid a 5% deposit of $30,000.00;

(b)    a loan of $60,000.00 was provided by the NAB;

(c)    a loan of $480,000.00 was provided by the NAB; and

(d)    $30,000.00 was paid by the Twin Trust.

269    At [39] of their submissions-in-chief the bankruptcy trustees submitted that the $30,000.00 balance for the purchase price of the Main Beach property was paid from the Twin Trust's bank account with the NAB 'using the Bankrupt's transferred funds'. No reference to any evidence was given. At [66.7] of Mr Aravanis's second affidavit he gave evidence that the $30,000.00 'originated from' funds transferred from Philip's own account with the NAB or trust distributions and partnership profit distributions made by Corrs. Accepting this evidence, it is apparent that no amount of the $30,000.00 was paid to the Twin Trust under the Corrs consulting agreement. Since that agreement is dated 1 July 2015 and the purchase of the Main Beach property settled on 16 December 2013 some may consider this unsurprising. I therefore find that none of the funds paid under the Corrs consulting agreement can be traced into the purchase of a property which occurred more than a year and a half before its inception.

270    The bankruptcy trustees also submitted that the Twin Trust had paid stamp duty and met loan repayments. The payment of stamp duty is irrelevant to the tracing exercise and in any event pre-dates the Corrs consultancy agreement. Insofar as the loan repayments are concerned, these are irrelevant insofar as they constitute interest but potentially relevant insofar as they constitute principal repayments. In order to make good the tracing claim it would be necessary to identify the repayments of principal, when they occurred and, to the extent that they were made by the Twin Trust, that its source of funds for doing so was money paid under the Corrs consulting agreement.

271    The bankruptcy trustees submitted that the $60,000.00 facility with the NAB had been repaid in full without identifying how or when this occurred. The statements for that loan reveal that it was paid off between 4 January 2014 and 7 January 2019 by a series of regular payments consisting of interest and principal. Mr Aravanis said that all of these repayments were made from the Twin Trust's account with the Commonwealth Bank which I accept.

272    The difficulty then becomes determining the amount of each repayment which represented principal and to show that each such portion of the repayments could be seen as having been made out of the payments made into the trust's Commonwealth Bank account by Corrs. To do this would require an examination of the 62 bank statements which are in evidence. The bankruptcy trustees did not attempt this task. I have considered whether I should conduct this examination myself but have concluded that I should not on procedural fairness grounds. The Twin Trust pointed out in its submissions that the bankruptcy trustees had not conducted the necessary tracing exercise on several occasions in terms which were clear, possibly strident. For example, in the Twin Trust's submissions of 14 August 2021 it was observed that the bankruptcy trustees 'had singularly failed to engage with, or even mention' the issue of tracing (at [42]) and at [36] it pointed out that 'no attempt has been made to analyse a possible tracing remedy'. The bankruptcy trustee were afforded, and availed themselves of, an opportunity to respond to that submission but beyond saying that tracing was available did not descend into the evidence at the level of granularity which their case necessarily entailed.

273    Given that procedural history, if I were now to do the bankruptcy trustees’ work for them and conduct a tracing exercise myself the effect would be that the Twin Trust would be denied the opportunity to respond to it. This would be procedurally unfair and I decline to do so. In that circumstance, I must conclude on the way in which the case has been run that the bankruptcy trustees have not shown that the repayment of the $60,000.00 loan can be traced to payments made by Corrs.

274    It follows that the bankruptcy trustees' claim under s 139D(2) fails in relation to the sale proceeds of the Main Beach property. It is either nonsensical because the sale occurred long before the payments or, in relation to the repayments totalling $60,000.00, because tracing was not attempted.

Tracing into the Swan Bay sale proceeds

275    The purchase price for the Swan Bay property was $415,000.00 and the purchase settled on 16 October 2015. The purchase was funded in the following fashion:

(a)    a deposit of $20,750.00 was paid by the Twin Trust between 16 and 18 March 2015; and

(b)    the balance of the purchase price, $394,847.97 was by paid by the Twin Trust on 14 October 2015.

276    It will be seen that there is an anomaly in that the sum of the deposit and the balance exceed the purchase price. This anomaly relates to an occupation licence and may be disregarded. It is evident that none of the deposit can be sourced to funds paid under the Corrs consultancy agreement which post-dated it. At the time of the payment of the $394,847.97 on 14 October 2015 there had been only one payment under the Corrs consulting agreement which was for $151,250.01 and was paid on 13 October 2015. Thus, the only available payment under the agreement which can be a candidate for tracing is that payment.

277    At the time that this amount was paid by Corrs to the Twin Trust the cash balance in its account with the Commonwealth Bank was $241,149.06. The payment increased this to $392,399.06. On the same day there was a further deposit of $8,000.00 which brought the balance to $400,399.06. This was immediately followed by a debit of the balance of the purchase price which was $394,847.97. At the time of that debit the payment by Corrs therefore represented $151,250.01/$400,399.06 of the contents of the account, i.e., 37.775%. I would therefore accept that a similar percentage may be traced into the payment of $394,847.97 which is $149,153.09. Expressed as a percentage of the purchase price of $415,000.00 it appears therefore that the Corrs payment constitutes 35.94% of the purchase price.

278    There were two further submissions made by the Twin Trust relevant to this sum. The first was that the extent of relief should be delimited by the extent of any benefit derived by Philip from the use of the Swan Bay property. Here the point was that it had only been used as a holiday home for some brief periods. The reference to the deriving of a benefit in s 139D(1)(d) is a jurisdictional prerequisite to the power under subsection (2) arising. The focus of the power is on the impugned estate. Whilst I accept that it is open to exercise that power so that only part of the estate is vested I do not think ordinarily that any vesting order should be limited to the benefit mentioned in s 139D(1)(d).

279    The second was that the monies advanced to the Twin Trust at Philip's behest were part of a loan arrangement between them and that this loan had been subsequently repaid. If there was a running loan arrangement which had been repaid then I would accept the Twin Trust's submission that the sum of $151,250.01 ought not to be recoverable under s 139D(2). To proceed otherwise would lead to double enrichment of the bankrupt estate for it would have the benefit of the $151,250.01 repaid to it (on this hypothesis) and the benefit of receiving it a second time under s 139D(2).

280    The evidence for the loan was contained in Exhibit 1 which was an affidavit of Maryann dated 6 August 2019. In this affidavit Maryann explained that she had been asked by the bankruptcy trustees to identify the source of funds for the purchase of the Swan Bay property. She had been unable to identify any documents beyond bank statements but she had been able to obtain a sworn affidavit of Philip which she exhibited to her affidavit as Exhibit MK-1. In this affidavit Philip said at [4] that in October 2015 he had advanced $431,325.00 to the Twin Trust to fund the purchase price of Swan Bay together with stamp duty and other acquisition expenses. The loan was made on the condition that the Twin Trust should repay it when it was able to do so. At [7] he said that the Twin Trust had, in fact, repaid the advance by paying various amounts on his behalf. He annexed a schedule in which he pointed to several payments made by the Twin Trust for his benefit including, for example, the payment of some of Philip's income tax liabilities, travel expenses and school fees.

281    I am not inclined to place any weight on this evidence except to the extent that it brings to light various debits and credits on the Twin Trust bank account. In particular, I do not accept that there was a loan agreement between Philip and the Twin Trust. On the other hand, I do accept that Philip used the Twin Trust bank accounts essentially as his own. Payments were made into it at Philip's behest reflecting monies earnt from his labours or from the sale of his assets. Subsequently, Philip also used the Twin Trust's money to meet some of his and his family's expenses. The inference I would draw from these inflows and outflows is not that there was a running loan balance between Philip and the Twin Trust but, rather, an intermingling of his affairs with its.

282    My impression is that Philip used the Twin Trust bank accounts largely as his own but with a view to protecting his family assets from his creditors, principally the Commissioner of Taxation. Philip appears to have been disinclined to pay income tax as opposed to being unable to do so. At the time that the Twin Trust was established his outstanding liability to the Commissioner was $1,964,614.81 and it had grown to $1,980,696.48 when the purchase of Main Beach took place on 16 December 2013. By the time that Kappfam entered into the Corrs consultancy agreement his tax debt was $2,426,598.63 and when the Twin Trust purchased the Swan Bay property it had grown to $2,483,145.07.

283    As a man earning the substantial remuneration associated with having been for many years a mergers and acquisitions partner of more than one large Sydney law firm, the obvious although perhaps distasteful inference is that Philip preferred putting his money, tax free, into his family trust over meeting his civic obligations under the Income Tax Assessment Act 1936 (Cth). It is therefore open to infer that Philip's purpose in using the Twin Trust was to avoid paying income tax. It is useful to assume that the drawing of that inference would involve a finding of some gravity against Philip. On that basis, one must therefore reflect upon the necessity for the Court properly to be satisfied that the inference should be drawn on the evidence before it, given the gravity of the finding. Duly bearing that in mind, I nevertheless draw the inference. The failure of Philip to give evidence before me more comfortably allows that inference to be drawn.

284    Consequently, I accept that the bankruptcy trustees are entitled to an order under s 139D(2) vesting 35.94% of the Swan Bay sale proceeds in them. It is then convenient to turn to the case under s 139E.

Section 139E

285    The text of s 139E is set out above. For the reasons I have given in relation to s 139D, I accept that s 139E(1) can apply to the Twin Trust as a respondent entity even though its trustee is presently a natural person. Dealing with the requirements of s 139E(1)(a)-(c):

Section 139E(1)(a)

286    This is relevantly in identical terms to s 139D(1)(a) and for the same reasons is satisfied in relation to the Corrs consulting agreement although not the JKL consulting agreement.

Section 139E(1)(b)(i)

287    This is relevantly in identical terms to s 139D(1)(b)(i) and for the same reasons is satisfied.

Section 139E(1)(c)

288    Unlike s 139D(1)(c), this provision is not concerned to identify an estate in particular property. Rather, its language requires one to assess 'at a particular time' whether the Twin Trust's net worth exceeded by a substantial amount what it might reasonably be expected to have been if Philip's services had not been provided on its behalf. 'Net worth' in relation to a trust is defined in s 5:

net worth, in relation to an entity, in relation to a time, means:

(a)    if the entity is a trust and the total value of the trust property as at that time exceeds the total of the amounts of the trustee’s liabilities as at that time (other than liabilities constituted by the rights of persons as beneficiaries under the trust)—the amount of the excess;

(b)    if the entity is not a trust and the total value of the entity’s assets as at that time exceeds the total of the amounts of the entity’s liabilities as at that time—the amount of the excess; or

(c)    in any other case—a nil amount.

289    As I have explained in relation to s 139D(2), only $151,250.01 paid under the Corrs consulting agreement went on to find its way into the Swan Bay purchase monies and this single payment occurred on 13 October 2015. I have rejected the Twin Trust's submission that this sum (and others) was lent to the Twin Trust by Philip. Had I accepted that submission it would have entailed that s 139E(1)(c) was not satisfied for the advance of a loan to the Twin Trust would have had no impact on its balance sheet (the credit entry for the loan proceeds being precisely matched by the debit constituted by the obligation to repay).

290    Returning to the question at hand, the particular time referred to in s 139E(1)(c), in this case it is 13 October 2015. Despite the deficit of explanation in the bankruptcy trustees’ submissions, having regard to the balance in the Twin Trust's bank account at that time, I accept that the payment that day of $151,250.01 did increase the net worth of the Twin Trust by a substantial amount compared to what it might reasonably be expected to have otherwise been. Consequently, I accept that s 139E(1)(c) is satisfied.

The exercise of the power in s 139E(2)

291    The power in s 139E(2) extends to ordering the Twin Trust (as a respondent entity) to pay, by its present trustee, the bankruptcy trustees an amount up to the amount referred to in s 139E(1)(c). That amount is the amount by which the payment by Corrs increased the net worth of the Twin Trust at the time it was made. In this case, that amount is $151,250.01. It is open to order the Twin Trust, by its trustee, to pay to the bankruptcy trustees that amount. Under s 139D(2) I have concluded that the bankruptcy trustees are entitled to an order vesting 35.94% of the sale proceeds of Swan Bay in them. To the extent that this is less than $151,250.01 I will order the Twin Trust, by its trustee, to pay to the bankruptcy trustees the difference out of the Swan Bay proceeds of sale. If such a sum exists, the bankruptcy trustees should have a charge over the sale proceeds to protect their entitlement.

Sections 120 and 121

292    Sections 120 and 121 provide:

120    Undervalued transactions

Transfers that are void against trustee

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

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

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

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

Exemptions

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

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

(b)    a transfer to meet all or part of a liability under a maintenance agreement or a maintenance order; or

(c)    a transfer of property under a debt agreement; or

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

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

(a)    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; or

(b)    in any other case:

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

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

Rebuttable presumption of insolvency

(3A)    For the purposes of subsection (3), a rebuttable presumption arises that the transferor was 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

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

What is not consideration

(5)    For the purposes of subsections (1) and (4), 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 or the Family Court Act 1997 (WA).

Protection of successors in title

(6)    This section does not affect the rights of a person who acquired property from the transferee in good faith and by giving consideration that was at least as valuable as the market value of the property.

Meaning of transfer of property and market value

(7)    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.

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 or the Family Court Act 1997 (WA).

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.

293    Both provisions have a requirement that there be a transfer of property from Philip to another person. The bankruptcy trustees claim relief under both provisions in respect of the following payments:

(a)    the payments made by Corrs to the Twin Trust under the Corrs consultancy agreement;

(b)    the payments made by JKL to the Twin Trust under the JKL consultancy agreement;

(c)    a collection of payments made to the Twin Trust by various persons including Philip and the following entities: JustKapital Litigation Pty Ltd, Livetiles Ltd (formerly known as Modun Resources Ltd) (‘Modun’) and Rhipe Ltd (formerly known as Rhype Limited) (‘Rhype’).

294    The bankruptcy trustees' ultimate submission about these payments was that their entitlement to them 'obviously creates an entitlement on the part of the Trustees to trace those moneys into their final location, which is the Swan Bay property Sale Proceeds and the Main Beach property': Reply Submissions at [68]. Thus, to the extent that the bankruptcy trustees fail in their efforts to trace into the sale proceeds, their claims for relief premised on the voidness arising from ss 120 and 121 lack any utility and are meaningless.

295    I will deal with this aspect of the bankruptcy trustees’ claim as follows. Firstly, I will identify the payments which the bankruptcy trustees identify as void transactions. Secondly, in relation to those transactions I will determine whether either of ss 120 or 121 is engaged so that they are to be treated as void. Thirdly, I will consider the bankruptcy trustees' efforts to trace into the sale proceeds of the Main Beach and Swan Bay properties.

The Voidable Transactions

The Corrs consultancy agreement

296    Under this agreement Kappfam, in its capacity as the trustee of the Twin Trust or subsequently in its capacity as a bare trustee for the trustee of the Twin Trust, was obliged to provide Philip's services to Corrs in return for certain payments of money. Philip's services were provided as required by the agreement and the sums of money were paid.

297    Such an arrangement appears to involve no transfer of property from Philip to the trustee of the Twin Trust. The bankruptcy trustees advanced three arguments as to why that conclusion should not be reached. First, they submitted that Philip had divested himself of the right to sue for unpaid wages (submissions-in-chief at [87]). I do not agree. He had no such right of which he could divest himself. Immediately before the consultancy agreement was entered into Philip had no right to sue for unpaid wages. This was because he was not employed by Corrs and had done no work as their employee. Upon entry into the consultancy agreement, Philip did not become an employee and he did not have any contractual rights against Corrs. One reason for this is that he was not a party to the agreement. Consequently, the entry of Kappfam into the consultancy agreement could not have had the effect of divesting him of that right which did not exist either before or after the date of the agreement.

298    In their reply submissions, the bankruptcy trustees took a different tack and advanced a second form of the argument. They noted that the definition of 'property' in s 5 was sufficiently broad to extend to future choses in action which I accept. They then submitted that the transfer of property which had occurred was the transfer of money which was otherwise payable to Philip by a person which the submission did not identify. However, the submission did say that what 'was transferred was the entitlement of the Bankrupt to be remunerated for his services directly'. It is implicit in that submission that the transfer was from Philip to Kappfam as trustee for the Twin Trust. I do not accept that such a transfer took place. On the bankruptcy trustees' submission, one must identify a future chose in action which Philip had which was transferred to Kappfam. The future chose in action can only be Philip's contractual rights against Corrs to be paid for his work. That being so it becomes necessary to identify how that future chose in action was transferred to Kappfam. I am unable to discern how this could be so.

299    Thirdly, the bankruptcy trustees submitted that their second submission was 'consistent' with s 120(7)(b). I do not think that it is. However, I do accept that s 120(7)(b) does assist the bankruptcy trustees and, indeed, it would appear to be their best point. It deems there to be a transfer of property where a person does something which results in another person becoming the owner of property that did not previously exist. Here the property which did not previously exist was Kappfam's right to be paid for Philip's services. Section 120(1) still requires that transfer to have been made by Philip to Kappfam but that requirement must be adjusted so that it comports with the deeming provision in s 120(7)(b). That is to say, whatever its meaning it must be sufficiently broad to encompass a situation where a person causes another person to become the owner of property which did not previously exist. Whatever the boundaries of that concept might be, it seems to me to encompass a situation where a person causes the remuneration for his personal services to be paid to a corporate entity. I therefore accept that Kappfam's entry into the consultancy agreement did involve a transfer of Philip's property for the purposes of s 120.

300    A similar deeming provision appears in s 121(9)(b) and operates in the same way. I am therefore satisfied that both provisions are, in principle, capable of operating in the manner suggested by the bankruptcy trustees.

301    The amounts paid under the Corrs consulting agreement for Philip's services across the period totalled $1,210,777.07. Subject to the other requirements of s 120 being satisfied, the bankruptcy trustees are entitled to treat the Corrs consulting agreement as conferring the right to be paid by Corrs on Philip. On that view, the payments made by Corrs to the Twin Trust would be treated as payments made by Philip to the Twin Trust.

The JKL consultancy agreement

302    I have set out a brief summary of this agreement earlier in these reasons.

303    At [86(b)] of their submissions-in-chief, the bankruptcy trustees identify the amount paid by JKL to the Twin Trust under this agreement, and therefore captured by ss 120 and 121, as being $2,109,076.39. No reference to any evidence is provided. At [86(c)] of the same submissions, the bankruptcy trustees submit that $2,409,076.30 paid to the Twin Trust by LawFinance Limited is also captured by ss 120 and 121. As I have explained earlier in these reasons, LawFinance Limited is the same entity as that which the bankruptcy trustees refer to as JKL throughout their submissions. It follows from this, and is also apparent from the similarity of the figures claimed, that the bankruptcy trustees’ submissions double-count $2,109,076.39 of the payments made under the JKL consultancy agreement.

304    The bankruptcy trustees’ submissions did not explain either of the amounts claimed but at [86(c)] I was referred to fn 88 which in turn directed attention to Mr Aravanis's second affidavit at [82.1], [82.4.1]-[82.4.4], [82.5] and [82.6], each of which evidence the payments described below.

(a)    At [82.1] Mr Aravanis gives evidence that $1,319,076.39 was paid into the Twin Trust’s bank account by JKL pursuant to invoices issued by Kapp Consulting.

(b)    At [82.4] Mr Aravanis gives evidence that $550,000.00 was paid by JKL pursuant to an invoice issue by Kappfam as follows:

(i)    at [82.4.1], $200,000.00 into the Twin Trust’s bank account on 9 March 2016;

(ii)    at [82.4.2], $300,000.00 in the form of 1.5m shares in JKL with an issue price of $0.20 per share issued to Twin Investors;

(iii)    at [82.4.3], $20,000.00 into the Twin Trust’s bank account with the NAB on 29 June 2017; and

(iv)    at [82.4.4], $30,000.00 into the Twin Trust’s bank account on 29 June 2017.

(c)    At [82.5] Mr Aravanis gives evidence of a payment of $100,000.00 by JKL to the Twin Trust on 7 September 2017.

(d)    At [82.6] Mr Aravanis gives evidence of payment of $440,000.00 by JKL to the Twin Trust on 13 December 2017. This payment was made under a settlement deed between JKL, Philip and Lucerne Australia Pty Ltd.

305    The sum of these payments, which I deal with in turn below, is $2,409,076.39. The discrepancy between this and the alternate figure claimed by the bankruptcy trustees I suspect can be explained by a failure to account for the $300,000.00 of shares issued by JKL to Twin Investors.

306    For the same reasons I have given in relation to the Corrs consultancy agreement, I am satisfied that the payments identified by Mr Aravanis at [82.1] involved a transfer of Philip's property to Kapp Consulting under ss 120 and 121. Evidence from the Chief Financial Officer of JKL indicates that the payment at [82.5] was part-payment of a ‘bonus’ invoiced by Kapp Consulting from which I infer that this was also paid under the consultancy agreement. It too, therefore, involved a transfer of Philip’s property.

307    The payment of $440,000.00 at [82.6] was made in settlement of certain claims of Philip’s including those relating to his entitlement to be remunerated under the consultancy agreement. Under cl 8 of the settlement deed, JKL was obliged to pay Philip $400,000.00. For the same reasons I have given above, this amount of the payment involved a transfer of Philip’s property. I would infer that the remaining $40,000.00 paid to Philip by JKL was for the payment of goods and services tax. As such, the payment to him of this amount was not for his services but rather to put him in funds to meet the tax liability that the A New Tax System (Goods and Services Tax) Act 1999 (Cth) imposed on him on receipt of remuneration connected to the provision of his services. Nevertheless, it is a payment to him and the fact that it was precisely balanced by a later obligation to pay tax does not alter the fact that the $40,000 was beneficially his. Hence, this portion of the payment also involved a transfer of Philip’s property under ss 120 and 121.

308    In relation to the payments at [82.4], I would infer that the issue of the invoice by Kappfam constituted a direction by Kapp Consulting, the entity with the right to be paid under the JKL consultancy agreement, that payment be made to Kappfam. Hence, the payments by JKL to Kappfam operated as a discharge of Kapp Consulting’s entitlement to be paid and therefore a payment to it under the consultancy agreement: see Commissioner of Taxation v Rozman [2010] FCA 324; 186 FCR 1 at [19]-[24]. It follows that for the reasons I have given in relation to the Corrs consulting agreement the payments at [82.4] involved a transfer of Philip’s property.

309    As such, I am satisfied that JKL paid amounts totalling $2,409,076.39 to the Twin Trust under the consultancy agreement across the period 1 January 2016 to 31 December 2017. For largely the same reasons I have given in relation to the Corrs consulting agreement I accept that if s 120 is otherwise satisfied, the payments made by JKL to the Twin Trust should be treated as payments made by Philip to the Twin Trust.

The remaining payments

310    These payments are not connected by any common theme except that they were all made between 1 November 2013 and 4 March 2019. Dealing with them in turn:

1.    Payments made by Philip or at his direction totalling $614,784.32

311    The bankruptcy trustees did not expand on this in their written submissions but did refer me at footnote 87 to Mr Aravanis's second affidavit at [93], [101] and [102]. Dealing with each:

(a)    At [93] Mr Aravanis gives evidence that on 3 November 2017 Philip sold 1,000,000 shares in Modun for $260,873.18 which proceeds were paid into the Twin Trust's account with the NAB. I accept that this involved a transfer of Philip's property to the Twin Trust.

(b)    At [101] Mr Aravanis gives evidence that on 21 November 2014 Philip sold shares in an entity called Rhype for $99,359.89 which proceeds were paid into the Twin Trust's account with the Commonwealth Bank. I accept that this involved a transfer of Philip's property to the Twin Trust.

(c)    At [101] Mr Aravanis gives evidence that Philip sold another parcel of shares in Rhype for $147,184.77 on 12 November 2014 and that, while this was initially paid into Philip's own bank account, subsequently on 25 November 2014 $83,000.00 of this amount was paid into the Twin Trust’s account with the Commonwealth Bank. As such, I accept that this involved a transfer of Philip’s property to the Twin Trust but only to the extent of $83,000.00.

(d)    At [102] Mr Aravanis gives evidence that Philip sold another parcel of shares in Rhype on 3 November 2017 for $171,551.25 which was paid into the Twin Trust's account with the NAB. I accept that this involved a transfer of Philip's property to the Twin Trust.

312    I therefore accept that the bankruptcy trustees have proven transfers of Philip's property to the Twin Trust of $260,873.18 (on 3 November 2017), $99,359.89 (on 21 November 2014), $83,000.00 (on 25 November 2014) and $171,551.25 (on 3 November 2017).

2.    Payment from JustKapital Litigation Pty Ltd of $275,000.00

313    The bankruptcy trustees referred me to footnote 89 of their written submissions-in-chief which disclosed that they relied on Mr Aravanis's second affidavit at [77]. This paragraph says that JustKapital Litigation Pty Ltd paid $275,000.00 into the Twin Trust's bank account for services rendered by Philip to JustKapital Litigation Pty Ltd on 30 April 2015. If accepted, that evidence would suggest that this $275,000.00 belonged to Philip. The Twin Trust did not submit that the $275,000.00 did not belong to Philip. I therefore accept this evidence that this payment involved a transfer of Philip's property to the Twin Trust.

3.    Payments from Modun totalling $146,332.64

314    Here the bankruptcy trustees referred me to paragraphs [88.1], [88.2], [91.1], [91.2] and [92] of Mr Aravanis's second affidavit. They did not refer me to [87] which makes clear that Philip was retained by Modun as a non-executive director with a salary and the possibility of a bonus. Dealing with each in turn:

(a)    Mr Aravanis gives evidence at [88.1] that $4,166.55 was paid to the Twin Trust bank account for Philip's services on 29 June 2015. In fact, recourse to the Twin Trust’s bank statements shows that $4,166.66 was paid. I accept that this involved a transfer of Philip's property to the Twin Trust.

(b)    Mr Aravanis gives evidence at [88.1] that $37,500.00 was paid to the Twin Trust bank account as salary on 27 August 2015. I accept that this involved a transfer of Philip's property to the Twin Trust.

(c)    At [88.2] Mr Aravanis gives evidence that $88,000.00 was paid by Modun for 'share based payments' but that he is unable 'to identify where this payment was made'. Since I do not know who received these funds it is not possible to determine whether the payment involved a transfer of Philip's property to the Twin Trust.

(d)    At [91.1] and [91.2] Mr Aravanis gives evidence that Modun paid Philip $6,250.00 in fees and $12,500.00 in termination benefits ‘during the period’ between 1 July 2015 and 30 June 2016. At [92] Mr Aravanis says these amounts are inclusive of superannuation but that he understands they were paid exclusive of superannuation by Modun on 20 May 2015 in a payment of $16,666.64 to the Twin Trust. I do not understand the basis upon which Mr Aravanis has formed this view and am therefore unable to assess its correctness. I therefore do not find this proved.

315    I therefore accept that the bankruptcy trustees have proved that the payments by Modun of $4,165.66 (on 29 June 2015) and $37,500.00 (on 27 August 2015) involved transfers of Philip's property to the Twin Trust.

4.    Payments from Rhype totalling $53,646.24

316    Mr Aravanis gives evidence at [98] of his second affidavit that Rhype paid amounts of $42,279.58 and $11,366.66 into a cash manager account in the name of Kappfam. He does not explain what this was for. At [96]-[97] he gives evidence of Philip’s entitlements to certain sums but these do not appear to be the same as the sums referred to in [98]. As such, I do not understand what Mr Aravanis is saying. I am not satisfied that the payments referred to at [98] involved a transfer of Philip's property.

Conclusion on the remaining payments

317    I accept that some, but not all, of the remaining payments involved transfers of Philip's property to the Twin Trust. Turning then to ss 120 and 121:

Section 120

318    This provision will be enlivened if the transfer took place in the period beginning five years before the date of the bankruptcy and the transferee gave no consideration for the transfer. I am satisfied that this is the case for each of the payments that involved a transfer of Philip's property. I include in that the payments made under the Corrs and JKL consulting agreements. Philip became bankrupt on 23 April 2018 and each of the transfers occurred in the five years prior to that date. There is no evidence that the Twin Trust gave any consideration for the transfers. Although the Twin Trust submitted that the payments were in the nature of loans to the Twin Trust, I have rejected that proposition above.

319    The effect of this is that s 120 renders each transfer void against the bankruptcy trustees. What the bankruptcy trustees wish to do with that fact is less clear. In their submissions-in-chief, they submitted at [2] that they wanted 'general relief' under s 120. However, it is not clear to me what that means. At [20(c)] of their supplementary submissions they claimed the sum of $2,109,076.39 under s 120. At [80] of their reply submissions they developed a single paragraph submission which I take to be a claim to tracing.

320    The question then becomes whether the individual payments can be traced into the Swan Bay or Main Beach properties and therefore their proceeds of sale.

Swan Bay

321    I have accepted that the following payments involved transfers of Philip's property to the Twin Trust:

322    The Swan Bay purchase price, deposit aside, was paid on 14 October 2015. I do not accept that payments made after that date can be traced into the purchase price since it had by then been paid. Therefore the tracing claim fails for (f) and (g).

323    As to (h), the Corrs consulting agreement was dated 1 July 2015 and all the payments made under it occurred from and after October 2015. As I have explained above in relation to s 139D(2) one of those payments of $151,250.01 was made immediately prior to the settlement and may be traced into the sale proceeds of Swan Bay. The balance all occurred after the purchase and cannot be traced into the purchase of a property which they post-date.

324    As to (i), the same problem afflicts the payments made under the JKL consulting agreement. These did not begin until after 30 June 2016 when the JKL consultancy agreement was entered into which was well after the completion of the purchase of Swan Bay. It is therefore not possible for these payments to be traced into the proceeds of sale for Swan Bay.

325    I do not accept that (a) or (b) may be traced either. Following the deposit of $99,359.89 on 21 November 2014 (by means of two separate deposits) and $83,000.00 on 25 November 2014, the Twin Trust's account with the Commonwealth Bank fluctuated with substantial deposits and withdrawals. These fluctuations included being in overdraft on 4 March 2015. That debit entry makes tracing of any sum prior to it impossible. I therefore do not find that the sum in either (a) or (b) may be traced.

326    Following the deposit of $275,000.00 on 30 April 2015 the bankruptcy trustees say that amounts totalling $567,533.30 were deposited into the Twin Trust's account which I am prepared to accept. There were also, however, a number of debits across that period. In May 2015 the debits totalled $34,028.67, in June $69,547.83, in July $44,308.68, in August $5,273.15 and in September $31,667.95. The bankruptcy trustees’ efforts at tracing did not involve any analysis of the impact of these debit entries.

327    Dealing with the payment in (c), in the absence of any analysis of the debits and credits on the account after 30 April 2015, I am unable to say how much of this amount ended up in the balance of the purchase price on 14 October 2015. It is likely that some of it did, however this is a matter of impression rather than analysis and impression is not proof.

328    As to the payment in (d), this was exceeded by the debits in June as was most of the payment in (e). The bankruptcy trustees did not make any submissions as to the priority in which a credit was to be consumed by a subsequent debit (e.g., first in, first out, in accordance with the presumption in Devaynes v Noble (1816) 1 Mer 529; 35 ER 767, or some alternative approach such as first in, last out). In the absence of any attempt at tracing, it is not the Court's role to do the bankruptcy trustees' work for them.

329    I thus conclude that the bankruptcy trustees have failed to demonstrate, and certainly to explain in any meaningful way, how their tracing case works. I therefore reject it. They have failed to prove an entitlement to trace into the Swan Bay proceeds beyond the single payment of $151,250.01 by Corrs. In relation to that payment I would grant the bankruptcy trustees the same relief I would give them under s 139D(2).

Main Beach

330    The same payments are involved. Since the Main Beach purchase was settled in December 2013, it predates any of the payments and it is impossible that any of them may be traced into the Main Beach proceeds. There remains the question of payments of principal in relation to Main Beach under the NAB facility for $60,000.00. As I have explained above, I do accept that over a period of about 5 years this loan was repaid in full. I have also explained that the bankruptcy trustees did not attempt a tracing exercise with respect to this sum. It is therefore not shown that the payments above may be traced into it. The bankruptcy trustees are therefore not entitled to a remedy under s 120 in relation to the Main Beach proceeds of sale.

Section 121

331    The tracing problem with s 121 is the same as with s 120. Therefore the only payment to be considered is the single payment of $151,250.01 which may be traced into the Swan Bay property. Section 121 will be engaged if Kappfam's entry into the Corrs agreement was made with either of the main purposes identified in s 121(1)(b)(i)-(ii). Section 121(2) deems that main purpose to be present in certain circumstances but it is clear that the proof of a bankrupt's main purpose is not limited to the deeming provision: s 121(3).

332    I have already concluded when considering s 139D(2) that Philip's purpose in using the bank accounts of the Twin Trust was to frustrate the claims of the Commissioner of Taxation. By 1 July 2015 Philip had every reason to think that he would eventually be bankrupted by the Commissioner of Taxation. I have no hesitation in inferring that his main purpose in making Kappfam, as trustee of the Twin Trust, the contracting party with Corrs was the furtherance of his aspiration to prevent any of his earnings ever falling into the hands of the Commissioner of Taxation. I therefore find that his main purpose was to prevent the payments under the Corrs consulting agreement being available to his creditors (s 121(1)(b)(i)) and, if that was not ultimately possible, at least to hinder or delay the process of making the payments available to his creditors (s 121(1)(b)(ii)). Thus I accept that the bankruptcy trustees are entitled to relief under s 121 in respect of that payment. They should have the same remedy as they have in respect of that sum under s 139D(2) and s 120.

333    It is not necessary in that circumstance to consider whether the deeming provision in s 121(2) was enlivened. Had it been necessary to consider the question of Philip's solvency, I would not have accepted Mr Aravanis's opinion that Philip was insolvent from 29 November 2006. Philip was in receipt of substantial remuneration at that time. To form a view on solvency one would need to know a great deal more about Philip’s financial position on 29 November 2006 than the bankruptcy trustees have undertaken to prove in this case. This would include understanding his partnership income across the period, his various investments and his capacity to borrow money.

Section 37A of the Conveyancing Act

334    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.

335    For the reasons I have given in relation to ss 120 and 121 I would reject the bankruptcy trustees' claims under this provision except in relation to the single payment of $151,250.01 from Corrs which may be traced into the sale proceeds of Swan Bay.

Residuary matters

336    There are four residuary matters. Firstly, the bankruptcy trustees submitted that the Corrs and JKL consulting agreements should be set aside. I do not see what purpose that would serve and there would appear to be procedural problems in doing so without the parties to the agreement being joined, in particular, Corrs and JKL.

337    Secondly, the bankruptcy trustees also sought the taking of accounts in relation to the Twin Trust as between it and Philip. I am not sure that this would be useful. The assets of the trust have been liquidated and the bankruptcy trustees have sought to demonstrate their entitlement to the proceeds. All of the bank statements were in evidence in this proceeding and it is clear that Mr Aravanis has been through all of them in detail even if the submissions made on his behalf largely steered clear of them. I do not think that any more of the creditors' money should now be spent on this exercise unless there is a real prospect of it resulting in a return to creditors. I am not persuaded that the taking of accounts would achieve that outcome.

338    Thirdly, there is on foot an application to restore one of the former trustees, Twin Investors, to the register of corporations. Whilst the Main Beach property was registered in its name, there was some utility in this as it would have facilitated its sale. However, it has since been sold and reinstatement is no longer necessary.

339    Fourthly, the bankruptcy trustees sought orders appointing them as receivers so as to sell the Main Beach property. That, too, is no longer necessary.

Conclusion

340    The bankruptcy trustees are entitled to orders under s 139D(2), s 139E(2) and relief to give effect to my conclusions relating to s 120 and s 121 as outlined above. Although the bankruptcy trustees have had some success they have failed on most of their claims. The Twin Trust was clearly correct when it submitted that the bankruptcy trustees had failed to engage in the tracing exercise that their claim on the sale proceeds self-evidently entailed. The parties should therefore bear their own costs. I would make the following orders:

(1)    A declaration that the Applicants are entitled to 35.94% of the proceeds of sale of the Swan Bay property.

(2)    Mr Kapp, in his capacity as the trustee of the Twin Trust, pay to the Applicants out of the proceeds of sale of the Swan Bay property and, if necessary, the Main Beach property any shortfall between that 35.94% share and the sum of $151,250.01.

(3)    The Applicants' entitlement under Order 2 be secured by a charge over the proceeds of sale of the Swan Bay and Main Beach properties.

(4)    The Applicants' proceeding be otherwise dismissed.

(5)    Each party pay their own costs.

(6)    The First Respondent be removed as a party to the proceeding.

(7)    The name of the Third Respondent be changed to ‘Philip James Kapp, as trustee of the Twin Trust’.

Associate:

Dated:    28 June 2023