Federal Court of Australia

Kirk as trustee of the Property of Smith (a Bankrupt) v Smith [2024] FCA 240

ORDERS

THE COURT ORDERS THAT:

1.    The parties liaise and endeavour to agree on draft dispositive orders giving effect to the findings in this judgment referable to the Originating Application filed on 15 April 2021, the Amended Statement of Claim filed on 15 October 2021, and the Statement of Cross-Claim filed on 23 November 2021 (Draft Agreed Orders).

2.    Draft Agreed Orders be provided to the Chambers of Justice Collier by 4.00pm on 5 April 2024.

3.    In the event that the parties cannot reach agreement in respect of Draft Agreed Orders, the matter be listed for case management before Justice Collier at 9.30am on 10 April 2024.

4.    Costs be reserved.

5.    There be liberty to apply.

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

REASONS FOR JUDGMENT

COLLIER J:

1    The proceeding currently before the Court constitutes three related proceedings arising from the bankruptcy of Mr Richard John Smith, and declarations sought by his Trustee in Bankruptcy (Trustee), Mr Darryl Edward Kirk, referable to alleged transfers of property by Mr Smith to his wife Mrs Glenys Smith which were, in turn, allegedly void as against the Trustee. As originally commenced, the proceedings in the Federal Court were as follows:

(1)    QUD117/2021, commenced by the filing of an originating application on 15 April 2021 by Mr Kirk. The first respondent is Mrs Smith. The second respondent is the Official Receiver.

(2)    QUD217/2021, commenced by the filing of an application on 5 July 2021 by Mr Smith and Mrs Smith. In that application Mr Smith and Mrs Smith sought orders against the Official Receiver, Mr Kirk and Colonial First State Investments Ltd ABN 92 002 348 352 (Colonial First State), including an order under s 139ZS of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) that a notice issued to Colonial First State on 22 April 2021 under s 139ZQ of the Bankruptcy Act be set aside. Interim relief was also sought in that application.

(3)    QUD251/2021, commenced by the filing of an application on 29 July 2021 by Mr Smith and Mrs Smith. In that application Mr Smith and Mrs Smith sought orders against the Official Receiver and Mr Kirk that a notice issued to Mrs Smith on 1 June 2021 under s 139ZQ of the Bankruptcy Act be set aside.

2    On 30 September 2021 Derrington J made consent orders as follows:

1.     Pursuant to rule 30.11 of the Federal Court Rules 2011 (Cth), this proceeding (Federal Court of Australia Proceeding number QUD 117/2021) (the Trustee Proceeding) be consolidated with Federal Court of Australia Proceeding number QUD 251/2021 (the Property Notice Proceeding) and Federal Court of Australia Proceeding number QUD 217/2021 (the Superannuation Notice Proceeding), and the consolidated proceeding be known as Kirk, as trustee of the estate of Smith v Smith & Ors and identified as proceeding QUD 117/2021 (the Consolidated Proceeding).

3    It is convenient to first deal with the primary claim before the Court, being the proceedings originally commenced by Mr Kirk against Mrs Smith and the Official Receiver in QUD117/2021. I shall return to the cross-claims and their proper disposition later in this judgment.

Background Facts

4    There is some dispute between the parties as to relevant background facts. The following facts however appear to be agreed.

5    At material times, Mr Smith and Mrs Smith were the registered proprietors (as joint tenants) of two properties in south-east Queensland.

6    The first property was located at 1205/157 Old Burleigh Road, Broadbeach, Queensland, and more particularly described as Lot 59 on BUP 4263, Local Government: Gold Coast, Title Reference 16147152 (Broadbeach Property). Mr and Mrs Smith were the registered proprietors between 10 March 2005 and 31 March 2016.

7    The second property was located at 23 Murphys Creek Road, Blue Mountain Heights, Queensland, and more particularly described as Lot 11 on RP121698, Local Government: Toowoomba, Title Reference 50600754 (Blue Mountain Heights Property). Mr and Mrs Smith were the registered proprietors between 29 January 2006 and 20 April 2016.

8    Each property was, at a particular time, the subject of a mortgage to the Commonwealth Bank of Australia.

9    At material times Mr Smith was the sole director of Faloda Pty Ltd ACN 009 956 772 (Faloda). Faloda was the corporate trustee of the R.D. Smith Trust (the Trust). Mr Smith’s parents had established the Trust by way of Trust Deed dated 1 April 1976 (the Trust Deed). Mr Smith’s mother, Mrs Ruth Smith, was the appointor, and had power to replace and/or appoint trustees. Mr Smith and Mrs Smith were included in the class of beneficiaries of the Trust.

10    The Smith family operated businesses under a partnership known as TFD Joinery Works (TFD). The TFD partnership was operated by companies controlled by the Smith family, namely Nu-Al Pty Ltd, Ruron Pty Ltd, Toowoomba Joinery Pty Ltd and RD Smith Pty Ltd. TFD conducted two manufacturing operations, one which produced aluminium windows and doors, and another which produced residential and commercial cabinetry and joinery.

11    The land and factory on which TFD operated its business was owned by Faloda in its capacity as trustee of the Trust, namely premises at 123 North Street, Toowoomba, Queensland and more particularly described as Lots 11 and 12 RP 17275, Local Government: Toowoomba, Title Reference 15150210 (North Street Property).

12    At material times, TFD had a business loan and an overdraft facility with the Commonwealth Bank (TFD Facility). On or around 17 December 2014, the limit of the overdraft facility was varied to $1.3 million. It appears that the TFD Facility was guaranteed by both Faloda and Mr Smith. Mr Smith’s guarantee in respect of the TFD Facility was limited to $1.3 million.

13    In 2015 TFD’s financial position deteriorated. On 14 August 2015 the Commonwealth Bank wrote the following letter to the directors of TFD:

Dear Mr Smith

…

We refer to the telephone discussion on 7 August 2015.

As discussed the Bank has the following concerns relating to the 2015 Company financial performance:

•    The substantial loss of over $974,000 incurred for the year ended 30 June 2015. This had followed a loss of $585,695 incurred in the 2014 financial year.

•    The significant ATO arrears position.

•    The deterioration in the aged receivables position with over 25% of accounts over 90 days.

•    The business is possibly trading insolvent.

Due to the above concerns, the Bank is not prepared to continue our banking relationship. Accordingly the Bank requests that the company's total indebtedness including all Hire Purchase Contracts and Equipment Loans be fully repaid by 15 November 2015 or as a minimum, an unconditional contract of sale of the factory to be provided to the Bank with settlement to be no greater than 60 days thereafter.

Should the total debt not be repaid or an unconditional sale of the factory not be achieved by 15 November 2015, then:

•    The Overdraft limit will be cancelled. Please note the Overdraft Account is an on-demand facility which limit can be cancelled at any time at the Bank's discretion.

•    Formal Letters of Demand will be issued requesting that the company's total indebtedness be repaid. These demands may be a precursor to the Bank acting pursuant to securities held to recover all monies owing. Note: this could lead to the appointment of an Agent for the Mortgagee to take possession and arrange the sale of company assets.

•    The interest rate on all variable interest rate loan facilities will be increased to the Bank's Overdraft Index Rate plus a margin of 4.5% pa variable (this rate is currently 13.98% pa variable).

…

14    On 8 September 2015, pursuant to Part 5.3A of the Corporations Act 2001 (Cth), administrators were appointed to the companies comprising TFD. On 29 September 2015, the Commonwealth Bank made a formal demand for payment from Mr Smith under his personal guarantee of TFD’s debts, in the amount of $1,253,172.58.

15    Creditors of TFD subsequently lodged caveats under the Land Title Act 1994 (Qld) over properties owned by Mr and Mrs Smith, in particular:

(1)    Nation Glass Pty Ltd lodged a caveat over both the Broadbeach Property and the Blue Mountain Heights Property on 11 September 2015;

(2)    Lincoln Sentry Group Pty Ltd lodged a caveat over both the Broadbeach Property and the Blue Mountain Heights Property on 30 October 2015; and

(3)    Borg Manufacturing Pty Ltd lodged a caveat over the Blue Mountain Heights Property on 4 November 2015.

16    On 1 December 2015 Faloda entered into a contract of sale to sell the North Street Property for $1.7 million. The sale was completed on 23 December 2015, and after discharging the Commonwealth Bank’s mortgage and other costs of sale, Faloda received nett proceeds of sale of $600,446.30, which were paid into the trust account of lawyers Wonderley & Hall.

17    On or about 2 December 2015 Mr Smith executed a Deed of Covenant with the Commonwealth Bank, by which the Commonwealth Bank agreed to forbear from enforcing its rights under the TFD Facility in consideration of Faloda agreeing to pay the full outstanding amount to the Commonwealth Bank from the proceeds of the North Street Property.

18    Around this time Mr and Mrs Smith attended various meetings with Mr Jeffrey Thomson and Mr Craig Thomson of Wonderley & Hall. Transcribed contemporaneous file notes of Mr Jeffrey Thomson were tendered at the hearing as an exhibit, and Mr Jeffrey Thomson gave evidence at the hearing. From the material before the Court it appears that Mr and Mrs Smith sought advice referable to future protection of their asset position, including the creation of a new trust over which Mr Smith would have total control.

19    It is not in dispute that on 28 January 2016 Faloda paid the Commonwealth Bank the sum of $506,543.29 to secure the transfer to Faloda of the Commonwealth Bank’s mortgages over the Broadbeach Property and the Blue Mountain Heights Property (Faloda Refinance). The transfer of the mortgages from the Commonwealth Bank to Faloda was registered on 16 February 2016.

20    The Broadbeach Property was sold for $430,000.00 on 23 March 2016. The following day the real estate agent engaged to sell the property transferred to Mrs Smith monies paid by way of the deposit in the amount of $30,100.00. Of the remaining proceeds of sale, $194,386.33 was paid to Mrs Smith, and an equivalent amount (less one cent) was paid into the trust account of Wonderley & Hall held in the name of Faloda.

21    The Blue Mountain Heights Property was sold on 20 April 2016 for $765,000.00. Of these proceeds of sale, $430,644,74 was transferred to Mrs Smith. The balance of $313,121.97 was paid to the trust account of Wonderley & Hall, again in the name of Faloda.

22    It is convenient to cumulatively refer to the sale of the Broadbeach Property, the sale of the Blue Mountain Heights Property, and the subsequent disposition of sale proceeds as the Property Transactions.

23    On 22 April 2016 Faloda and Mrs Smith executed a loan agreement, whereby Faloda, in its capacity as Trustee of the Trust, loaned the amount of $250,000.00 to Mrs Smith (Loan Agreement). On 26 April 2016 the amount of $250,000.00 was paid to Mrs Smith out of the funds held in the trust account of Wonderley & Hall in the name of Faloda.

24    On 17 May 2016 Mrs Smith was registered as the sole proprietor of real property located at 1402/2865 Gold Coast Highway, Surfers Paradise, Queensland, more particularly described as Lot 80 on SP 161863, Local Government: Gold Coast, Title Reference 50483118 (Surfers Paradise Property). Mrs Smith acquired that property for the sum of $785,000.00.

25    Some time in the first half of September 2016, Mr Smith deposited the sum of $247,639.88 into a superannuation account in his name (Account 0045) with Colonial First State.

26    On 1 December 2016 Mr Smith deposited an amount of $383,549.44 into another superannuation account in his name with Colonial First State (Account 5820).

27    On 19 December 2016 Mrs Smith applied for a superannuation account with Colonial First State (Mrs Smith’s Superannuation Account 3306).

28    On 21 December 2016 Mr Smith caused the amount of $244,651.71 to be transferred from Account 0045 to a bank account in his name (Mr Smith’s Heritage Account).

29    Further on 21 December 2016, Mr Smith caused the amount of $84,000.00 to be transferred from Account 5820 to a bank account in Mrs Smith’s name (Mrs Smith’s Heritage Account).

30    On 23 December 2016, Mr Smith paid, from the money in Mr Smith’s Heritage Account, the amount of $244,651.71 into Mrs Smith’s Superannuation Account 3306 (First Superannuation Transfer).

31    On 23 December 2016, the amount of $80,348.29 was transferred from Mrs Smith’s Heritage Account into Mrs Smith’s Superannuation Account 3306 (Second Superannuation Transfer).

32    It is not in dispute that Mr Smith committed an act of bankruptcy within the meaning of s 40 of the Bankruptcy Act on 17 October 2018 when he failed to comply with the requirements of a bankruptcy notice issued by a creditor on 14 September 2018.

33    On 27 March 2019 a sequestration order was made by the Federal Circuit Court of Australia (as the Court then was) in respect of Mr Smith, and the applicant was appointed as Trustee of Mr Smith’s estate.

34    On 16 August 2021, the Court ordered that the balance of funds in Mrs Smith’s superannuation account be paid into the Court and that Colonial First State be taken to have discharged any debt in relation to these proceedings.

PLEADINGS

Amended Statement of Claim

35    The applicant filed an Amended Statement of Claim on 15 October 2021. The relief sought by the applicant in the Amended Statement of Claim was as follows:

1.    A declaration that each Transfer, as that term is defined in the Statement of Claim filed with this originating application, is void against the Applicant pursuant to s 120 or alternatively s 121 of the Bankruptcy Act 1966 (Cth) (Act).

2.    A declaration that the First Respondent received the property located at 1402/2865 Gold Coast Highway, Surfers Paradise, Queensland, more particularly described as Lot 80 on SP 161863, Local Government: Gold Coast, Title Reference 50483118 (the Surfers Paradise Property) as a result of a transaction that is void against the Applicant.

4.     A declaration that the Surfers Paradise Property is charged with the payment to the Applicant of 74%, or alternatively half the value of the Surfers Paradise Property or, in the further alternative, such other amount or proportion as is found to be equitable.

5.     An order for the sale of the Surfers Paradise Property to enforce the charge.

6.    In the alternative to paragraphs 4 and 5 above, an order requiring the First Respondent to take all necessary steps and do all necessary things to enable half or, alternatively, such other proportion as is found to be equitable, of her right, title and interest in the Surfers Paradise Property to be transferred to the Applicant.

6A.    A declaration that each of the First and Second Superannuation Transfers, as those terms are defined in the Statement of Claim, are void against the Applicant pursuant to s 120 or alternatively 121 or alternatively 128B of the Act.

6B.    An order requiring the money paid into Court in this proceeding pursuant to the Court’s order dated 30 September 2021, plus any accretions, be paid to the Applicant.

6C.    In the alternative to the relief sought in paragraphs 2, 3, 5 and 6 above:

(a)    restitution of the value of each of the Transfers, the First Superannuation Transfer, and the Second Superannuation Transfer, less any amount which may be paid pursuant to the claim for relief in paragraph 6B above; alternatively

(b)     an order pursuant to s 30 of the Act requiring the Respondent to pay the Applicant an amount representing the value of each of the Transfers, the First Superannuation Transfer, and the Second Superannuation Transfer, less any amount which may be paid pursuant to the claim for relief in paragraph 6B above.

7.     Interest on any sum found to be payable pursuant to section 51A of the Federal Court of Australia Act 1976 (Cth).

8.    Such further or other relief as the Court finds to be equitable or appropriate.

9.    Costs.

(tracked changes omitted)

36    In summary, in the Amended Statement of Claim filed 15 October 2021, the applicant pleaded:

    From the money Mrs Smith received from the sale of the Broadbeach Property, the Blue Mountain Heights Property, and the monies received in accordance with the Loan Agreement, Mrs Smith paid the balance of $734,265.65 at the settlement of the Surfers Paradise Property.

    The main purpose of Mr Smith in engaging in transactions referable to those properties and the various superannuation funds into which monies were paid, was:

•    to prevent his interest in the Broadbeach Property, the Blue Mountain Heights Property and the cash withdrawn from his superannuation from becoming divisible among his creditors; or

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

        (Relevant Purpose)

    The Loan Agreement was a sham transaction, in that:

•    the payment by Faloda to Mrs Smith of the amount of $250,000.00 was recorded in the financial statements of the Trust for the year ended 30 June 2016 as a distribution to Mr Smith, which was the true character of that payment;

•    There was no record in the financial statements of the Trust for the year ended 30 June 2016 of a loan to Mrs Smith from Faloda;

•    neither Faloda nor Mrs Smith ever intended that Mrs Smith repay the sum of $250,000.00 to Faloda;

•    the Loan Agreement was entered into for the purposes of defeating creditors of Mr Smith, and to redirect his entitlement from the Trust to Mrs Smith; and

•    the Loan Agreement was part of a scheme designed to keep Mr Smith’s equity in the Broadbeach Property and the Blue Mountain Heights Property beyond the reach of his creditors, and to permit Mrs Smith to buy a property in her name.

    The material effects of the Property Transactions were to transfer:

•    Mr Smith’s interests as joint tenant in the Broadbeach Property and the Blue Mountain Heights Property to Mrs Smith; or alternatively

•    Mr Smith’s share of the net proceeds of sale in the Broadbeach Property and the Blue Mountain Heights Property to Mrs Smith.

37    In respect of the transfers by Mr Smith of his interest in, or alternatively his share of the nett sale proceeds, of each of the Broadbeach Property and the Blue Mountain Heights Property, to Mrs Smith, and s 120 of the Bankruptcy Act:

    each transfer was a transfer of property by a person who later became bankrupt;

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

    Mrs Smith gave no consideration for any transfer to her; and

    each transfer was void against the trustee in bankruptcy.

38    In respect of the transfers by Mr Smith of his interest in, or alternatively his share of the nett sale proceeds, of each of the Broadbeach Property and the Blue Mountain Heights Property, to Mrs Smith, and s 121 of the Bankruptcy Act:

    each transfer was a transfer of property by a person who later became bankrupt;

    but for the Property Transactions:

•    Mr Smith’s interests as joint tenant in the Broadbeach Property and the Blue Mountain Heights Property; or alternatively

•    Mr Smith’s half share in the nett proceeds of sale (after paying out the Commonwealth Bank Mortgages),

would probably have been divisible property available to his creditors.

    Mr Smith’s main purpose in making each transfer was the Relevant Purpose;

    alternatively, Mr Smith’s main purpose in making each transfer was taken to be the Relevant Purpose because it could reasonably be inferred that in late 2015 he was, or was about to become, insolvent;

    each transfer was void against the trustee in bankruptcy.

39    But for the loan agreement, the sum of $250,000.00 distributed by Faloda as trustee of the Trust to Mr Smith would probably have been divisible property available to his creditors;

40    Alternatively, s 121A of the Bankruptcy Act applied to the sequence of events from the transfer to Faloda through to the loan from Faloda to Mrs Smith.

41    In respect of the First Superannuation Transfer and the Second Superannuation Transfer, for the purposes of s 120 of the Bankruptcy Act:

    the First Superannuation Transfer and the Second Superannuation Transfer were transfers of property by a person who later became bankrupt;

    the First Superannuation Transfer and the Second Superannuation Transfer took place in the period beginning 5 years before the commencement of Mr Smith’s bankruptcy and ending on the date of his bankruptcy;

    Mrs Smith gave no consideration for either the First Superannuation Transfer or the Second Superannuation Transfer; and

    The First Superannuation Transfer and the Second Superannuation Transfer were both void against the trustee in bankruptcy.

42    In respect of the First Superannuation Transfer and the Second Superannuation Transfer, for the purposes of s 121 of the Bankruptcy Act:

    each of the First Superannuation Transfer and the Second Superannuation Transfer were a transfer of property by a person who later became bankrupt;

    but for the First Superannuation Transfer and the Second Superannuation Transfer:

•    the sum of $244,651.71 in the Bankrupt’s Heritage Account; and

•    the sum of $80,348.29 in Mrs Smith’s Heritage Account,

    would probably have been divisible property available to Mr Smith’s creditors.

    Mr Smith’s main purpose in making each of the First Superannuation Transfer and the Second Superannuation Transfer was the Relevant Purpose;

    alternatively, Mr Smith’s main purpose in making each of the First Superannuation Transfer and the Second Superannuation Transfer was taken to be the Relevant Purpose, because it could be reasonably inferred that in late 2015 Mr Smith was, or was about to become, insolvent; and his financial position had not materially improved by late 2016; and

    the First Superannuation Transfer and the Second Superannuation Transfer were void against Mr Smith’s trustee in bankruptcy.

43    The Trustee pleaded that, for the purposes of s 128B of the Bankruptcy Act, each of the First Superannuation Transfer and the Second Superannuation Transfer were made by way of contribution to an eligible superannuation plan and, but for those transfers, the sum of $244,651.71 in the Bankrupt’s Heritage Account and the sum of $80,348.29 in Mrs Smith’s Heritage Account would probably have been property available to Mr Smith’s creditors. Further, Mr Smith’s main purpose in making each of the superannuation transfers was the Relevant Purpose, or his main purpose could be taken to be the Relevant Purpose because in late 2015 Mr Smith was, or was about to become, insolvent and his financial position had not materially improved by late 2016.

Defence

44    On 23 November 2021 the first respondent, Mrs Smith, filed a Defence.

45    I note that, while the Defence pleaded that Mr Smith was not motivated by the Relevant Purpose in engaging in the Property Transactions, the First Superannuation Transfer, and the Second Superannuation Transfer, at the hearing Counsel for Mrs Smith accepted that there was an intention of Mr Smith to defeat creditors.

46    Mrs Smith pleaded that Mr Smith was not a party to, and could not be said to have been involved in, the Property Transactions, or where he was involved, Mr Smith did not have an interest in those assets, or the transactions did not relate to property that would not have been available for division among Mr Smith’s creditors.

47    Mrs Smith denied that the Loan Agreement was a sham transaction because:

    the character of the payment by Faloda to Mrs Smith was not a distribution to Mr Smith as he was not entitled to receive a distribution;

    the parties entered into the Loan Agreement with the intention that it be legally effective between them as an arms-length and legitimate loan;

    from 28 July 2019 it was not possible for Mrs Smith to make repayment of monies owing under the Loan Agreement because Faloda was deregistered as a company and ceased to be a trustee of the Trust, and the only person with power to appoint a new trustee was Mr Smith’s elderly mother Ruth who was 97 years old at the time and in a nursing home;

    Mr Smith and Mrs Smith had discussed an interest-free loan being made by Faloda to Mrs Smith to permit her to buy the Surfers Paradise Property; and

    the Loan Agreement was designed to permit Mrs Smith to buy a property in her name, this purpose was permitted pursuant to the terms of the Trust Deed, and was consistent with the longstanding operations of the Trust.

48    Mrs Smith had made additional equity contributions in respect of the Broadbeach Property as follows:

a. on or about 19 May 2015, First Respondent caused $90,000.00 to be transferred from her Heritage Bank 'Online Saver' bank account described as 'S26' to a TFD Facility 'Overdraft Cheque Account' (Facility Contribution);

b. on or around 15 June 2015, the First Respondent caused $178,351.77 to be withdrawn from her "One Path" personal superannuation fund and deposited into a Heritage Bank account held in the name of the First Respondent and the Bankrupt with the account number '6981917S24' (Superannuation Transfer A);

c. the Balance Sheet for TFD dated 28 October 2015 recorded a liability to 'Sue Smith' in the amount of $100,000.00, which was:

i.     a reference Superannuation Transfer A; and

ii.     understated the actual amount of the amount thereby paid by the First Respondent to TFD;

d. the monies comprising Facility Contribution and Superannuation Transfer A were subsequently used by TFD to pay wages and other expenses on behalf of TFD;

e. shortly before the sale of the Broadbeach Property, the First Respondent arranged and made payment of certain necessary costs in relation to the sale of the Broadbeach Property, including advertising and real estate agent's fees, the value of which was at least $2,000.00 (Broadbeach Advertising Contribution);

Particulars of Broadbeach Advertising Contribution

The Broadbeach Advertising Contribution included a payment of approximately $2,000.00 which the First Respondent paid to the real estate agency 'The Professionals Broadbeach' in respect of the Broadbeach Property.

f. between 8 September 2015 and 23 March 2016, the First Respondent also made non-financial contributions to the Broadbeach Property;

Particulars of non-financial contributions

The First Respondent's non-financial contributions to the Broadbeach Property included:

I.     undertaking and procuring maintenance and cleaning work in preparation for the sale of the Broadbeach Property; and

II.     liaising with real estate agents and advertisers in order to procure the sale of the Broadbeach Property.

g. between 8 September 2015 and 20 April 2016, the First Respondent arranged and paid for tradespeople to attend the Blue Mountain Heights Property in order to undertake repairs with the view of increasing the value of that property, the value of which was at least $40,000.00 (Blue Mountain Heights Renovation Contribution);

Particulars of Blue Mountain Heights Renovation Contribution

The Blue Mountain Heights Renovation Contribution included:

I.     Town and Country floor polishing, which cost approximately $4,500.00;

II.     the purchase of a ride-on mower, which cost approximately $5,000.00;

III.     substantial landscaping and garden maintenance work, which cost around $10,000.00;

IV.     the engagement of arborists in order to care for and preserve an historically significant fig tree located at the property;

V.     the purchase of a large number of truckloads of soil for terracing the rear of the property;

VI.     the installation of sprinkler systems;

VII.     replacing the carpeting within the house itself;

VIII.     refurbishing of the external entrance, veranda and timber ceilings; and

IX.     other general repairs and refurbishments such as revarnishing of wooden surfaces, rendering and decking.

h. between 8 September 2015 and 20 April 2016, the First Respondent arranged and made payment of certain necessary costs in relation to the sale of the Blue Mountain Heights Property, including advertising and real estate agency costs, the value of which was at least $10,000.00 (Blue Mountain Heights Advertising Contribution); and

Particulars of Blue Mountain Heights Advertising Contribution

The Blue Mountain Heights Advertising Contribution included:

I.     approximately $6,500.00 which the First Respondent paid to real estate agency 'Peter Snow & Co'; and

II.     approximately $3,500.00 which was paid to the real estate agency 'Colliers' and their related entity, 'Diversified Properties'.

i. between 8 September 2015 and 20 April 2016, the First Respondent made nonfinancial contributions to the Blue Mountain Heights Property.

Particulars of non-financial contributions

The First Respondent's non-financial contributions to the Blue Mountain Heights Property included:

I.     undertaking and procuring maintenance and cleaning work in preparation for the sale of the Blue Mountain Heights Property; and

II.     liaising with real estate agents and advertisers in order to procure the sale of the Blue Mountain Heights Property.

(paragraph 14a to 14i. of Defence)

49    In relation to the Property Transactions and the disposition of the relevant proceeds of sale:

    only four transfers of real property were alleged in the Amended Statement of Claim – namely the sale of the North Street Property, the Broadbeach Property and the Blue Mountain Heights Property, and the purchase of the Surfers Paradise Property – however the Loan Agreement had no connection to any of those transactions;

    Mrs Smith never received Mr Smith’s interest in either the Broadbeach Property or the Blue Mountain Heights Property;

    although Mr Smith’s share of nett proceeds of the sale of the Broadbeach Property and the Blue Mountain Heights Property was transferred to Mrs Smith, she received those monies in circumstances where she was lawfully entitled to do so;

    in relation to the Broadbeach Property, Mrs Smith had made Additional Equity Contributions as identified at paragraphs 14a to 14i of the Defence.

    Mrs Smith pleaded the following in relation to the proceeds of sale of the Broadbeach Property:

a. the sum of $194,386.33 which was paid into the Trust Account was paid in reduction of the secured debt of $506,543.29 which the First Respondent and the Bankrupt owed to Faloda pursuant to the Faloda Refinance (First Faloda Refinance Payment);

b. as a result the First Faloda Refinance Payment being made, the total secured debt which was owed to Faloda under the Faloda Refinance was reduced to $312,156.62;

c. the sum of $194,386.32 which was paid to the First Respondent at settlement (Broadbeach Settlement Payment) constituted part of the nett proceeds from the sale of the Broadbeach Property (after deducting the Broadbeach Settlement Adjustments and the First Faloda Refinance Payment) (Broadbeach Nett Proceeds);

d. the contributions which are pleaded at paragraph 14.a to 14.i of this Defence (Additional Equity Contributions) made it fair and equitable for the First Respondent to receive the entirety of the Broadbeach Settlement Payment, rather than one half of it (as would otherwise be the case in view of the fact that the First Respondent and the Bankrupt held the Broadbeach Property in equal shares);

e. upon the Bankrupt becoming bankrupt on or about 27 March 2019:

i. the substratum of the joint relationship or endeavour between the Bankrupt and the First Respondent was removed; and

ii. that occurred without any blame which is attributable to the First Respondent; and

f. in the premises of the matters pleaded at paragraphs c to e above:

i. it would be unconscionable to deny the First Respondent recourse to the proceeds of the sale of the Residential Properties in order to recover the Additional Equity Contributions; and

ii. the First Respondent:

1. was entitled to a constructive trust over the Bankrupt's interest in the Broadbeach Property; and

2. was entitled to recover the Additional Equity Contribution from the Bankrupt's interest in the Broadbeach Nett Proceeds; and

g. further or alternatively in the premises of the matters pleaded at paragraphs c to e above, to the extent to which the Bankrupt had any entitlement to receive part of the Broadbeach Nett Proceeds for himself, those proceeds:

i. were paid into the First Respondent's bank account in her capacity as the Bankrupt's carer;

ii. were used by the First Respondent to pay the day-to-day expenses of the Bankrupt between 24 March 2016 and 27 March 2019; and

iii. were not used to fund the purchase of the Surfers Paradise Property.

        (paragraph 15 of the Defence)

    In relation to the payment of the deposit of $30,100.00 forming part of the proceeds of sale of the Broadbeach Property, Mrs Smith was entitled to receive that money because she was entitled to recover the Additional Equity Contributions, and was entitled to:

•    a constructive trust over Mr Smith’s interest in the Broadbeach Property; and

•    recover the Additional Equity Contribution from Mr Smith’s interest in that deposit.

    Alternatively, Mrs Smith was entitled to recover part of that deposit because those proceeds:

•    were paid into Mrs Smith’s bank account in her capacity as Mr Smith’s carer;

•    were used by Mrs Smith to pay the day-to-day expenses of Mr Smith between 24 March 2016 and 27 March 2019; and

•    were not used to fund the purchase of the Surfers Paradise Property.

    Similar constructive trust arguments were pleaded by Mrs Smith in relation to the sum of $430,644.74 which was paid to Mrs Smith at settlement of the Blue Mountain Heights Property.

    The Loan Agreement arose following a conversation between Mr Smith and Mrs Smith in April 2022, whereby Faloda would make an interest free loan to Mrs Smith to fund the purchase of the Surfers Paradise Property. The purpose of the loan was:

•    to make use of funds which Faloda held;

•    to provide financial assistance to Mrs Smith, in accordance with the terms of the Trust Deed, to purchase the Surfers Paradise Property; and

•    to continue Faloda's practice of providing loans to beneficiaries and their related persons and entities.

    It was incorrect to aver that Mr Smith was entitled to receive a distribution from the Trust in the amount of $284,130.00 because, since on or around 23 December 2015, he had owed a nett amount to Faloda of $313,659.73. This was because although prima facie Mr Smith was entitled to receive a distribution of $284,130.00 from the Trust, Faloda was entitled to recover from Mr Smith the amount of $597,789.72 which was 50% of the amount paid by Faloda to the Commonwealth Bank to purchase the mortgages and discharge the guarantees of Faloda and Mr Smith to the Commonwealth Bank.

50    In relation to the deposits of monies by Mr Smith into his superannuation accounts (Account 0045 and Account 5820), those deposits were made by Mr Smith as consolidation of his personal superannuation holdings, and following advice that it would be worthwhile for him to establish two accounts with Colonial First State (namely a regular fund and a pension fund). It followed that Mr Smith transferred the total amount of $631,189.32 into Account 0045 and Account 5820. If those funds had not been transferred to those accounts, they would have remained in his previous superannuation accounts, and been exempt from being divisible amounts available to Mr Smith’s creditors pursuant to s 116(2)(d) of the Bankruptcy Act.

51    In relation to the superannuation transactions, Mrs Smith further pleaded that, for the purposes of the applicant’s claim pursuant to s 128B of the Bankruptcy Act, the superannuation transactions were not separate, but formed part of the one transaction. Mrs Smith further pleaded in relation to the superannuation transactions that the provisions of s 128B had not been met in respect of conduct of Mr Smith or Mrs Smith.

52    To the extent that the first respondent’s pleadings concerned ss 120 and 121 of the Bankruptcy Act and the superannuation transactions, it was unnecessary for me to have regard to that aspect of the Defence given that the Trustee ultimately did not press a case based on those sections in relation to the superannuation transactions.

53    In respect of the Loan Agreement, the sale of the North Street Property and the disposition of its proceeds, the Faloda Refinance, and the purchase of the Surfers Paradise Property, Mrs Smith pleaded that those transfers did not include a transfer of property by Mr Smith or by any person who later become bankrupt for the purposes of s 120 of the Bankruptcy Act.

54    Further, in relation to the sale of the Broadbeach Property, the sale of the Blue Mountain Heights Property, the disposition of the proceeds of those sales to Mrs Smith, and the subsequent purchase of the Surfer Paradise Property, Mrs Smith pleaded those transfers:

    were transfers to transferees who were not related entities of Mr Smith for the purpose of s 120 of the Bankruptcy Act;

    took place more than two years before the commencement of Mr Smith’s bankruptcy;

    occurred at times when Mr Smith was solvent; and

    were not transfers to which s 120(1) of the Bankruptcy Act applies.

Reply

55    Materially, the applicant pleaded the following in Reply:

    It was the intention of Faloda that Mr Smith would not be obliged to pay any contribution to Faloda in the event the Commonwealth Bank called on Faloda’s guarantee or Faloda’s mortgage to the Commonwealth Bank;

    Faloda and Mr Smith were not equal co-sureties, but rather Faloda was the primary surety and Mr Smith a subsidiary surety, such that it would be inequitable to permit Faloda to claim contribution from Mr Smith;

    By the time Faloda and Mr Smith entered into the Deed of Covenant with the Commonwealth Bank, Mr Smith had commenced upon a course of conduct designed to defeat or delay his creditors, of which the discharge of TFD’s Commonwealth Bank facility was the first step;

    Any right of Faloda against Mr Smith as a result of their relationship as co-guarantors was not in the nature of a debt, but an equitable right of contribution, and it would be inequitable to permit Faloda to claim a right of contribution from Mr Smith; and

    Even if the payments to Mrs Smith and Faloda of the proceeds of sale of the Broadbeach property and the Blue Mountain Heights Property gave rise to a right of Mr Smith to make a claim against Mrs Smith in equity, such a right would only result in Mrs Smith being an unsecured creditor of Mr Smith and, to the extent that such a right was capable of giving rise to the remedy of a constructive trust, that constructive trust would be a remedial constructive trust which could only arise by an order of the Court.

Cross-Claim of First Respondent

56    On 23 November 2021 Mrs Smith and Mr Smith filed a notice of a cross claim which sought:

1.    An order under section 139ZS of Bankruptcy Act 1966 (Cth) that the notice issued to Colonial First State Investments Limited on 22 April 2021 under section 139ZQ of the Bankruptcy Act 1966 (Cth) (First 139ZQ Notice) be set aside.

2.    An order pursuant to section 139ZS of Bankruptcy Act 1966 (Cth) that the notice issued to Glenys Susanne Smith on 1 June 2021 under section 139ZQ of the Bankruptcy Act 1966 (Cth) (Second 139ZQ Notice) be set aside.

3.    Costs.

4.    Any further or other order that this Honourable Court considers appropriate.

57    On the first day of the hearing, Mr Russell for the Trustee submitted as follows:

MR RUSSELL: I will commence to open the applicant’s case. Your Honour will have seen, from the written outline, that this is a consolidated proceeding of what was originally three proceedings. The first is the one in which my client is the applicant, and that is, in substance, a claim for various relief under what can broadly be termed the voidable transactions provisions of the Bankruptcy Act. The transactions which underly those claims were also the subject of notices given by the official receiver under section 139ZQ. Those proceedings – the other two proceedings are 217 and 251 of – I should say QUD 257 and 217 of – 251 and 217, I’m sorry, your Honour, of 2021, in which Mrs Smith applied to set aside those 25 notices.

Those applications have now been subsumed by the cross-claim filed in this proceeding. Your Honour will have seen, from my learned friend’s written opening, the submission that the cases largely mirror each other, in that if my client fails to establish its primary claim, it follows the notice should be set aside. There’s another point made - - -

HER HONOUR: Do you agree with that, Mr Russell?

MR RUSSELL: I think that must be true, your Honour. So that it’s not quite, as I understand my friend’s submission – it doesn’t work entirely the other way, for two reasons. One is that, as I understand it, there’s an additional point not dissimilar, it seems, to the decision your Honour handed down a week or so ago, in relation to the quality of the notice. But that may transpire to be academic, because it’s difficult to imagine a scenario where my client succeeds in establishing its voidable transaction claim, but the notice is insufficient, so that the notice is set aside, but nevertheless, the transaction is held to be voidable.

So it really does seem that the substance of success, on my client’s case, is what’s going to determine the ultimate outcome in the proceeding, and it’s for that reason that I’ve opened the case, and the parties have proceeded throughout and will conduct the trial throughout as though my client is the plaintiff.

HER HONOUR: Good. Thank you.

(Emphasis added)

(Transcript of hearing pp 4-5)

58    There was no demur to this submission by Mrs Smith.

59    Plainly, the success or otherwise of the cross-claim is tied to the result of the substantive claim of the Trustee. It is logical to deal first with the substantive claim, before turning to the cross-claim.

Submissions in the substantive claim

Applicant’s submissions

60    In summary the case of the Trustee was as follows.

61    The relevant transfers of property identified were void pursuant to Part IV, Div 3 of the Bankruptcy Act because:

    Mrs Smith gave no consideration for the property she received and, as a consequence, s 120 of the Bankruptcy Act applied;

    Mr Smith’s main intention in entering into the transactions was to prevent those assets from becoming divisible among his creditors or to hinder or delay the process of making property available for division among his creditors. That intention was established by evidence, and also because it could reasonably be inferred from all the circumstances that, at the time of the transfer, Mr Smith was, or was about to become, insolvent;

    each of the superannuation transfers are also void because of s 128B of the Bankruptcy Act.

62    It was admitted on the pleadings that Mrs Smith paid the purchase price for the Surfers Paradise Property from the proceeds of sale of the Broadbeach Property and the Blue Mountain Heights Property, and the $250,000 she received under the Loan Agreement. The terms of the loan would be repayable within 7 days of written demand. No interest was payable, and no security was provided.

63    Mr Smith and Mrs Smith had been warned or told numerous times by their lawyer, Mr Jeffrey Thomson, that moving money outside of Faloda could be traced by creditors.

64    Faloda paid the Commonwealth Bank the total sum of $506,543.29.40. The characterisation of that payment was in dispute, but there could be no real doubt that it was paid in consideration of the transfer from the Commonwealth Bank to Faloda of the mortgages over the Broadbeach Property and the Blue Mountain Heights Property.

65    Mr Smith’s and Mrs Smith’s affidavit evidence should not be accepted, save for so much of it as was supported by objective documentary evidence or amounted to an admission against interest. Their version of events was totally inconsistent with the contemporaneous documentary record, and Mr Jeffrey Thomson’s file notes.

66    The insuperable obstacle for Mrs Smith’s case was that, beyond the transaction documents themselves, there was no documentary evidence which supported her version of events. For example, Mr Smith and Mrs Smith’s alleged “Faloda Mortgage Agreement” was entirely inconsistent with the origin and very clear purposes recorded in Mr Jeffrey Thomson’s file note. There was no independent consideration of Faloda purchasing the residential mortgages – it was a device developed by the solicitors in order to sell the residential properties through the caveats.

67    Mr Smith was not a credible witness in that:

    He blamed his poor memory on the medication he was taking, however his memory appeared to improve during cross-examination. Despite that, Mr Smith claimed to have a good recollection of the transactions the subject of this proceeding. When it suited him, Mr Smith relied on his medications as explaining his conduct or lack of memory, but then quickly retreated from accepting that his memory was poor as a consequence.

    The Court should not accept the proposition that Mr Smith’s memory has inexplicably improved in a way that bolstered critical parts of Mrs Smith’s defence of the Trustee’s claim.

    In terms of demeanour, Mr Smith was an unimpressive witness. He frequently gave evasive answers or refused to accept obviously correct propositions. He was often argumentative.

    Mr Smith’s cross-examination also revealed the reason why many of his and Mrs Smith’s financial records were not produced in this trial, namely Mr Smith had destroyed them. He did so at a time when his solicitors had given him many warnings about the prospect of a challenge to the transactions of the very kind now advanced by the Trustee. His willingness to do so reflects very poorly on his credibility.

68    In respect of evidence of Mrs Smith:

    Mrs Smith presented as a witness who was, for the most part, attempting to give honest evidence. Nonetheless, her evidence still suffered from real credibility issues, and also presented as unreliable when closely scrutinised.

    Mrs Smith’s evidence frequently demonstrated a lack of sophistication or understanding about the transactions or involvement in her and Mr Smith’s financial affairs.

    Mrs Smith admitted she had signed her affidavit without reading the entirety of the document.

    During the course of cross-examination of Mrs Smith:

•    Mrs Smith did not recall any conversation with Mr Smith about how to allocate their respective shares of the proceeds of sale of the Broadbeach Property and the Blue Mountain Heights Property;

•    Mrs Smith accepted that the amount of $194,386.32 paid to Wonderley & Hall’s trust account from the proceeds of the sale of the Broadbeach Property represented Mr Smith’s share of the property (and not any joint payment to Faloda on account of the supposed Faloda Refinance);

•    Mrs Smith accepted that, on the advice of Mr Thomson, she and Mr Smith made an agreement that Mr Smith’s share of the residential properties would be used to repay the mortgage, and her share would be used to buy a new property;

•    Mrs Smith accepted that she did not recall any conversation with Mr Smith prior to signing the Loan Agreement, and that she signed the Loan Agreement merely because Mr Smith and Mr Thomson told her to; and

•    Mrs Smith accepted that the Loan Agreement was simply a way for her to get money out of the Trust to enable her to purchase the Surfers Paradise Property.

    Mrs Smith’s oral evidence bore significant inconsistencies with her affidavit.

69    There was ample evidence to support the inference that in late 2015 and in 2016, Mr Smith was about to become insolvent from the collapse of TFD.

70    The position in respect of the Loan Agreement was as follows:

    Mr Smith transferred his entitlement to receive payment from Faloda on account of the outstanding distribution of $284,129.00.

    The Loan Agreement was a sham, in that:

•    Mrs Smith effectively conceded as much under cross-examination;

•    Mr Smith’s conduct was not consistent with a genuine intention for Mrs Smith to repay the loan;

•    Objective documentary evidence did not support the existence of a real loan; and

•    Mr Smith’s explanations for the state of accounts were nonsensical and should not be accepted.

    The evidence established that Mr Smith was warned about making a distribution to himself because of the potential impact on his plan to deceive his creditors about his financial position.

    Consistently with the overall asset protection strategy, the amount of the loan was fixed by reference to the purchase price of a new property for Mrs Smith, rather than the funds which Faloda had on hand.

71    The position in relation to superannuation transactions was as follows:

    Mr Smith and Mrs Smith’s explanation for the First Superannuation Transfer and the Second Superannuation Transfer should be rejected.

    These transfers occurred in circumstances in which Mr Smith and Mrs Smith had, by the middle of 2016, successfully achieved their goal of protecting their major assets from Mr Smith’s creditors by converting them into property held only in Mrs Smith’s name.

    That property would have been available to Mr Smith’s creditors.

72    Most of the amount the subject of the alleged constructive trust in respect of proceeds of sale of the Broadbeach Property and the Blue Mountain Heights Property, was not owed by Mr Smith to Mrs Smith:

    Of the $320,351.77 claimed as forming part of Mrs Smith’s “Equity Entitlement”, $268,351.77 was owed by TFD and not Mr Smith. An additional $3,981.80 of the advertising costs was owed by Faloda.

    Of the $52,000.00 claimed as being direct contributions to the properties, there was objective evidence for only two payments totalling $4,290 (the $3,981.80 having been applied to the North Street Property). Equity intervenes in these circumstances only where it positively appears that it would be unconscionable for one party to retain the benefit of the other’s contributions to the property in circumstances where they were not intended to enjoy it.

    In any event, in the absence of an intention, express or implied, or some type of estoppel, a constructive trust based on unequal contributions to a failed joint endeavour is purely remedial in nature. It does not come into existence until the Court declares it to.

    Mrs Smith had notice of the claims of other creditors by reason of her knowledge of the caveats, and of her involvement in the conferences with Wonderley & Hall in which those claims were discussed. That knowledge and her participation in Mr Smith’s scheme to defeat his creditors made it unlikely that equity would intervene to assist her.

73    The applicant submitted that 77.07% of the value of Surfers Paradise Property should be transferred to the Trustee for relief, on the basis of the following table:

(Extract from Trustee’s closing submissions)

74    Ultimately the Trustee submitted that the transactions underlying his claim were not in serious dispute. Mrs Smith did not press her challenge to the issue of Mr Smith’s intention in engaging in relevant transactions, and further accepted that, to the extent she received more than what constituted her beneficial interest in the sale proceeds from the two properties, she received a transfer of property for which she gave no consideration. It followed that, in the submission of the Trustee, the real issue for determination was whether the property the subject of the transfers would probably have become part of Mr Smith’s estate in bankruptcy or would probably have been available to creditors if the property had not been transferred.

First Respondent’s Submissions

75    The first respondent submitted that, insofar as proceeds of sale of the Broadbeach Property and the Blue Mountain Heights Property were transferred to Mrs Smith, the question was whether Mrs Smith had an equitable interest that exhausted the sale proceeds of the properties, because of costs incurred by her in preparing the properties, being advertising and renovation costs, and in respect of the substantial contributions made by her out of her own funds for the purposes of maintaining her husband’s business. If she did:

    there was no “transfer” of property from Mr Smith to enliven s 120 of the Bankruptcy Act; and

    section 121 of the Bankruptcy Act was not enlivened because none of the property alleged to have been transferred would have been divisible among Mr Smith’s creditors.

76    In relation to the Loan Agreement, Mrs Smith submitted that it was not a sham, and accordingly there was no transfer of property by Mr Smith for the purposes of the Bankruptcy Act, nor a transfer of property that was divisible among his creditors. There was simply a transfer of property by Faloda, to which Mr Smith had no entitlement, and for which Mrs Smith gave market value, being a promise to repay the same sum of money. Even if the Loan Agreement was found to be a sham, there was no evidentiary basis for the assertion that the payment to Mrs Smith was a distribution to Mr Smith that was assigned to Mrs Smith, as opposed to nothing more than an unauthorised distribution of trust property by Faloda.

77    The First Superannuation Transfer and the Second Superannuation Transfer were only challengeable under s 128B of the Bankruptcy Act. Further, the payments made came from money originally sourced in superannuation accounts held by Mr Smith, which was not divisible among his creditors.

78    On 19 May 2015 Mrs Smith transferred the amount of $90,000 from a Heritage bank account in her name (described as “S26”) to the TFD Facility Overdraft Cheque Account.

79    On 15 June 2015, Mrs Smith also transferred $178,351.77 from a superannuation account in her name, held with OnePath superannuation, to a Heritage Bank account held jointly in the name of Mr Smith and Mrs Smith that was used to pay expenses of TFD.

80    No evidence adduced by the Trustee contradicted this.

81    In relation to whether Mrs Smith paid the amount of $12,000.00 or $8,271.50 for advertising costs of the properties and approximately $40,000.00 to renovate the properties:

    from the Bank statement it was clear that at least $8,271.50 was used in respect of preparing the properties for sale; and

    Mrs Smith’s evidence that she paid approximately $40,000 on account of the renovations, and a further $3,700 in relation to the sale of the properties should be accepted.

82    The Court should accept that Mrs Smith made contributions of $52,000 in preparing the Broadbeach Property and the Blue Mountain Heights Property for sale.

83    Mrs Smith relied on the following principles in relation to whether she had a beneficial interest in the Broadbeach Property and the Blue Mountain Heights Property in excess of 50%:

    Equity will restore the parties to a joint endeavour which fails when contributions have been made, in circumstances where it is not intended that the other party enjoy them should endeavour fail.

    A constructive trust following the failure of a joint endeavour is imposed by equity without regard to the actual presumed intention of the parties.

    The right of a party to be restored in equity is one that will ordinarily be supported by a constructive trust.

    A trustee in bankruptcy stands in the shoes of the bankrupt, and accordingly takes the property subject to all the liabilities and equities that affect it in the bankrupt’s hands. Consequently, equity will intervene where it would be unconscionable for the legal owner of property to deny the beneficial ownership of another person.

    It is not necessary for a relationship to end for the substratum of a joint endeavour to fail.

    It is not necessary for equity’s intervention that the contributions made to the joint endeavour have been made directly to the acquisition or improvement of the relevant property.

    A transfer of the proceeds of sale held legally by a bankrupt representing the transferee’s equitable interest in a property will not constitute a transfer of property to the transferee.

84    These principles were applicable to the present case as follows:

    Mrs Smith could establish that she had a beneficial interest in the Broadbeach Property and the Blue Mountain Heights Property exceeding 50%, and was entitled to the proceeds representing that interest.

    Mr Smith’s insolvency brought the joint endeavour in respect of the Broadbeach Property and the Blue Mountain Heights Property to an end.

    Improvements to the properties by Mrs Smith were plainly not intended to be for the benefit of Mr Smith.

    Mrs Smith made two payments totalling $268,351.77 out of her own money to support TFD.

    Even though she would have had a claim in the liquidation of TFD for the sums advanced to support the business, Mrs Smith’s contributions were nonetheless contributions to the acquisition, maintenance or improvement of the Broadbeach Property and the Blue Mountain Heights Property, because the payments reduced Mr Smith’s potential liability in respect of the guarantees given by him to the Commonwealth Bank, which were secured by mortgages over those properties.

    The consequences of the payments created a sufficient nexus between them and the maintenance of the relevant properties to entitle Mrs Smith to be repaid the equity from the proceeds of sale before any division of the remaining equity.

85    Mrs Smith claimed that, out of the proceeds of sale (being $655,131.06), she was entitled to:

    50% of the balance of the proceeds (being $327,565.53);

    repayment of her contributions of $52,000; and

    a further $268,351.77, referable to the payments she made which:

•    supported Mr Smith’s business; and

•    as a consequence, maintained the properties and prevented any risk of foreclosure by the Commonwealth Bank, while they were prepared for sale.

86    Accordingly, Mrs Smith submitted that:

    Payments to her did not constitute a transfer of property to her—it was property to which she was already beneficially entitled.

    As that exhausted the whole of the sale proceeds, the claim against her in reliance on s 120 for the recovery of what was said to be Mr Smith’s interest in the Broadbeach Property and the Blue Mountain Heights Property should be dismissed.

    If the claim under s 120 fails because there was no transfer of property, it follows that the claim under s 121 must also fail.

87    In relation to the Loan Agreement, the bare facts relating to that transaction were not in dispute, including that, on 22 April 2016, Mr Smith (on behalf of Faloda) and Mrs Smith executed the Loan Agreement by which Faloda agreed to loan Mrs Smith the sum of $250,000.

88    In respect of the allegation that the Loan Agreement was a sham:

    The Loan Agreement was made only after consultation with Mr Jeffrey Thompson, the Smiths’ solicitor. It did not appear that Mr Thompson had any reason to think that the transaction was not genuine, as it reflected the instructions which Mr Smith had been given. The Loan Agreement was drawn up and signed by Faloda and Mrs Smith.

    Mr Smith and Mrs Smith in their evidence understood that the loan had to be repaid.

    It was necessary that the Trustee show that both Faloda and Mrs Smith intended the Loan Agreement to be a false document.

    There was no direct evidence of Mrs Smith’s intention, and there was no evidence from which an inference adverse to Mrs Smith could be drawn. The evidence on which the Trustee relied was that Faloda had been deregistered and its books did not include the loan. Had Faloda made a written demand for repayment of the loan, Mrs Smith would have no good legal defence to a claim by Faloda.

    Mrs Smith did not cause Faloda to be deregistered. The fact that Faloda was deregistered cannot, therefore, be relied upon to draw inference about her state of mind.

    Although the Trust accounts appeared to show a distribution to Mr Smith, rather than a loan to Mrs Smith, there was no suggestion that Mrs Smith prepared those accounts or agreed that they reflected the true position.

    The Trust accounts which were put to Mr Smith were not particularly reliable.

89    The rejection of the Trustee’s case that the Loan Agreement was a sham necessitates the rejection of his claim that the $250,000 paid under it was void either under s 120 or 121.

90    There was no transfer of property from Mr Smith to Mrs Smith that was voidable. There was instead a transfer of Faloda’s money to Mrs Smith, and the money held in this Trust was for the various discretionary beneficiaries of the Trust.

91    Factually, that assertion could not be squared with the true position, which was that Mr Smith owed a substantial sum of money to Faloda which far exceeded any distribution entitlements that he had as a beneficiary of the Trust (or could have had). If the Loan Agreement was not intended to take effect according to its terms, then the transfer of money to Mrs Smith was still not a transfer from Mr Smith, it was simply an unauthorised payment of trust money by Faloda which was only recoverable at the suit of Faloda.

CONSIDERATION

92    The evidence before the Court in this case reveals a complex history of transactions, over several years, involving property of Mr Smith, of his businesses, and of Mrs Smith, at a time when Mr Smith and businesses which he controlled were facing serious financial difficulties. The evidence further reveals that Mr Smith was concerned about the prospect of himself and Mrs Smith, in their retirement years, facing insolvency. An asset Mrs Smith ultimately acquired is the Surfers Paradise Property.

93    The Trustee has relied on ss 120, 121 and 128B of the Bankruptcy Act. Sections 120 and 121 are of relevance in relation to that aspect of the Trustee’s claim concerning the proceeds of sale of the Broadbeach Property and the Blue Mountain Heights Property. Section 128B is relevant insofar as concerns the Trustee’s claims regarding monies the subject of the First Superannuation Transfer and the Second Superannuation Transfer.

94    To the extent material for the purposes of the present case, those sections are as follows:

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.

…

(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.

…

(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.

128B Superannuation contributions made to defeat creditors--contributor is a person who later becomes a bankrupt

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 transfer is made by way of a contribution to an eligible superannuation plan; and

(b)     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

(c)     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; and

(d) the transfer occurs on or after 28 July 2006.

…

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 for at least 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.

95    During closing submissions at the hearing, Counsel for Mrs Smith submitted as follows:

MR DERRINGTON: I will not press a submission that it cannot be established – or, sorry, that it cannot be reasonably inferred from the circumstances at the time of the transfers that Mr Smith was or was about to become insolvent. So your Honour can take from that concession that the question of subjective intention is not something that I’m going to argue about either and that - - -

HER HONOUR: Is not what?

MR DERRINGTON: Is not something I’m going to argue about and that for the purposes of section 121 your Honour can presume that there was an intention to defeat creditors because provided that one can reasonably infer circumstances of insolvency, the Act requires that assumption to be made.

HER HONOUR: Right.

MR DERRINGTON: So the case that is advanced by my side is limited really then in respect of each of the transactions to the propositions that either the property that was transferred was not property of Mrs Smith’s or that the property that was transferred would not have been divisible amongst Mr Smith’s creditors or formed part of his estate. That’s really the ambit of the ballpark that I’m dealing with.

(transcript p 129 ll 6-25)

96    Further, I note that only s 128B of the Bankruptcy Act is in issue between the parties in respect of the First Superannuation Transfer and the Second Superannuation Transfer. That this is the case was clarified during closing submissions, as follows:

MR DERRINGTON: So for the purposes of the transfers, to the extent that there is a challenge to them under section 121 of the Act, the fight is over subparagraph (a).

HER HONOUR: Yes.

MR DERRINGTON: And for the purposes of 128(b) which deals with the superannuation transfers the fight is over the subparagraph (b). The second thing I can tell you is that I understand from my learned friend that the claims in respect of superannuation and the recovery of the money that was transferred into Mrs Smith’s superannuation account were challenged under each of 120, 121 and 128B. I understand my friend will concede that he can only succeed under 128(b) and so I no longer – I have intended to but I won’t need to take your Honour through the proper construction of 120 and 121 because there’s no long a claim being pressed on that basis.

(transcript p 130 ll 6-21)

MR RUSSELL: Finally, your Honour, can I turn to the – the superannuation transactions. Not to clarify, but just to confirm and perhaps state more precisely the concession in relation to this, about sections 120 and 121. My friends put it fairly – just so that your Honour has it – some of the submissions that were made commencing at paragraph 176 of my friend’s submission, argue that the trustee cannot have recourse both to section 128B and section 120 and 121, to a lesser extent, of the Act. My friend provides some analysis of the proper interpretation to be given to the Act in the passages that follow. We accept those – we accept the arguments and the interpretation of the Act there offered, and therefore accept that to succeed on the superannuation transactions, section 128B is the only avenue available to the applicant.

The point really turns on the proper construction of section 128B of the Act…

(transcript p 157 l 41 – p 158 l 6)

97    Having regard to the submissions of the parties and the background facts, it appears that the fundamental question for the Court to consider is whether the monies which were ultimately used by Mrs Smith to purchase the Surfers Paradise Property were monies which constituted property that would have become part of Mr Smith’s estate, or would probably have been available to his creditors.

Contended Entitlement of Mrs Smith to Increased Proportion of Proceeds of Sale of the Broadbeach Property and Blue Mountain Heights Property

98    Mrs Smith conceded that she received more than 50% of the proceeds of sale of the Broadbeach Property and the Blue Mountain Heights Property. Mrs Smith contended however that she was entitled to do so because:

    she was entitled to be repaid the costs incurred in preparing those properties for sale, being advertising and renovation costs; and

    she had made two substantial contributions out of her own funds for the purposes of maintaining her husband’s business, which reduced the debts which Mr Smith owed which were secured against the properties and likely forestalled any action being taken by the Commonwealth Bank in respect of the Broadbeach Property and the Blue Mountain Heights Property (which equity required Mr Smith to account for in the distribution of proceeds).

99    It followed, in Mrs Smith’s submission, that as a result she had an equitable entitlement to more than 50% of the proceeds of sale, and, to the extent that her receipt of the sale proceeds reflected a greater beneficial interest in the properties, Mrs Smith was not receiving a transfer of property from Mr Smith so as to enliven s 120 or 121 of the Bankruptcy Act.

100    For completeness I further note that, although s 116(1)(a) of the Bankruptcy Act provides (inter alia) that all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, is property divisible amongst the creditors of the bankrupt, s 116(2)(a) provides that s 116(1) does not extend to property held by the bankrupt in trust for another person.

101    Mrs Smith submitted that relevant contributions by her were as follows:

    on about 19 May 2015, Mrs Smith caused a payment of $90,000 to be transferred from her Heritage Bank “Online Saver” bank account described as “S26” to a TFD Facility Overdraft Cheque Account;

    on about 15 June 2015, Mrs Smith caused $178,351.77 to be withdrawn from her “One Path” personal superannuation fund and deposited into a Heritage Bank account held in her and her husband’s joint names, which was then used by Mr Smith to pay expenses of TFD, including wages;

    at least $8,271.50, and then a further $3,700.00, were paid from Mrs Smith’s personal funds to preparing the properties for sale, being payments identified in her bank statements; and

    Mrs Smith paid approximately $40,000.00 (from money inherited by her from her mother) on account of renovations of the properties.

102    In her affidavit dated 29 July 2021, Mrs Smith gave evidence of both payments of $90,000.00 and $178,351.77 (Exhibits GSS-02 and GSS-03). That these payments were made did not appear to be disputed by the Trustee.

103    As also submitted by Mrs Smith, the Trustee’s cross-examination of Mr Smith was conducted on the basis that the payments of $90,000.00 and $178,351.77 were made by Mrs Smith.

104    Further, Mrs Smith deposed that she likely paid approximately $12,000.00 in advertising costs relating to the sale of the Broadbeach Property and the Blue Mountain Heights Property, with that estimate comprising:

    approximately $2,000.00 paid to the real estate agency “The Professionals Broadbeach” in respect of the Broadbeach Property;

    approximately $6,500.00 paid to real estate agency “Peter Snow & Co” in respect of the sale of the Blue Mountain Heights Property; and

    approximately $3,500.00 paid to the real estate agency “Colliers” and their related entity, “Diversified Properties”, in respect of the sale of the Blue Mountain Heights Property.

105    Despite estimating advertising costs of $12,000.00, Mrs Smith in her affidavit was only able to provide evidence of three payments. Those payments totalled $8,271.50, were made between 16 September 2015 and 17 November 2015, and were in the amounts of $3,981.50, $1,750 and $2,540 respectively. These payments were each made from a bank account in Mrs Smith’s name to Diversified Properties, a related entity of Colliers who provided advertising services. During cross-examination, Mrs Smith accepted that these 3 transactions were the only transactions she was able to identify referable to advertising costs.

106    The closing submissions of the first respondent further appear to accept that payments totalling $8,271.50 were established. The Trustee does not appear to dispute that Mrs Smith paid $8,271.50 to Diversified Properties in respect of advertising costs, however submitted that the third payment of $3,981.50 was paid by Mrs Smith on behalf of Faloda to advertise the North Street Property. During cross-examination, Mrs Smith could not recall to which property each payment was referable.

107    In the same affidavit Mrs Smith gave evidence that she had paid approximately $40,000.00 in respect of renovations of the Blue Mountain Heights property, including:

    Town and Country floor polishing, in the amount of approximately $4,500.00;

    the purchase of a ride-on mower, in the amount of approximately $5,000.00;

    substantial landscaping and garden maintenance work, in the amount of approximately $10,000.00;

    the engagement of arborists in order to care for and preserve an historically significant fig tree located at the property;

    the purchase of a large number of truckloads of soil for terracing the rear of the property;

    the installation of sprinkler systems;

    replacing the carpeting within the house itself;

    refurbishing of the external entrance, veranda and timber ceilings; and

    other general repairs and refurbishments such as revarnishing of wooden surfaces, rendering and decking.

108    Mrs Smith further deposed that she did not keep any record or receipts of any of these renovation costs and that some of the renovations were “cash jobs”. During cross-examination, Mrs Smith further gave evidence that she did not keep records of the amounts spent on renovations.

109    The Trustee submitted that there was no documentary evidence of any money being spent on renovations for the Broadbeach Property or the Blue Mountain Heights Property, and submitted that there was evidence that, in the period in which Mrs Smith claimed to have spent that money, her bank account balance was never higher than $24,768.55 and none of the transactions evident during the period bore any apparent relationship to renovation costs or even significant cash withdrawals that could pay for those “cash jobs”. In particular, the Trustee referred to Statements for Mrs Smith’s Heritage Bank Accounts 2015-2020.

Findings

110    Notwithstanding Mrs Smith’s evidence, I am not persuaded of her claimed contribution of $40,000.00 referable to renovations of the Broadbeach Property or the Blue Mountain Heights Property. No documentary evidence was produced by Mrs Smith supporting that claim. Any assertion by Mrs Smith of an interest referable to the payment of that sum is not substantiated.

111    Whilst there is evidence that Mrs Smith contributed $8,271.50 towards advertising costs, it is unclear as in respect of which property this payment was made. I accept however that this amount was paid by Mrs Smith in respect of the sale of one or more of the Broadbeach Property, the Blue Mountain Heights Property, or the North Street Property.

112    All other alleged contributions by Mrs Smith in respect of renovations and advertising are not substantiated, and I do not accept that they were made.

113    The payments made by Mrs Smith of $90,000.00 (to the TFD Facility Overdraft Cheque Account) and of $178,351.77 to a Heritage Bank account held in Mrs Smith and Mr Smith’s joint names (then used by Mr Smith to pay expenses of TFD, including wages) are not seriously disputed by the Trustee. It does not follow however that the making of any of these payments gave rise to an equity in Mrs Smith’s favour, attaching to the proceeds of sale of the Broadbeach Property and the Blue Mountain Heights Property, such that she was entitled to an increased proportionate amount of those proceeds.

114    The first respondent relied on the principle that equity will restore the parties to a joint endeavour which fails when contributions have been made in circumstances where it is not intended that the other party enjoy them should the endeavour fail, and in particular on the decision of the High Court in Baumgartner v Baumgartner (1987) 164 CLR 137; [1987] HCA 59. In that case the appellant and respondent commenced a de facto relationship resulting in the birth of a child. The parties pooled their incomes for living expenses. The appellant bought land in his own name, after consulting with the respondent as to her views. The evidence before the Court was that the land and the home subsequently built thereon was the home of both parties and their child, and that the respondent usually gave the appellant her pay packet to permit the pooling of resources for mortgage payments and other expenses of running the household. The parties separated, and an issue arose concerning legal and equitable title to the property.

115    Chief Justice Mason and Wilson and Deane JJ observed that a question arose whether, in the circumstances, the respondent was entitled to relief by way of constructive trust, and that such a trust may be imposed even though the person on whom it was imposed had no intention to create a trust or hold the property on trust. Referring to the decision of Mahoney JA in Allen v Snyder [1977] 2 NSWLR 685, their Honours said:

30.    … His Honour observed that in such situations an intention may be imputed in circumstances where the imputation is necessary "in good faith and in conscience", though he added that this expression was of such generality that it did not provide an acceptable test for decision-making. In the ultimate analysis his Honour rejected (at p 707) the argument that the Court would impose a constructive trust by reference to what was "fair" in the ordinary sense of that term. But in the course of reasoning to that result Mahoney J.A. indicated some situations in which it might be appropriate to impose a constructive trust. Thus, he said (at p 706):

"A husband may pay for the matrimonial home and cause the legal title to be vested in the wife. The wife may earn money and use it in defraying household expenses, thus relieving the family budget and allowing the husband to pay mortgage instalments on the home. It will be necessary, from time to time, to determine whether, in such situations, the failure to recognize that the one or the other has a proprietary interest in the home is so contrary to justice and good conscience that a trust or other equitable obligation should be imposed."

His Honour's reference to "contrary to justice and good conscience" is to be understood as "unconscionable". The significance of this statement so understood is that it asserts that the foundation for the imposition of a constructive trust in situations of the kind mentioned is that a refusal to recognize the existence of the equitable interest amounts to unconscionable conduct and that the trust is imposed as a remedy to circumvent that unconscionable conduct.

116    Their Honours then referred to Muschinski v Dodds (1985) 160 CLR 583 and continued:

31.    In Muschinski v. Dodds a man and woman who had lived together for three years decided to buy a property on which to erect a prefabricated house and to restore a cottage. The woman was to provide $20,000 from the sale of her house and the man was to pay the cost of construction and improvement from $9,000 he would receive on the finalization of his divorce and from loans. The property was conveyed to them as tenants in common. Although some improvements were made by the man, the erection of the house did not proceed and the parties separated. The woman contributed $25,259.45 and the man $2,549.77 to the purchase and improvement of the property. This Court declared that the parties held their respective legal interests upon trust to repay to each his or her respective contribution and as to the residue for them both in equal shares.

32.    Deane J. (with whom Mason J. agreed) reached this result by applying the general equitable principle which restores to a party contributions which he or she has made to a joint endeavour which fails when the contributions have been made in circumstances in which it was not intended that the other party should enjoy them. His Honour said (at p 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 369, at pp 374-375 and per Jessel M.R., Lyon v. Tweddell (1881) 17 ChD 529, at p 531."

33.    His Honour pointed out (at p 614) that the constructive trust serves as a remedy which equity imposes regardless of actual or presumed agreement or intention "to preclude the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle". See also p 617. In rejecting the notion that a constructive trust will be imposed in accordance with idiosyncratic notions of what is just and fair his Honour acknowledged (at p 616) that general notions of fairness and justice are relevant to the traditional concept of unconscionable conduct, this being a concept which underlies fundamental equitable concepts and doctrines, including the constructive trust.

117    Their Honours further observed that, in that case, the parties:

34.    …pooled their earnings with a view to meeting all the expenses and outgoings arising from their living together as a family. The individual contributions of each party were not allocated to a particular category or particular categories of expenses and outgoings. The pool of earnings was used to pay outgoings associated with accommodation - mortgage instalments on the unit at Cabramatta and the property at Leumeah - as well as other living expenses. There was no suggestion that the respondent's contributions were paid and received by way of rent or a charge for use and occupation and for living expenses. Such a suggestion would be inconsistent with the relationship that came into existence between the appellant and the respondent, a family relationship which was for the most part until 1982 a long-term stable relationship in which marriage was under continuous contemplation. The land at Leumeah was acquired and the house on it was built in the context and for the purposes of that relationship. Together they planned the building of the house. Together they inspected it in the course of its construction. Together they moved out into it and made it their home after it was built.

35.     In this situation it is proper to regard the arrangement for the pooling of earnings as one which was designed to ensure that their earnings would be expended for the purposes of their joint relationship and for their mutual security and benefit. To the extent which the pooled funds were the source of payment of mortgage instalments by the appellant, the pooled funds contributed not only to present accommodation expenses but also to the security of the parties' accommodation in the future. In this context it would be unreal and artificial to say that the respondent intended to make a gift to the appellant of so much of her earnings as were applied in payment or mortgage instalments. There is no evidence which would sustain a finding that the respondent intended to make a gift to the appellant in this way.

36.     The case is accordingly one in which the parties have pooled their earnings for the purposes of their joint relationship, one of the purposes of that relationship being to secure accommodation for themselves and their child. Their contributions, financial and otherwise, to the acquisition of the land, the building of the house, the purchase of furniture and the making of their home, were on the basis of, and for the purposes of, that joint relationship. In this situation the appellant's assertion, after the relationship had failed, that the Leumeah property, which was financed in part through the pooled funds, is his sole property, is his property beneficially to the exclusion of any interest at all on the part of the respondent, amounts to unconscionable conduct which attracts the intervention of equity and the imposition of a constructive trust at the suit of the respondent.

37.    It therefore becomes necessary to determine the terms of that constructive trust. The facts that the Leumeah property was acquired and developed as a home for the parties and that, at least indirectly, it was largely financed out of money drawn from the pool of their earnings, this being one of the purposes which the pool was to serve, combine to support an equality of beneficial ownership at least as a starting point. Equity favours equality and, in circumstances where the parties have lived together for years and have pooled their resources and their efforts to create a joint home, there is much to be said for the view that they should share the beneficial ownership equally as tenants in common, subject to adjustment to avoid any injustice which would result if account were not taken of the disparity between the worth of their individual contributions either financially or in kind. The question which has caused us particular difficulty is whether any such adjustment is necessary in the circumstances of the present case to avoid any injustice which would otherwise result by reason of disparity between individual financial contributions. The conclusion to which we have come is that some such adjustment is necessary.

118    The principles explained in Baumgartner have been considered in subsequent cases in which the question arose concerning contributions made by an applicant towards the price of land, or towards mortgage payments in respect of land, in which the applicant had no registered interest: see for example Silvester v Sands [2004] WASC 266; Draper v Official Trustee in Bankruptcy (2006) 156 FCR 53; [2006] FCAFC 157.

119    In Official Trustee in Bankruptcy v Lopatinsky (2003) 129 FCR 234; [2003] FCAFC 109 more than one-half interest in a matrimonial home was paid to the wife of a bankrupt, following an informal agreement between the bankrupt and the wife that she would not sue him for an adjustment of her property rights under the Family Law Act 1975 (Cth) following the failure of the marriage. The wife contended that she was entitled to an interest under a resulting or constructive trust over the proceeds of sale of the matrimonial home, and that there was no “transfer” of property to her.

120    The Full Court noted in Lopatinsky at [112] that it was well-established that when two or more persons contributed unequally to the purchase of a property and title was taken by them as joint tenants, there was an equitable presumption that they held the title on a resulting trust for themselves as tenants in common in shares proportionate to their contributions: see Calverley v Green (1984) 155 CLR 242 per Mason and Brennan JJ at 258-259. Their Honours noted, in summary:

    Both Mr and Mrs Lopatinsky were liable for payments in respect of the mortgage over the matrimonial home. Payments made by the wife towards mortgage instalments could not have brought about any alteration in the equitable interests of the parties in that property: at [115].

    If the wife had made disproportionate contributions to the payment of mortgage instalments without intending the husband to have the benefit of those payments, she may have been entitled to contribution in equity for her share of the payments and a charge to secure her equitable entitlement: at [116].

    There was nothing in the evidence which was capable of giving rise to any suggestion of a gift to the husband in respect of her payments: at [117].

121    Their Honours continued:

130     The principles which underlie the imposition of a constructive trust in equity provide a more flexible approach than the resulting trust in two important respects. First, as Deane J said in Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583 at 614 ("Muschinski"), the constructive trust is a remedial institution which is imposed by equity without regard to the actual or presumed intentions of the parties. Second, the relevant events which lead to the finding of an interest may occur after acquisition and beneficial interests may change in the course of the relationship; see Green v Green (1989) 17 NSWLR 343 per Gleeson CJ at 355-356.

131     The unifying principle under which equity will intervene to declare the existence of a constructive trust over a former matrimonial home is that a constructive trust will be imposed where it would be unconscionable on the part of one of the parties to refuse to recognise the existence of an equitable interest in the other; see Baumgartner at 147; see also Green v Green at 353 per Gleeson CJ.

132     Here, Mrs Lopatinsky had a legal interest in 50% of the proceeds of sale of the Peakhurst property. Can it then be said that a constructive trust ought to be imposed to increase her beneficial interest in the property to 81%?

133     The principle which underlies the decision of the High Court in Baumgartner is that a party is to have restored to him or to her the contributions which he or she has made to a joint endeavour which has failed where the contributions have been made in circumstances in which it was not intended that the other party should enjoy those benefits. Upon the failure of the joint endeavour it would be unconscionable for the other party to retain them; see Baumgartner at 148 per Mason CJ, Wilson and Deane JJ; see also Muschinski at 620 per Deane J.

…

137     Here, there was a form of "pooling". It was done out of necessity rather than by way of agreement as in Baumgartner. There was pooling of the earnings of Mr and Mrs Lopatinsky for the purpose of meeting the mortgage instalments, firstly on the Kogarah property and later on the Peakhurst property. However, as we have said, we cannot determine the precise percentage borne by Mrs Lopatinsky in excess of her 50% liability.

138     We do not see why the payments made as a matter of necessity should leave Mrs Lopatinsky in a different position from a wife or partner who made the payments under an express agreement as in Baumgartner. In our view, it would be inconsistent with the principle to which we referred at [129], ie the restoration of contributions to a failed joint enterprise, to hold otherwise.

139     It seems to us to follow that Mrs Lopatinsky had an equitable interest of more than 50% under a constructive trust over the net proceeds of sale of the Kogarah property. The amount which represented her equitable interest in the proceeds of Kogarah was then applied to the purchase of the Peakhurst property. The effect of the decision in Baumgartner is that she also had an equitable interest under a constructive trust for the same percentage (ie more than 50%) of the amount by which the net proceeds of sale of Peakhurst exceeded the net proceeds of sale of Kogarah.

(emphasis added)

122    More recently in Staatz v Berry, in the matter of Wollumbin Horizons Pty Ltd (in liq) (No 3) [2019] FCA 924, Derrington J found that real property the subject of a scheme for the establishment of a form of commune, should properly be found to be held by a company as a bare trustee pursuant to a constructive trust for those parties who had subscribed money for the purposes of becoming members of the commune. In particular his Honour observed:

137.     It follows that the there was a common intention that the Mortgage Subscribers would have an interest in the Property and there was detrimental reliance on that intention by them when they subscribed their funds and, in some cases, moved onto the land. The suggestion by the Company or the other members that they do not have an interest in the land is unconscionable in the equitable sense and equity will not permit them to assert to a greater interest in the Property so as to defeat the interests of the Mortgage Subscribers: Baumgartner v Baumgartner [1987] HCA 59; (1987) 164 CLR 137, 147-148 per Mason CJ, Wilson and Deane JJ, 152 per Toohey J.

138.     It is apparent that a significant factor in this case is that the important arrangements underpinning the legal structure of the Community were bedevilled by an almost complete lack of formality. Whilst it may be that an application for a unit in the unit trust was completed by some of the Mortgage Subscribers, compliance with the unit trust deed seemed to end there. The Company received the funds and, indeed, used them, although there was no hint that any corresponding unit was issued. By that time the matter of the issuing of units had seemed to have evaporated. Despite the funds being held on trust, Mr Darwin and the Company used them to discharge the mortgage and the Mortgage Subscribers were seemingly accepted as part of the Community and permitted on the land where they expended money in establishing dwellings. The best which can be discerned from these informal and casual dealings is that the parties had a common intention that if the Mortgage Subscribers paid their money to the Company they would become members of the Community and have an interest in the Property which was commensurate with that of the existing members. That arrangement was put into effect, the money paid and, for all outward appearances, the Mortgage Subscribers became members of the Community. In general terms it can be said that the detriment suffered by each was the amount of the money they subscribed to the Company.

139.     In circumstances such as these it might not be inappropriate to recognise the existence of a constructive trust of the type referred to in Bannister v Bannister [1948] 2 All ER 133 in respect of the previously mortgaged portion of the Property for the Mortgage Subscribers in proportion to the amounts which were contributed. That was because the joint endeavour between them and the Pre-Purchase Subscribers failed in circumstances where it was not intended that the benefit of one member’s subscription be enjoyed by the others. Alternatively, it was because the common intention of the parties was that all were to have an interest in the Property and it would be inequitable to deny any member a beneficial interest. (The principles underpinning these two types of constructive trust are discussed later in these reasons.)

123    Turning now to the present case, to the extent that I find payments were made by Mrs Smith as she has claimed, I further find as follows.

124    First, in respect of the payment of advertising costs of $8,271.50 by Mrs Smith, as I observed earlier it is unclear from the evidence as to which property or properties those advertising costs were made. At the hearing Mrs Smith gave the following evidence:

- - - that you’ve described of advertising costs?---It could have been – yes. It could have been our house. It could have been - - -

It could have been either of the properties. It could have been - - -?---It could have been TFD – the ..... of TFD.

Your evidence - - -?---I don’t know.

Your affidavit evidence hasn’t been that you personally paid the advertising costs for the TFD property at 123 North Street?---Well, that’s – if something had to be paid, I had to pay it because we had no paperwork. We had nothing.

Do you accept that it’s more likely that you paid the advertising costs for your personal residential properties than for the business’ sale of 123 North Street?---Can you ask that question?

So I understood your evidence a moment ago, Ms Smith, to be that you thought that it – this – these costs might have related to the business’ sale of the property at 123 North Street; is that what you said a moment ago?---That’s what I said, yes.

Yes. I’m suggesting to you that it’s much more likely that you’ve paid advertising costs relating to your own residential properties and investment property at Broadbeach than it is that you paid the business’ advertising costs for the sale of 123 North Street?---You’re suggesting that it’s more than likely the residential property?

Yes?---At this stage I don’t believe it’s more than likely the residential property. It could have been either.

You don’t have a good recollection of - - -?---No. This is seven/eight years ago.

(transcript pp 79-80)

125    On the material before me I am not satisfied that the payment of $8,271.50 by Mrs Smith could be specifically attributed to advertising concerning the sale of either the Broadbeach Property or the Blue Mountain Heights Property. It could equally have been made in respect of advertising for the North Street Property. In any event, I am unable to identify how what appeared to be a voluntary contribution towards advertising by Mrs Smith, being a one-off payment of a minor sum, enlivens the equitable principles explained in such cases as Baumgartner and Lopatinsky.

126    Second, the circumstances wherein Mrs Smith transferred funds in the amounts of $178,351.77 and $90,000.00 (totalling $268,351.77) to TFD to enable its businesses to continue to operate were completely distinguishable from the facts of cases where the Baumgarner principles of constructive trust have been analysed and applied.

127    Authorities supporting a constructive trust of the nature contended by Mrs Smith have historically involved contributions by individuals towards the purchase price or mortgage repayments directly attributable to real property. In Baumgartner, for example, the relevant contributor did not have a legal or registered interest in the property. In Lopatinsky while both contributors had a registered interest, the issue before the Court was whether there was a disproportion of contributions towards acquisition of the property by the marital partners. It was in such circumstances that equity was able to intervene to recognise the existence of an interest of the plaintiff in the property not otherwise identified on the relevant title. The facts of the present case are completely distinguishable from such circumstances as addressed in those authorities.

128    There is no evidence at all before the Court that the payment by Mrs Smith of the total of $268,351.77 to TFD had any connection with any joint endeavour or common intention referable to the ownership by her and Mr Smith of the Broadbeach Property or the Blue Mountain Heights Property. Mrs Smith gave evidence that she and Mr Smith were concerned that they would lose their home if the TFD companies became insolvent, however the key issue in that context is that the funds provided by Mrs Smith were to keep the TFD companies afloat, to continue to provide income to her family and pay both creditors and employees, with a side benefit being preservation of the personal assets of herself and Mr Smith because of personal guarantees given by Mr Smith over the indebtedness of TFD. As the Trustee correctly submitted, even assuming that there was any prospect of equity intervening, the payment of these funds by Mrs Smith to TFD could only give rise to any constructive trust referable to assets of TFD companies, and there was no suggestion nor pleaded allegation of any joint endeavour between Mrs Smith and TFD, or associated constructive trust.

129    Further, such evidence as is before the Court indicates that the amount of $268,351.77 paid by Mrs Smith to TFD was in the nature of a loan by Mrs Smith to TFD. In her affidavit, Mrs Smith deposed:

20.    I continued to work for the TFD Companies between 2012 and 2015, while also acting as Richard's carer. During that time, Richard's health continued to deteriorate, and he continued to face significant pressure in relation to the performance of the TFD Business. I felt that some employees were continuing to take advantage of Richard's ill health, and that there was a lack of other leadership and management to respond to declining standards. Competition also increased around this time as a result of products being imported directly from China and other overseas manufacturers.

21.     I was aware from:

(a) what Richard said to me from time to time; and

(b) the various things I saw around the factory with staff

that the TFD Business was experiencing tough times. We were winning fewer tenders and quotes with customers, and a number of key staff member had left the TFD Business to work for competitors.

22.    Richard did not say anything specific to me. He would say things like, “we need to win this job if there is to be enough money to pay the bills” or “things are not good” or “things are tight”.

23.     However, I was not involved in pricing, accounts or management for the TFD Business, and none of the customers with whom I dealt raised any concerns regarding any financial issues with me.

24.    The state of the TFD Business was taking a great toll on Richard. His health was poor and the stress from the business made it much worse. I felt very sorry for him and was concerned about his wellbeing. He was not coping well.

…

TFD Facility Contribution

31.    Managing the TFD Business was an enormous burden for Richard, and I wanted to help him in any way I could to improve his wellbeing and take pressure off him.

32.    I was aware that Richard was particularly worried about the monies which were owing in relation to a facility agreement between CBA (as lender) and the TFD Companies (as borrower) (TFD Facility) which was comprised of two separate agreements between CBA and the TFD Companies which were amended on or about 12 December 2014, being:

(a) a 'Better Business Loan' with the number '443 10624356' dated on or about 18 August 1995 and varied on or about 12 December 2015; and

(b) an 'Overdraft Cheque Account' with the BSB 064 433 and the Account Number 0054 0342

dated on or about 18 August 1995 and varied on or about 12 December 2014.

33.     Around that time, I had a conversation with Richard in which Richard said words to the effect of "The TFD Facility is guaranteed by me personally. If TFD can't make payments, our home is on the line". Richard and I were both very concerned about what might happen if CBA called upon Richard's guarantee.

34.    In early May 2015, I had approximately $91,000.00 of personal savings in my Heritage Bank 'Online Saver' account with the account number 638-260 and identified as account 'S26' (Account S26). I decided that one way that I could help Richard would be to transfer those savings from Account S26 to the TFD Companies in order to ease Richard's burden and to assist him in paying the monies which were owing under the CBA Facility.

35.    On 19 May 2015, I caused $90,000.00 to be transferred from Account S26 to TFO Facility 'Overdraft Cheque Account' (TFD Facility Contribution).

36.    Attached hereto and marked "GSS-02" is a Transaction Listing for Account S26 between the period of 28 February 2015 and 31 October 2020, which has been extracted from pages 300 to 305 of MFl-5 (Account S26 Statement). I believe the contents of Account S26 Statement to be true and correct. The May 2015 TFD Payment appears on the Account S26 Statement with the reference 'Transfer to CBA - 00540342'.

37.    I felt that making the May 2015 TFD Payment was a good way for me to show my support for Richard and to ease his concerns about the personal guarantee which he had given in respect of the CBA Facility. Our marriage partnership was a happy one, and Richard's whole life was changing around him. He and I were both worried about his health falling apart, and our finances falling apart. He took great pride in being the protector of the family.

130    In particular I note the following evidence at the hearing of Mrs Smith:

Can you go to paragraph 20, please, and just read that paragraph to yourself?---Yes.

Does that refresh your memory?---Mmm.

Competition increased as a result in part of Chinese imports?---It did, yes.

Richard’s health began to deteriorate?---Yes.

You were very concerned about his wellbeing?---Yes.

By May of 2015, managing the business was an enormous business for Richard?---Yes.

You wanted to help him?---Yes.

You wanted to take pressure off of him?---Yes.

The TFD business had a business loan with the Commonwealth Bank. You knew that at the time?---I knew there was an overdraft.

Did you know which bank it was with?---CBA, yes.

You were aware at the time that Richard had guaranteed those obligations?---Yes, I was aware that Richard had guaranteed - - -

And that meant that he was personally liable?--- - - - creditors anyway.

I’m sorry?---I – I was aware Richard was a guarantee for creditors.

You were aware that he was a guarantee on the overdraft account as well?---On the overdraft.

Sorry, is – were you aware of that, Ms Smith?---Had I thought about it, I possibly would assume that, but - - -

You don’t have a recollection now - - -?---I don’t have – no.

- - - of being aware of that at the time?---No.

You were very concerned about the bank calling on Richard’s guarantee?---Yes.

You knew that he couldn’t personally repay the sum owed on the overdraft account?---Yes.

You decided to transfer some of your savings to the TFD overdraft account?---Yes. I didn’t - - -

In order to ease Richard’s burden?---Yes.

In order to assist the TFD companies to repay the money they owed to the Commonwealth Bank?---Yes. I did not do that simply. I did that because I was totally aware – I – I was totally aware that Richard had a – a – a cashflow problem. I was well aware of the work that we had in the factory and I was aware that we had a lot of retainers due. In a commercial – in a commercial job, they hold so much back, and I was aware that there was a lot of retainers being ready to be – within – within months ready to be released.

I see?---I was also aware that the – because of the aluminium factory losing so much, I had meetings with the – with our aluminium supplier, and between her and myself, we took it on board to redirect the aluminium factory in a – in a new – in a new direction, and we were – we had several meetings with body corporates in – in – at the Gold Coast about buildings that needed windows replacing. We – yes, we had been to a lot of meetings. We had one contract to replace one lot of windows, and we – the body corporate had approved the $500,000 as a deposit for those windows, and they were only a supply-only. They wanted us to just make them and put them there and they were getting abseilers to do the windows. So I was aware of that. We had – we had two buildings in excess of 30 years old that all needed the windows replacing. We had two that were – I think we had signed the contract on one. We were just about to sign the contract on another, and we had three more – three more buildings that were – we were talking logistics to at that time. So I had no fears whatsoever of – of loaning money because I could see TFD being in a really, really good spot. I just knew that he had a bit of a – we had two builders go – go under and I knew that he had a cashflow problem because he kept – he told me. Does that answer?

Yes, Ms Smith. Thank you. You knew that providing your savings to the TFD companies would reduce the amount potentially owing on Richard’s guarantee?---Can you say that again?

You knew at the time that if you paid some money from your savings into the TFD companies, that would reduce the amount which was potentially owing on Richard’s guarantee to the bank?---I – I – I didn’t look that much into it. I didn’t even think about the – I didn’t think about the bank. I was only aware – only thinking about the staff, making sure they were paid, and the creditors.

You knew the money was going to be paid into the overdraft account?---I had no – I had no idea what he was doing with it. It’s – I had nothing to do with that side of the business.

But you made the transfer of the funds?---I made them available for Richard to do the transfers.

You were not a director of any of the TFD companies?---No.

You were not a shareholder of any of the TFD companies?---No.

You yourself had not guaranteed the overdraft account?---No.

It was the TFD companies who were obliged to repay you?---Yes. TFD – I – I won’t – I’m sorry, but I won’t say “the TFD companies” because it was just TFD to me.

I see?---TFD Joinery.

The business?---The business.

(emphasis added)\

(transcript p 71-73)

131    As is plain from this evidence, Mrs Smith understood that TFD was obliged to repay her, and that TFD was the source of funds for herself and Mr Smith. It is clear that Mrs Smith voluntarily transferred the relevant funds to TFD to keep the business afloat, for the benefit of herself, Mr Smith, their employees and their creditors. There was no suggestion that Mr Smith was in any way obliged to secure the payment of those funds by Mrs Smith to TFD, or that the transfer of those funds by Mrs Smith was in any way dependent on her acquiring an increased interest in the properties owned by her and Mr Smith.

132    As the Trustee has submitted, at best for Mrs Smith, if the transfer of Mr Smith’s interest in the residential properties had not occurred, she would have been an unsecured creditor with an in personam claim on his estate. That would not have prevented Mr Smith’s interests in the Broadbeach Property or the Blue Mountain Heights Property (or the proceeds of sale thereof) from becoming part of Mr Smith’s estate in bankruptcy or available to his other creditors.

Conclusion

133    To the extent that I accept that Mrs Smith made the payments she claimed – specifically the amounts of $8,271.50, $178,351.77 and $90,000.00 – I am not satisfied that any of those payments by Mrs Smith gave rise to an interest which she could assert in equity to increase her entitlement to the proceeds of sale of the Broadbeach Property and the Blue Mountain Heights Property, beyond her entitlement to 50% of those proceeds.

Loan Agreement

134    As I noted earlier, Mr Smith was the sole director of Faloda, which was in turn the corporate trustee of the Trust. The evidence of Mr Smith was that Faloda was incorporated on 9 March 1976, at which time he, his parents and his brother were appointed directors. On or about 13 March 2014, Mr Smith became the sole director and secretary of Faloda, which position he retained until his bankruptcy on 27 March 2018.

135    On 22 April 2016, Faloda and Mrs Smith executed the Loan Agreement, whereby Faloda loaned monies to Mrs Smith on the following terms:

1.     The Lender agrees to lend $250,000.00 AUD to the Borrower and the Borrower agrees to repay this principal amount to the Lender.

2.     The Borrower is liable to the Lender for the payment of the full principal amount and costs.

3.     The loan is repayable within seven (7) days of the Lender providing the Borrower with written notice of demand.

4.     Notwithstanding anything to the contrary in this Agreement; if the Borrower defaults in the performance of any obligations under this Agreement, then the Lender may declare the principal amount owing under this Agreement at that time to be immediately due and payable.

5.     This Agreement will be construed in accordance with and governed by laws of the State of Queensland.

6.     All costs and expenses including without limitation the legal costs incurred by enforcing this Agreement as a result of any default by the Borrower will be added to the principal then outstanding and will immediately be paid by the Borrower.

7.     This Agreement will pass to the benefit of and be binding upon the respective heirs, executors, administrators, successors and permitted assigns of the Borrower and Lender.

8.     This Agreement may only be amended or modified by written agreement executed by both the Borrower and the Lender.

9.     This Agreement constitutes the entire agreement between the Parties and there are no further items or provisions either oral or otherwise.

10.     The clauses and paragraphs contained in this Agreement are intended to be read and construed independently of each other. If any term, covenant, condition or provision of this Agreement is held by a Court of competent jurisdiction to be invalid, void or unenforceable it is the Parties' intent that such provision be reduced in scope by the Court only to the extent deemed necessary for the provision to be reasonable and enforceable and the remainder of the provisions will in no way be affected, impaired or invalidated.

11.     This Agreement may consist of a number of copies (whether original, faxed or emailed), each signed by one or more parties to this Agreement. If so, the signed copies (whether original, faxed or emailed) are treated as making up the one document and the date on which the last counterpart is signed will be the date of this Agreement.

136    On 26 April 2016, pursuant to the Loan Agreement, Wonderley & Hall transferred the sum of $250,000 to Mrs Smith from money the firm held on trust on behalf of Faloda.

137    The balance sheet of the Trust for the year ended 30 June 2016 did not record the loan to Mrs Smith. The balance sheet however recorded a reduction of $284,130.00 in Mr Smith’s entitlement to receive a distribution from the Trust.

138    Faloda was deregistered by the Australian Securities and Investments Commission on 28 July 2019 for failure to pay relevant fees to the Commission.

139    In respect of the Loan Agreement, Mrs Smith pressed the argument that she gave consideration in respect of the $250,000.00 in the form of her promise to repay, and that accordingly the Loan Agreement was not a sham.

140    On the basis that the Loan Agreement was a genuine transaction entered by Mrs Smith and Faloda, being an agreement by which money was paid and a promise was made to repay that money, Mrs Smith contended that:

    There was no transfer of property by Mr Smith for the purposes of s 120 of the Act, nor a transfer of property that was probably divisible among Mr Smith’s creditors; and

    There was simply a transfer of property by Faloda, to which Mr Smith had no entitlement, and for which Mrs Smith gave market value, that being a promise to repay the same sum of money.

141    Mrs Smith further contended that even if the Loan Agreement were found to be a sham:

    The Trustee had not established any evidentiary basis for the assertion that the payment to Mrs Smith was a distribution to Mr Smith that was assigned to her, as opposed to nothing more than an unauthorised distribution of trust property by Faloda; and

    The Court would still need to make the factual finding that the $250,000.00 would have been probably distributable amongst Mr Smith’s creditors or available to his estate, however Mr Smith had a significantly greater liability to Faloda as a co-surety, namely the obligation to contribute to Faloda one half of what had been paid to the Commonwealth Bank to discharge the guarantee that both Faloda and Mr Smith had given. It followed that Mr Smith had an obligation to Faloda of approximately $600,000.00 and an entitlement under the trust of $284,130.00, such that the money in Faloda’s bank account would never have been distributed to Mr Smith and/or been available to his creditors.

142    At the hearing the Trustee accepted that to be successful on this point, a finding that the Loan Agreement was a sham was necessary, and it followed that if the Court did not find that it was a sham, its proper characterisation was as a transfer of property from Faloda to Mrs Smith, and that was the end of that part of the case.

Was the Loan Agreement a sham?

143    In Re Sharrment Pty Limited (1988) 82 ALR 530; [1988] FCA 179 the Full Court considered a series of complicated transactions involving a number of proprietary companies and trusts, including companies controlled by a bankrupt and trusts for his family. At first instance in that case the primary Judge found that each of the relevant companies were alter egos of the bankrupt, and that:

…the elaborate juggling of funds and thicket of book entries were all a cloak, artifice or sham intended to create the appearance of a debt due by Mr. Wynyard to one of his family trusts known as the Wynyard Family Trust (No. 4)

144    In the decision Lockhart J observed:

12.     "Sham" is a word which, although not infrequently having attracted the attention of the courts usually hovers on the periphery of cases. Here it is at the heart of the case. It is a word which first appeared as slang in the 17th Century and the dictionaries describe it as being of obscure origin. It is indeed a pity that it cannot be relegated to its earlier obscurity because of the ambiguity and uncertainty that surrounds its meaning and application. Ambiguous though its meaning is, it is an ambiguity that has attended the word for centuries: "Let the plot-mungers stay behind, whose art can truth to sham, and sham to truth convert": Oldham's Sat. Imit. Jur. mWKS 1703 (429); "The laws of sham and semblance which are called the 'devil's laws'": Carlyle's Past and Present L.V. 36.

13.     The meaning of the word "sham" has been considered in many cases. In Scott v. Federal Commissioner of Taxation (No. 2) (1966) 40 ALJR 265 Windeyer J. said at 279:

"On the other hand, if the scheme, including the deed, was intended to be a mere facade behind which activities might be carried on which were not to be really directed to the stated purposes but to other ends, the words of the deed should be disregarded ... A disguise as a real thing: it may be an elaborate and carefully prepared thing; but it is nevertheless a disguise. The difficult and debatable philosophic questions of the meaning and relationship of reality, substance and form are for the purposes of our law generally resolved by asking did the parties who entered into the ostensible transaction mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front - all these words have been metaphorically used - concealing their real transaction..."

14.     I shall have occasion to refer again to this passage later in this judgment.

15.     Diplock L.J. described the "popular and perjorative word" sham in Snook v. London & West Riding Investments Limited (supra) at 802 in these terms:

"I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities ... that for acts or documents to be a 'sham', with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating."

…

16.     A "sham" is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.

17.     The central issue in the case is the dichotomy between appearance and reality in characterising the transactions in 1979 as a sham. This dichotomy was recognised by the trial Judge in his reasons for judgment. The real difficulty in this case is not to determine the applicable principles of law but rather to characterise the transactions as a matter of fact.

Particular elements of "sham" transactions

18.     Although the issue for the Court in respect of the September-October 1979 transactions is to characterise them in their entirety there is some authority which assists in recognising the significance of particular elements of the transaction.

19.     First, the fact that the transaction involved a round robin of cheques does not necessarily establish that the transaction is a sham, even when no party has funds to meet the cheques: Re Barnett; Perpetual Trustee Co. Limited v. Barnett (1969) 2 NSWR 721.

20.     Second, the artificiality of the transaction does not give rise to its characterisation as a sham or to the characterisation of the constituent documents as a sham so long as each document "had the effect that it purported to have", and so long as none of the documents purported "to do something different from what the parties had agreed to do": Inland Revenue Commissioners v. Littlewoods Mail Order Stores Limited (1962) 2 All ER 279 per Lord Reid at 285.

21.     Third, the complexity of the transaction does not in itself establish its character as a sham. In Coppleson's Case (supra) Hunt J. of the Supreme Court of New South Wales considered a gift to a hospital of redeemable preference shares instead of cash. His Honour observed at 4023 that the fact that "the transaction became complex and elaborate rather than simple and straightforward does not seem to me to affect its true nature if in legal form it is a gift and if the parties thereto intended it to be operative according to its tenor".

22.     Fourth, a purported disposal of property, and by analogy a purported creation of a debt, may be a sham where donor and donee (or lender and debtor) do not intend to give effect to the transaction, it being agreed between them that there will be no change in the legal and beneficial ownership of the property. The fact that Mr. Wynyard continued to act as though The Chase was in his control may give rise to an inference that the transactions which led to its being purchased in the name of Seyta with funds apparently the funds of Seyta were a sham.

23.     Fifth, the fact that the transactions of 1979 may have been intended by Mr. Wynyard to present a shield against creditors does not, absent the transactions being set aside under the relevant provisions of the Bankruptcy Act, characterise them as a sham. The transactions may in themselves be legally effective although intended to achieve an unacceptable purpose. In Miles v. Bull (supra) Megarry J. said at p 264:

"A transaction is no sham merely because it is carried out with a particular purpose or object. If what is done is genuinely done, it does not remain undone merely because there was an ulterior purpose in doing it."

Megarry J. went on to observe that in the context of determining whether a sale of property was a sham so as to allow a defence to an action for possession that:

"mere circumstances of suspicion do not by themselves establish a transaction as a sham; it must be shown that the outward and visible form does not coincide with the inward and substantial truth." (at 264)

24.     The characterisation of a sham adopted by Megarry J. in Miles v. Bull (supra) is consistent with that adopted by Windeyer J. in Scott's Case (supra) at 279, in the passage which I cited above. Following a thorough review of the earlier authorities, Windeyer J. there defined the issue as whether the parties who entered the ostensible transaction

"... mean it to be in truth their transaction, or did they mean it to be, and in fact use it as, merely adisguise, a facade, a sham, a false front - all these words have been metaphorically used - concealing their real transaction ..."

145    I also note the conclusion of Lockhart J in that case:

47.     In conclusion I would say this. Although there was much evidence in the case, little of it touched the critical question as to whether what was done in August-September 1979 was a sham. The Court is left with little direct evidence and is therefore required to draw inferences from the circumstances surrounding the relevant events. The difficulty I feel about the matter is that to draw the inference of sham for which the Official Trustee contends is to reach a strong finding, and one which cannot be made if another inference is at least equally open. As I have indicated I think that another inference is open, namely, that what was done was to in fact create a debt in pursuance of Mr. Wynyard's desire to benefit his family through his family trusts.

48.     It is perhaps tempting to draw the inferences which were drawn by the trial Judge. I fully recognise that there is an unpleasant aura pervading the facts of the case. First comes the very complex series of interlocking transactions in 1979, followed about a year later by the purchase of "The Chase". The purchase then works to the benefit of Mr. Wynyard's family, while Mr. Wynyard's creditors and in particular the Commissioner of Taxation have recourse to little, if any, funds and are denied recourse to the proceeds of the sale of "The Chase". It remains that, when dispassionately reviewed, the evidence simply cannot support the inferences sought by the Official Trustee.

146    Similarly in that case Beaumont J said:

16.     In the first place, there is no suggestion here of any express arrangement or understanding that the transactions were not to take effect according to their terms. Nor, in my view, is there any basis for inferring that the parties intended something different from what they in fact did. It is true, as his Honour said, that there was apparently no commercial reason which might explain why Mr. Wynyard entered into the 1979 transactions. But it does not follow that the arrangements were not genuine. The dealings were between parties who were not at arms' length and, in that context, the absence of a commercial basis for their arrangements is not absurd. It is understandable that Mr. Wynyard might wish to benefit the Wynyard family companies at his own personal expense. He chose to do this by entering into a series of transactions, apparently predetermined, which, so far as appears, had their intended effect (cf. Gorton v. The Commissioner of Taxation of the Commonwealth of Australia [1965] HCA 1; (1965) 113 CLR 604 at p 621)….

17.     The only evidence on this question is the evidence provided by the transactions themselves. There is no material from which it could be concluded that the parties intended that their dealings have an operation which was different from that which would flow from the terms of the documents employed.

147    The decision in Sharrmant was favourably cited in Equuscorp Pty Ltd v Glengallan Investments [2004] HCA 55; 218 CLR 471 where the High Court said:

46.     Each of these transactions was legally effective. None of the transactions that took place on 30 June 1989 could be said to be a sham. The primary judge was wrong to characterise them, as he did by his references to "artifice", "façade" and "charade", as shams. "Sham" is an expression which has a well-understood legal meaning. It refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences. In this case, debts were created and satisfied at all points in the chain until, at its end, Rural Finance owed JFM and FJA certain sums, and the respondents owed Rural Finance certain sums. And of most particular relevance to the present matters, in accordance with its obligations under the written loan agreements, Rural Finance had applied the money it lent in payment of the application moneys due from the respondents for the units being bought.

47.     The contrary view reached in the Court of Appeal was much influenced by that Court's earlier decision in Australian Horticultural Finance Pty Ltd v Jekos Holdings Pty Ltd. Perhaps that decision may be understood as turning upon its particular facts. If, as the respondents contended in these matters in the Court of Appeal, it stands for some more general principle - that there is no "loan" unless there is "real" money lent - it is wrong and should be overruled.

(footnotes omitted)

148    In Raftland Pty Ltd v Commissioner of Taxation (2006) 227 ALR 598, [2006] FCA 109 a taxpayer appealed the disallowance by the Commissioner of Taxation of an objection to a notice of assessment, contending that the finding that distributions made in the capacity of the taxpayer as trustee of a unit trust was a sham was wrong in law. At first instance Kiefel J relevantly observed:

[75] The commissioner contends that neither of the purported distributions — that of the sum of $250,000 or that of the balance of Raftland’s trust’s income for the 1995 tax year — reflected the true arrangement or transaction between the parties. It is submitted that the resolutions to distribute are a “sham” and should be disregarded, as should the appointment of the E&M Unit Trust as a tertiary beneficiary, since it was made only to facilitate the false distributions.

[76] The term “sham” has been used in the context of commercial transactions and the ITAA. It has come to be applied where persons have entered into an “ostensible transaction as a disguise to conceal their true transaction”: Re State Public Services Federation; Ex Parte Attorney-General (WA) (1993) 178 CLR 249 at 290 ; 113 ALR 385 at 405–6 ; [1993] HCA 30 per Toohey J. In Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 454 ; 82 ALR 530 at 536–7 (Sharrment), Lockhart J reviewed the authorities on the meaning of “sham” in this context, and concluded:

A “sham” is therefore for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.

[77] Critical to a characterisation of a transaction as a sham is that the parties do not intend to give effect to the ostensible transaction: Scott v FCT (No 2) (1966) 40 ALJR 265 at 279 (Scott v FCT); Coppleson v FCT (1981) 34 ALR 377 at 380–1 ; 52 FLR 95 at 98 (Coppleson v FCT). In Sharrment at FCR 455; ALR 537–8 his Honour gave the example of a purported disposal of property and the creation of a debt. In his Honour’s view it might be a sham if the donor and donee do not intend to give effect to the transaction, it being agreed between them that there will be no change in the legal and beneficial ownership of the property. His Honour referred to Lord Diplock’s judgment in Snook v London & West Ryding Investments Ltd (1967) 2 QB 786 at 802 where it was explained that a sham arose where acts are done, or documents are created, which are intended to give the appearance of creating the parties’ legal rights and obligations, different from the actual legal rights and obligations. His Lordship considered it to be clear, in legal principle, that to be a sham the parties must have “a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating”. It is otherwise where the parties intend that the documents in question should take effect, and operate according to their tenor “and that they should respectively have the rights and be bound by the obligations thereby created”: Lau v FCT (1984) 54 ALR 167 at 172–3 per Connolly J.

[78] The commissioner listed a number of factors which, it was submitted, show that there was no intention to create a right on the part of the E&M Unit Trust to receive the alleged distributions. It is not necessary to set them out. A number of them are concerned with Raftland taking control of the E&M Unit Trust. While this may be a factor indicative of intention, it is not conclusive as to the parties’ common intention. In Sharrment Lockhart J considered that one person’s control of the situation did not itself permit a conclusion about whether a loan was regarded by the parties as recoverable: at FCR 457; ALR 539–40. It was necessary to look at the legal effect of what had been undertaken.

[79] The importance of this consideration was confirmed in Equuscorp Pty Ltd v Glengallen Investments Pty Ltd (2004) 218 CLR 471 ; 211 ALR 101 ; [2004] HCA 55 where the High Court rejected an argument that unless real money was lent, the transaction was a sham. In their Honours’ view this relied upon an economic rather than a legal effect of the transaction: at [48]. A “sham” refers to steps which take the form of a legally effective transaction, but which the parties do not intend should have the apparent, or any, legal consequences. The proposition that no real money was lent, and no real capital therefore brought to the venture, depended upon an unstated premise that the obligations said to be owed could not, or would not, be met: at [49].

149    Her Honour concluded that, in that case, it could readily be inferred that there were no distributions of income to the relevant trust, and further that the appointment of the trust as a tertiary beneficiary was made only as part of the façade and should also be disregarded (at [83]-[90]).

150    The taxpayer in that case unsuccessfully appealed to the Full Court, and subsequently to the High Court of Australia. In the High Court (Raftland Pty Ltd v Federal Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 516) Gleeson CJ, Gummow and Crennan JJ said:

35.     The term "sham" may be employed here, but as Lockhart J emphasised in Sharrment Pty Ltd v Official Trustee in Bankruptcy the term is ambiguous and uncertainty surrounds its meaning and application. With reference to remarks of Diplock LJ in Snook v London and West Riding Investments Ltd, Mustill LJ later identified as one of several situations where an agreement may be taken otherwise than at its face value, that where there was a "sham"; the term, when "[c]orrectly employed", denoted an objective of deliberate deception of third parties.

36.     The presence of an objective of deliberate deception indicates fraud. This suggests the need for caution in adoption of the description "sham". However, in the present litigation it may be used in a sense which is less pejorative but still apt to deny the critical step in the appellant's case. The absence of a present entitlement within the meaning of s 100A(1)(a) of the Act may appear from an examination of the whole of the relevant circumstances, and these are not confined to the terms of the Raftland Trust instrument.

(footnotes omitted)

151    In Lewis v Condon (2013) 85 NSWLR 99; [2013] NSWCA 204 a person who became a bankrupt was the registered proprietor of a property. The daughter of the bankrupt alleged that the property was held as a trustee under a trust of which she was a beneficiary. At first instance the Supreme Court of New South Wales held that the trust was not a sham, although the daughter had no standing to institute the proceedings. On appeal Leeming JA for the Court of Appeal said:

[57]     It is well-recognised that “sham” is an ambiguous term and uncertainty surrounds its meaning and application in various legal contexts: Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 453; Raftland Pty Ltd v Federal Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 516 at [35]. It is necessary to use the term precisely.

[58]     The essence of a sham for present purposes is as stated by the High Court in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 at [46]:

“[46] … [Sham] refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences.”

[59]     That is to say, it is essential that there be an intention that the true transaction is different from that which would ordinarily be attributed to the transaction on the face of the documents. As Lord Wilberforce put it, “to say that a document or transaction is a ‘sham’ means that while professing to be one thing, it is in fact something different”: WT Ramsay v Inland Revenue Commissioners [1982] AC 300 at 323.

[60]    Basic to the legal notion of sham is that it is a confined and exceptional aspect of the process of giving legal meaning to a document, as Professor Conaglen has pointed out (“Sham Trusts” (2008) 67 Cambridge Law Journal 176 at 206):

“The relevance of the sham doctrine, and the difference between it and normal processes of construction, lies in the fact that it justifies the court in ignoring (as opposed to construing) the usual primary material regarding that transaction, and focusing its attention instead on all other material factors which indicate the arrangement that the parties in fact intended.”

[61]     That echoes the words of Windeyer J in Scott v Commissioner of Taxation (Cth) (No 2) (1966) 40 ALJR 265 at 279:

“The difficult and debatable philosophic questions of the meaning and relationship of reality, substance and form are for the purposes of our law generally resolved by asking did the parties who entered into the ostensible transaction mean it to be in truth their transaction, or did they mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front … concealing their real transaction.”

[62]    The sham doctrine is thus one of those relatively rare doctrines in the law where legal meaning is given to a document by reference to a subjective intention. Other examples are a plea of non est factum at law and a claim for rectification in equity. All these doctrines “must necessarily be kept within narrow limits”, for all subtract from the objective theory of contractual obligation, and if unchecked would cause “serious mischief”: see Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [46]–[47]. This has long been the law: see for example Jordan CJ’s reasons in Perpetual Trustee Co (Ltd) v Bligh (1940) 41 SR (NSW) 33 at 39–40. In all these areas, strong evidence is required in order to displace the orthodox approach to construction. Hence the “heavy onus” that must be discharged by the plaintiff in a non est factum case (Petelin v Cullen (1975) 132 CLR 355 at 360) and the need for “clear and convincing proof” in a rectification suit (Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 at [451]–[460]).

[63]     Because a finding of sham requires a finding of an intent to deceive, considerations associated with Briginshaw v Briginshaw (1938) 60 CLR 336 require a cautious approach: Raftland Pty Ltd v Federal Commissioner of Taxation at [36]. Thus there is a “strong and natural presumption against holding a provision or a document a sham”: National Westminster Bank plc v Jones [2001] 1 BCLC 98 at [59] per Neuberger J. “A court will only look behind a transaction’s ostensible validity if there is a good reason to do so, and ‘good reason’ is a high threshold, since a premium is placed on commercial certainty”: Official Assignee v Wilson [2007] NZCA 122; [2008] 3 NZLR 45 at [52] per Robertson and O’Regan JJ. Lockhart J referred to “a strong finding, and one which cannot be made if another inference is at least equally open” in Sharrment Pty Ltd v Official Trustee in Bankruptcy at 461.

[64]    Sham in the sense relevant to this appeal is to be distinguished from other transactions to which legal opprobrium attaches, such as transactions entered into for an improper purpose, which have long been the subject of statutory attention, such as voidable settlements or conveyances to defraud creditors. Sham is also to be distinguished from the body of law (which ultimately turns on questions of statutory construction) as to whether apparently artificial transactions attract taxation advantages: see Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 at 19 and Tower MCashback LLP I v Revenue and Customs Commissioners [2011] UKSC 19; [2011] 2 AC 457, decisions referred to by G Pagone, “Sham Trusts” [2012] Victorian Judicial Scholarship 5 and which reflect what Lord Walker described in the latter appeal at [80] as the “unremitting ingenuity of tax consultants and investment bankers determined to test the limits”. The High Court criticised applying the notion of sham to transactions which were legally effective, albeit that they had no “economic effect” and which did not involve “real money” in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd at [46]–[51].

[65]    It is also necessary to be precise as to the extent to which a transaction is said to be a sham. The whole of the transaction may be a sham, or merely a part of it; see for example the clause found by the House of Lords to be a sham in the otherwise valid lease in AG Securities v Vaughan [1990] 1 AC 417. There may be a validly created trust, but a later settlement of property upon the terms of that trust may nonetheless be a sham: Official Assignee v Wilson at [57].

…

[68]    Critical to this appeal is the proposition that a transaction will not be a sham merely because it was entered into with an improper motive. That is confirmed by two authorities relied on by the primary judge, Chase Manhattan Equities Ltd v Goodman [1991] BCLC 897 at 921 (“mere impropriety of motive is no ground for treating a transaction as a sham”) and Miles v Bull [1969] 1 QB 258 at 264 (“[i]f what is done is genuinely done, it does not remain undone merely because there was an ulterior purpose in doing it”). It is also affirmed by G Thomas and A Hudson, The Law of Trusts, 2nd ed (2010), New York, Oxford University Press at par 2.33, Lewin on Trusts, 18th ed (2008), London, Sweet & Maxwell at par 4.21 and Waters’ Law of Trusts in Canada, 4th ed (2012), Thomson Reuters at 157–159. The same principle was stated by Lockhart J in Sharrment Pty Ltd v Official Trustee in Bankruptcy at 455, by the Court of Criminal Appeal (Beazley JA, Grove and Ireland JJ) in Barendse v Comptroller-General of Customs (1996) 136 FLR 243 at 257–258, and applied by Ward J (as her Honour then was) in Re Idylic Solutions Pty Ltd; Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276 at [2044]–[2046].

[69]    The proposition that not every transaction entered into for a legally improper motive is a sham must also be correct in principle. There is a clear distinction between a settlement of property in favour of (say) a spouse intended to operate in its terms, but made with the intent of defrauding creditors, and a sham declaration of trust in favour of a spouse never intended to give rise to the ordinary incidents of a trust. Both are entered into for an improper purpose, but the legal meaning of the former accords with the language of the declaration (although it is apt to be set aside pursuant to statute), while the legal meaning of the latter is that there is no trust at all. The limited notion of what constitutes a sham does not swallow up the large class of other transactions entered into for a purpose regarded as improper by the law.

[70]    In short, every case of shamming intent involves a finding of intentional deception as to the effect of a document, but not every case of improper purpose is a sham. That is why, in my opinion, the major premise of Mr Condon’s attack upon the primary judge’s failure to find a sham is unsound.

152    More recently in Coshott v Prentice (2014) 221 FCR 450; [2014] FCAFC 88 the Court said:

63.     While the term “sham” may be ambiguous and its meaning and application uncertain, it has a clear and well understood legal meaning: Raftland Pty Ltd v Federal Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 516 (Raftland ) at 531-532 [35] (Gleeson CJ, Gummow and Crennan JJ). As Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ explained in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 (Equuscorp) at 486 [46] in a passage cited by the primary judge at [88], when employed as a legal term, the word “refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences”. In other words, as Leeming JA (with whose reasons McColl JA and Sackville AJA agreed) recently explained in Lewis at 112 [59]:

...it is essential that there be an intention that the true transaction is different from that which would ordinarily be attributed to the transaction on the face of the documents. As Lord Wilberforce put it, ‘to say that a document or transaction is a ‘sham’ means that while professing to be one thing, it is in fact something different’: WT Ramsay v Inland Revenue Commissioners [1981] UKHL 1; [1982] AC 300 at 323.

64.     Thus, the element of deliberate deception lies at the heart of the legal concept of a sham. The seriousness of the allegation of a sham thus mandates that the Court act with much care and caution before finding that it is established, as the appellants contend. More fundamentally, it is this element of intentional deceit which justifies the Court taking the exceptional step of determining the legal effect of a document, such as a contract or trust instrument, on the basis of the parties’ subjective intentions, including by reference to extrinsic material, as opposed to the objective meaning of the document: Raftland at 561 [140]-[142]; Lewis at 112-115 [60]-[72]. This is the rationale for the sham doctrine. As Professor Matthew Conaglen explained in ‘Sham Trusts’ (2008) 67(1) Cambridge Law Journal 176 at 180 (in an analysis approved by the NSW Court of Appeal in Lewis):

Where parties have chosen to ‘channel’ their relations through certain legal forms, the courts necessarily apply a two-stage process when construing that arrangement: first, ascertaining what rights and obligations the parties intended to create, and second, categorising that set of rights and obligations as a matter of law... The doctrine of sham is crucially relevant at the first stage of the process, in that it identifies the material to which a court can and cannot have regard when ascertaining what rights and obligations the parties intended to create.

(Emphasis in original)

153    Many aspects of the case presently before me exhibit complex movement of funds, resulting in the submission by the Trustee that the loan from Faloda (which was under the control of Mr Smith) to Mrs Smith, was actually an artifice or sham intended to create the appearance of a debt due by Mrs Smith to Faloda, when in reality the monies had been disbursed to Mr Smith by Faloda and re-routed to Mrs Smith. The Trustee further drew the attention of the Court to the fact that there was no interest payable by Mrs Smith, no security provided by Mrs Smith in respect of the loan, and the accounts of the Trust included no record of the money loaned to Mrs Smith.

154    However, the starting point is that Faloda and Mrs Smith formally entered into the Loan Agreement, which specifically required Mrs Smith to repay monies to Faloda on demand by Faloda. As was explained in Coshott and Lewis, and reiterated by the High Court in Raftland (at [36]), the Court must act with care and caution before finding that what appears on its face to be a legally enforceable contract did not take effect according to its terms, on the basis that it was a mere façade or false front concealing another, “real” transaction.

155    I am not satisfied on the evidence that the Loan Agreement was a “sham”, and that the parties thereto had a common intention not to create the legal rights and obligations which the Loan Agreement gave the appearance of creating.

156    First, as I noted earlier, it is not in dispute that Faloda was the trustee of the Trust, and that Faloda had owned the North Street Property on which TFD had conducted its manufacturing operations producing aluminium windows and doors, and residential and commercial cabinetry and joinery. It is further uncontroversial that, at the time of the loan, Mr Smith was the sole director of Faloda, and that he had been a beneficiary of the Trust and a director of Faloda since 1976 (when the Trust was originally established by Mr Smith’s father). Mr Smith gave evidence that a purpose of the Trust was to lend money to family member beneficiaries when required. I note in particular his evidence at the hearing as follow:

After paying out the mortgage – sorry, I withdraw that. Sue’s share of the proceeds of the residential properties was not enough to buy the unit that she wanted to buy; that’s correct?---Correct.

She needed the funds – she needed some additional funds from the trust to complete that purchase. You had Wonderley & - - -?---She needed some additional funds. I suggested from the trust.

You had Wonderley & Hall prepare a loan document?---I did.

I suggest to you, you did not have a conversation with Sue about the loan?---I did have a conversation with Sue about the loan.

I suggest you just gave her a document to sign?---I had a conversation with Sue about the loans. Are you familiar with the terms of the loan?---I – I believe so.

It had no term limit, the loan. It didn’t have to be repaid by any particular time?---That’s consistent with how the trust operated.

It charged no interest?---Consistent with how the trust operated.

There was no commercial benefit to the trust in giving Sue a loan?---That’s how the trust operated.

(transcript p 52-53)

157    Given Mr Smith’s long history of association with the Trust, I consider this evidence credible. It is uncontroversial that a family corporate trustee would agree to lend money to beneficiaries on favourable terms, including that there be no interest payable and no security required. I further consider it credible that the family trust of which Faloda was the trustee would operate to benefit its family member beneficiaries, notwithstanding that the Trust also owned industrial premises on which manufacturing operations were conducted. The obvious inference to draw is that Faloda conducted any business, including leasing out its property on a commercial basis, ultimately for the benefit of the family member beneficiaries.

158    Mr Smith’s evidence is consistent with the terms of the Trust Deed of the Trust. The terms of the Trust provided that the trust fund was to be applied for the benefit of the persons therein described. The Trust Deed further identifies the following powers of the Trustee:

7.    The Trustee shall in his absolute discretion invest the Trust Fund or any part thereof in any one or more of the following investments:-

…

(e)    In deposits or loans with any person firm body association or company with or without interest and with or without security and upon such terms and conditions as the Trustee in his absolute discretion shall think fit.

…

8.    Without in any way limiting the generality and absoluteness of the discretions, powers and authorities herein contained the Trustee shall until the Vesting Day and during such further period if any as the law may allow have the following additional powers:-

…

(ix)    to do and take all such acts things matters and proceeds as the Trustee may think fit in respect of the Trust Fund or any of the powers hereunder.

…

(xii)    To borrow from or to advance or lend at interest or otherwise to any person, firm, body, association or company whatsoever (whether a corporate body or not) including any person or company being a beneficiary and including the trustee or trustees or any of them in such manner and upon such terms and conditions and provisions as the Trustee shall in his absolute discretion think fit.

159    It is not in dispute that Mrs Smith was a beneficiary of the Trust and that Faloda could lend her money on such terms as it chose.

160    Second, the Trustee submitted that the financial statements of the Trust recorded its dominant business as being the owner of the North Street Property and its dealings with TFD in relation to the business.

161    The primary business activity of Faloda may have been as the owner of the North Street Property and landlord of the companies conducting businesses on that property. Such activity however was not inconsistent with the operation of the Trust for the benefit of its beneficiaries. As the Trust Deed made plain, the function of the Trust was to apply its funds for the benefit of the beneficiaries. A loan to Mrs Smith was consistent with that purpose.

162    Third, the transfer of monies pursuant to the Loan Agreement was not recorded in the financial statements of the Trust, but rather a reduction in Mr Smith’s entitlement to receive a distribution from the Trust was recorded. Mr Smith gave evidence in re-examination that he “probably prepared this document and sent it off to [an accounting firm]”.

163    In my view, minimal weight should be placed on the absence of a record of the Loan Agreement, and the change in Mr Smith’s entitlement to a distribution, in the 2016 financial statements of the Trust. As Counsel for Mrs Smith submitted, the financial statements of the Trust bore indications of the application of, at best, indifferent accounting practices. I note evidence given during the hearing which showed that there had been errors in previous financial statements of the Trust, which apparently had been corrected. I further note the lack of clarity in the financial statements referable to the respective legal and financial positions of Faloda and Mr Smith, following the entry by Mr Smith and the Commonwealth Bank into the Deed of Covenant, and the payment by Faloda of the full outstanding amount to the Commonwealth Bank under the overdraft facility.

164    Fourth, while Faloda was subsequently deregistered, I note that this occurred some time after the execution of the Loan Agreement. The inference cannot be drawn that at the time of the Loan Agreement there was an intention on the part of Mr Smith, or anyone else, that Faloda would cease to operate as the corporate trustee of the Trust, such that it would never seek repayment of the loan to Mrs Smith. Certainly there is no evidence, nor any suggestion, that Mrs Smith was in any way involved in the deregistration of Faloda.

165    Both Mr Smith and Mrs Smith gave evidence that they understood that if Faloda had demanded repayment of the loan, Mrs Smith was required to repay it. This was the plain effect of the Loan Agreement.

166    Fifth, the fact that Mr Smith and Mrs Smith had sought advice from Wonderley & Hall referable to the protection of their positions should TFD collapse, or sought to put arrangements into place to acquire the Surfers Paradise Property using funds from Faloda, does not necessarily mean that the loan which took place was a sham. Mrs Smith agreed during cross-examination at the hearing that the Loan Agreement was a way for her to get the funds out of the Trust to enable her to purchase the Surfers Paradise Property. However as Lockhart J pointed out in Sharrmant at [23] (citing Megarry J in Miles v Bull [1969] 1 QB 258 at 264), a transaction is no sham merely because it is carried out with a particular purpose or object. If what is done is genuinely done, it does not remain undone merely because there was an ulterior purpose in doing it. The fact that the loan was made on what appeared to be other than commercial terms, or that Mr Smith may have desired that the Trust contribute funds towards the acquisition of a property for Mrs Smith, does not of itself mean that it was not a genuine loan. As the cases have found, the question is whether the transaction is legally effective, not economically effective: see Beaumont J in Sharrmant at [16]; Equuscorp at [48]-[49]; Kiefel J in Raftland at [79]. Any ulterior motives of Mr Smith and Mrs Smith would not invalidate an otherwise genuine and legally effective transaction: see Lewis v Condon at [68].

Conclusion

167    I am satisfied that the Loan Agreement was not a sham.

168    It follows that, the sum of $250,000.00 advanced to Mrs Smith by Faloda was not money available to creditors of Mr Smith, such as to fall within ss 120 or 121 of the Bankruptcy Act.

Superannuation Transactions

169    The first respondent pleaded that the First Superannuation Transfer and the Second Superannuation Transfer were not separate transfers of property, but rather formed part of a single “transfer” for the purposes of the Bankruptcy Act. Mrs Smith pleaded that, but for that single transfer, the funds which became the subject of the First Superannuation Transfer and the Second Superannuation Transfer would have remained in Mr Smith’s superannuation Account 0045 and Account 5820, and been exempt from being divisible among his creditors pursuant to s 116(2)(d) of the Bankruptcy Act. Mrs Smith further pleaded that the purposes of the single transfer were to:

i.    transfer monies from the Bankrupt's superannuation accounts to the Mrs Smith's Superannuation Account so that the First Respondent had funds for her own retirement;

ii.     make up for the perceived injustice that the Bankrupt felt for allowing the First Respondent to effect Superannuation Transfer A;

iii.    provide the First Respondent with a sense of comfort in knowing that she held superannuation funds in her own name; and

iv.    ensure that the First Respondent was able to control the finances of the Bankrupt and the First Respondent in the event that the Bankrupt's mental and physical health made it impossible for him to do that himself;

(Para 32a of the Defence)

170    The first respondent pleaded that other than the funds from Mr Smith, no other contributions were made to Mrs Smith’s Superannuation Account 3306 at any material time since its establishment in December 2016. Mrs Smith further pleaded that between February 2017 and November 2018, she withdrew a total of $250,000.00 from her Superannuation Account 3306 and paid those monies into a bank account in her name with Heritage Bank. Those funds were used primarily for, inter alia, Mr Smith’s day-to-day expenses and care, and their joint day-to-day expenses.

171    Materially, as I noted earlier in this judgment:

    On 21 December 2016 Mr Smith caused the amount of $244,651.71 to be transferred from his superannuation Account 0045 to the Bankrupt’s Heritage Account (namely, the First Superannuation Transfer). This amount was received into the Bankrupt’s Heritage Account on 22 December 2016; and

    On the same day Mr Smith caused the amount of $84,000.00 to be transferred from another of his superannuation accounts (Account 5820) to a Heritage Bank account in Mrs Smith’s name (namely, the Second Superannuation Transfer).

172    Following these transfers, on 23 December 2016 monies totalling $325,000.00 were transferred to Mrs Smith’s Superannuation Account 3306. This money was the combined total of:

    $244,651.71, directly transferred from the Bankrupt’s Heritage Account, and

    $80,348.29, being a portion of the $84,000.00 originally transferred from account 5820 to Mrs Smith’s Heritage Account, subsequently transferred from Mrs Smith’s Heritage Account.

173    As I have already noted, Mr Smith became bankrupt on 17 October 2018.

174    Section 116 of the Bankruptcy Act relevantly provides:

(1) Subject to this Act:

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

…

is property divisible amongst the creditors of the bankrupt.

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

(a) property held by the bankrupt in trust for another person;

…

(d) subject to sections 128B, 128C and 139ZU:

…

(iii) the interest of the bankrupt in:

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

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

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

175    Materially, the elements of s 128B of the Bankruptcy Act are:

    there was a transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee): s 128B(1);

    the transfer was made by way of a contribution to an eligible superannuation plan: s128B(1)(a);

    the property transferred 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: s128B(1)(b); and

    the transferor’s main purpose in making the transfer was to prevent the transferred property from becoming divisible among the transferor’s creditors, or to hinder or delay the process of making property available for division among the transferor’s creditors: s128B(1)(c).

176    It was not in dispute that First Superannuation Transfer and the Second Superannuation Transfer constituted the transfer of property to Mrs Smith by way of a contribution to an eligible superannuation plan within the meaning of s 128B(1)(a).

177    Further, notwithstanding para 32a of the Defence, I understand that Mr Smith’s purpose in arranging for those funds to be ultimately transferred to Mrs Smith’s Superannuation Account 3306 is not in dispute – it was to prevent the funds from becoming divisible among his creditors, or to hinder or delay the process of making property available for division among his creditors within the meaning of s 128B(1)(c) of the Bankruptcy Act.

178    For present purposes in relation to s 128B(1)(b) of the Bankruptcy Act, the question is whether it is probable that the monies the subject of the First Superannuation Transfer and the Second Superannuation Transfer either would have become part of Mr Smith’s estate or would have been available to his creditors if those monies had not been transferred to Mrs Smith.

179    The key reason that Mrs Smith claims that the monies the subject of the First Superannuation Transfer and the Second Superannuation Transfer were not “property [that] 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” within the meaning of s 128B(1)(b) was the uncontroversial fact that the money transferred into Mrs Smith’s superannuation accounts was originally sourced from superannuation accounts held by Mr Smith. The first respondent also submitted that, in answering the question of whether property would probably have become part of the transferor’s estate, the Court must look to the whole of the transaction, not just an isolated aspect of it: Re Emanuel (No 14) Pty Ltd (in liq) (1997) 147 ALR 281 at 288-9. Mrs Smith further submitted that the proper reading of s 128B(1)(b) was that a transfer or 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:

the property [in the hands of the transferor prior to the act taken to be the transfer] would probably have become part of the transferor's estate or would probably have been available to creditors if the property [in the hands of the transferee after the act taken to be the transfer] had not been [taken to have been] transferred.

180    In other words – the first respondent submitted that if the transfers to Mrs Smith’s Superannuation Account 3306 had not occurred, there would have been no money in the hands of Mr Smith to which s 128B(1) could attach, as the relevant money would have remained in his superannuation accounts. The first respondent relied in particular on Peldan v Anderson (2006) 227 CLR 471 and Combis (Trustee) v Spottiswood (No 2) [2013] FCA 240 at [55].

181    Alternatively, the first respondent submitted that Mr Smith’s evidence of his purpose was sufficient to establish that the money which he withdrew to transfer to Mrs Smith was, whilst in their respective bank accounts, held on a Quistclose trust which would have prevented the funds being available to Mr Smith’s creditors had he become bankrupt before the superannuation transactions were completed: Re Veli; Ex parte AE Developments Ltd v Scott (1988) 18 FCR 204 at 211 applying Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 at 581-2.

Peldan v Anderson and Combis (Trustee) v Spottiswood (No 2)

182    In Peldan v Anderson a married couple had been the registered proprietors of real property as joint tenants since 1995. In 2003 steps were taken by the husband to unilaterally sever the joint tenancy. The wife died in January 2004. A sequestration order was made against the estate of the husband on 21 April 2004. His trustees in bankruptcy contended that the unilateral severance of the joint tenancy was a transaction by the husband which was void against them by operation of s 121 of the Bankruptcy Act. In particular, the trustees contended that the unilateral severance transaction constituted a "transfer of property" for the purposes of s 121(1) of the Bankruptcy Act within the extended sense provided for by s 121(9)(b) of the Bankruptcy Act. Section 121(9)(b) materially provided that a person who did something that resulted in another person becoming the owner of property that did not previously exist was taken to have transferred the property to the other person. The key issue was whether a unilateral severance of the jointure was a “transfer of property” which would probably have become part of the husband’s estate or would probably have been available to his creditors if the property had not been transferred. The High Court examined in detail the nature of the respective interests in the land, and observed that upon registration of the transfer executed by the husband severing the joint tenancy, the wife became the “owner of property that did not previously exist”, namely the interest as tenant in common of the land (whereas previously her interest had been as a joint tenant). It followed that the terms of s 121(9)(b) were met because, by the husband registering the transfer unilaterally severing the joint tenancy, he did something by dint of which he was taken to have transferred the interest as tenant in common to the wife. Their Honours continued:

32.    Having established that events falling within par (b) of s 121(9) have occurred, the next issue on this appeal is presented. This concerns the reading of that provision with par (a) of s 121(1). The step treated by par (b) of s 121(9) as having taken place assumes that character "[f]or the purposes of this section". Paragraph (a) of s 121(1) asks whether "the property", had it not "been transferred", would probably have either become part of the bankrupt's estate or been available to creditors.

33.    A difficulty then arises in the following way: (i) s 121(9)(b) takes "property that did not previously exist" to be the transferred property; further, the provision applies to situations (such as the present case) where the bankrupt "does something" which results in the creation of that property; (ii) when par (a) of s 121(1) speaks of "the property", the natural reading requires this to be construed as referring to the property which has been transferred under the transfer which is void against the trustee in bankruptcy; and (iii) the use of the subjunctive in par (a) ("if the property had not been transferred") indicates a supposition that the described occurrence is contrary to fact; it presupposes that there was no transfer, and asks what in that situation would have happened to "the property".

34.    These factors taken together produce an apparent conundrum in applying par (b) of s 121(9) for the purposes of par (a) of s 121(1). This is that, if the act which is taken to have transferred the property did not occur, the "property that did not previously exist" ex hypothesi would never have come into existence, and so could never "probably have become" part of the bankrupt's estate. A similar problem is posed by par (b) of s 121(1), where the phrase "the transferred property" appears in terms. In that paragraph, if the expression "the transferred property" is construed as referring to the property taken to have been transferred, which did not come into existence until the occurrence of the act which is taken to have transferred it, how could the transferor's main purpose be to prevent that property from becoming divisible among the creditors?

35.    Paragraphs (a) and (b) of s 121(1) both assume that the transferred property was, prior to the transfer, capable as a matter of fact of becoming part of the bankrupt estate. Section 121(1)(a) therefore involves the assumption that the transferred property had an antecedent existence to the transfer, or would have come into existence had the transfer not been made. On the other hand, s 121(9)(b), as discussed earlier in these reasons, assumes that the property which "did not previously exist" would not have come into existence if the act which is taken to have transferred it had not occurred. In this way the two paragraphs are in conceptual and linguistic contrariety.

36.    These textual and conceptual difficulties manifest a failure in the drafting of s 121(9)(b) adequately to grapple with the conceptual nature of the elements in pars (a) and (b) of s 121(1) and their interaction. This problem does not arise with s 120 or s 122, even though definitional sub-sections identical to s 121(9)(b) are used. This is because, in dealing with undervalued transactions and preferences, those sections do not employ language which requires identification of the "transferred property" in the way that s 121(1)(a) does when dealing with transfers to defeat creditors.

37.    In the examples given of the operation of par (b) of s 121(9) where the "property that did not previously exist" may be "carved out" of the transferor's property, it is impossible discretely to identify the "transferred property" in the hands of the transferor prior to it being vested in the other person…

183    Their Honours concluded as follows:

44.    Where s 121(9)(b) is relied upon, the phrase "the property" in the opening words of s 121(1)(a) should be construed as signifying "the property in the hands of the transferor prior to the act which is taken to be the transfer". This removes from the operation of s 121(1)(a) the assumption that it is existing property which is being transferred. It involves treating the words "the property" in s 121(1)(a) in a special sense to give to s 121(1) an extended operation as required by s 121(9)(b).

45.    The acceptable construction is best illustrated by setting out the paragraph as if it read in this manner:

"(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 [in the hands of the transferor prior to the act taken to be the transfer] would probably have become part of the transferor's estate or would probably have been available to creditors if the property [in the hands of the transferee after the act taken to be the transfer] had not been [taken to have been] transferred ..." (bracketed words inserted).

46.    The italicised words are appropriate because it would be at odds with s 121(9)(b) for the subjunctive clause to read "if the property in the hands of the transferor prior to the deemed transfer had not been deemed to be transferred". Section 121(9)(b) expressly states that the property which is deemed to have been transferred is the "property that did not previously exist".

47.    The effect of the acceptable construction is to shift the emphasis of the inquiry in s 121(1)(a), and to focus not upon whether the "transferred property" would have become part of the transferor's estate in bankruptcy, but upon whether that result would have obtained in respect of the transferor's "property" (as defined in s 5(1)) out of which the newly created property has been "carved".

184    The High Court concluded at [48] that even if the husband’s interest in the wife’s share of the property had not been taken by s 121(9)(b) of the Bankruptcy Act to have been “transferred”, it would never have become part of the husband’s bankrupt estate, because upon bankruptcy there is a severance of a joint tenancy and the unity of title is destroyed. It followed that the husband’s trustee in bankruptcy would have had no claim to the whole of the proceeds of sale of the property.

185    In Combis, property was transferred by operation of a number of deeds of gifts to which a bankrupt, his wife, and various entities with which they were associated were parties. Justice Logan examined, inter alia, the requirement under s 121 of the Bankruptcy Act that the trustee establish that 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. Importantly his Honour observed:

55.    The first element in the cause of action for which s 121 provides requires the making of a predicative value judgment as to what probably would have been the fate of the transferred property. If this element is not proved, it becomes academic what may have been the bankrupt’s main purpose in making the transfer.

…

61.    The alternative limb in s 121(1)(a) of the Act poses a different, broader, more abstract predictive fate for the property. Would that property, but for the transfer, probably have been available for creditors? This alternative looks to a time on and from the transfer but before bankruptcy. It also looks to creditors generally rather than to any one particular creditor or even to persons to whom a debt is presently due and owing: The Trustees of the Property of Cummins v Cummins (2006) 227 CLR 278 at [29] to [32] (Cummins Case). At the time of the transfers effected by the Deeds of Gift, viewed either as money paid to Mrs Spottiswood or as a debt chose in action transferred to her, that property would have been available to creditors but for the transfer. For that reason, and notwithstanding the omission of the parties expressly to address the question of its proof in submissions, I consider that the first element is proved.

186    To the extent that the first respondent submitted that these authorities supported a finding that the monies the subject of the First Superannuation Transfer and the Second Superannuation Transfer were monies that fell within the s 116(2)(d)(iii) of the Bankruptcy Act, because they were in Mr Smith’s superannuation funds prior to transfer on 21 December 2016 to the Bankrupt’s Heritage Account and Mrs Smith’s Heritage Account, I do not accept that submission.

187    In Peldan the High Court was primarily concerned with construing s 121(9) of the Bankruptcy Act in circumstances where newly created property was “carved out” of property of the bankrupt. The comments of the High Court must be considered in the context of the nature of the property involved, the fact that the relevant proprietary interest had not previously existed, and the construction and application of s 121(9) of the Bankruptcy Act to give an extended operation to s 121(1).

188    Both Peldan and Combis focused on the property in question at a time on and from the transfer, but before the bankruptcy. The circumstances in Peldan were not analogous with those in this case. In Peldan property came into existence following an act of the bankrupt, such as to enliven s 121(9)(b) of the Bankruptcy Act. It was the moment immediately prior to severance of the joint tenancy which was the subject of the attention of the High Court in Peldan.

189    In the present case relevant monies had been in Mr Smith’s superannuation accounts. If they had remained in Mr Smith’s superannuation accounts, and were still there at the commencement of his bankruptcy on 17 October 2018, it appears that those monies would have been the subject of s 116(2)(d)(iii) of the Bankruptcy Act and would not have been property divisible amongst his creditors in his bankruptcy.

190    However those funds were withdrawn by Mr Smith from his superannuation accounts on 21 December 2016. He then paid those monies into, respectively, his account in Heritage Bank (namely the amount of $244,651.71) and a Heritage Bank account in the name of Mrs Smith (namely the amount of $84,000.00). Section 128B is the subject of argument only because the majority of those monies were paid into an eligible superannuation plan (Account 3306) of Mrs Smith on 23 December 2016.

191    Should the Court view this sequence of events as one “transfer” by Mr Smith of superannuation monies – which monies would not or probably would not have been available to his creditors if they had not been transferred – to Mrs Smith’s eligible superannuation plan?

192    Such authorities as are relevant suggest not.

193    A starting point is the decision of Spender J in Worrell (Trustee) v Kerr-Jones [2002] FCA 1090. In that case the bankrupt and the respondent were a married couple. The marriage broke down and the couple began negotiations for a property settlement. The wife claimed that she accepted an offer by the husband to pay her $95,000.00 from an MLC Superannuation entitlement, and they signed and filed consent orders to that effect. MLC Limited paid the funds to the wife’s bank account on 7 August 1996. On 27 September 1996 the bankrupt presented a debtor’s petition, and a trustee was appointed on 2 December 1996. The marriage was dissolved on 18 December 1996. The trustee sought to recuperate the amount of $95,000.00 from the wife pursuant to s 122 of the Bankruptcy Act.

194    At first instance Baumann FM had found that the funds were available to the bankrupt and his property, were paid to the wife at the bankrupt’s direction, and thus constituted a “transfer of property” for the purposes of s 122 (Worrall v Kerr-Jones [2002] FMCA 21 at [24]). At [41] his Honour said:

41. Section [116 (1)] of the Act defines the property divisible amongst creditors and [s 116(2)] excludes certain property from that definition. I agree with the Applicant's submission that no part of the $95,000.00 was an interest of the bankruptcy in a super fund at the commencement of the Bankruptcy as it had been removed from the fund. The Applicant says the protection for monies in superannuation funds provided by s.116 can only apply where there monies are in the fund at the commencement of the bankruptcy or are paid to the bankrupt by the fund after commencement of the Bankruptcy. The Applicant essentially submits that funds became available to creditors as soon as the funds were released by MLC Limited.

195    His Honour then went on however to observe that the case before him involved a different issue, namely whether a payment to a creditor from funds otherwise unavailable to unsecured creditors is a preference. On the law as it then was, his Honour found that the payment did not result in a voidable preference to the wife over the other creditors, comparing the position of other creditors if the payment had not been made, to the position they were in after the payment had been made.

196    On appeal to the Federal Court, Spender J said:

14    It is clear in this case that the funds in the superannuation account could have been withdrawn by the bankrupt, as the letter of 23 July 1996 evidences. Those funds were, at the bankrupt's express direction, paid by MLC Limited not to the bankrupt but to the respondent. The Magistrate was correct to conclude that there was a transfer of property by the bankrupt for the purposes of s 122 of the Act.

197    Relevantly his Honour later found:

22    In this case, the respondent received an advantage over the other creditors of the bankrupt, in that she was paid her debt in full and they received nothing.

23    It is true to say that if the funds in question had remained in the MLC Five-Star Variable Income Plan, they would not have been available to the Trustee (or to the creditors), because subs 112(2)(d) would have operated to exclude the funds from the "property of the bankrupt" available for distribution to creditors. The fact is that the funds did not remain in the MLC Five-Star Variable Income Plan: prior to his bankruptcy the bankrupt directed the withdrawal of those funds and the payment of them to the respondent.

24    For the above reasons, the appeal should be allowed and the order of the Federal Magistrate dismissing the application be set aside, as well as the order as to costs of 5 March 2002…

(emphasis added)

198    Second, in Cunningham (Trustee) v Gapes, in the matter of Gapes (Bankrupt) [2017] FCA 787 the mother of a person, who subsequently became a bankrupt, died. The will of the deceased provided that the proceeds of a superannuation fund of the deceased be distributed to her beneficiaries, one of whom was the bankrupt. The monies payable to the bankrupt were paid directly by the executor to the bankrupt’s wife. The trustee of the bankrupt claimed those monies, on the basis that the money was property divisible among the creditors of the bankrupt pursuant to s 116(1). In summary the wife argued that the money was directly and solely attributable to the funds held by the deceased in a superannuation fund, that payment through an administrative mechanism of a solicitor, and the estate of a deceased person, did not alter the nature of the funds as a payment to the bankrupt from a regulated superannuation fund, and as such the money fell within the exception in s 116(2)(d)(iv) of the Bankruptcy Act and was not divisible among the creditors of the bankrupt. In the course of delivering judgment I noted that the superannuation funds of the deceased were paid to the estate of the deceased, and the bankrupt’s share paid to the direction of the bankrupt in the course of the administration of that deceased estate. I continued:

22.    That the Money may have originally derived from a regulated superannuation fund in which the deceased had an interest does not mean that it bore that character by the time that it was paid to the Bankrupt. Patently, the situation is not akin to circumstances where the rightful owner of property has been deprived of it and the law grants rights of following or tracing, such that as a matter of law the character of the property remains identifiable (see, for example, discussion in Bridge M, Gullifer L, McMeel G and Worthington S, The Law of Personal Property (Sweet & Maxwell, 2013) p 17 and McGrath P, Commercial Fraud in Civil Practice (Oxford University Press, 2008) p 477). The respondent has not, and in my view cannot, identify how the Money paid from the superannuation fund to the deceased estate retained the character of fund payments after it became part of the deceased estate and there was a distribution from the estate to the Bankrupt in his capacity as a beneficiary of the estate.

23.    As the applicant correctly argued, if the respondent’s submission in this respect had merit a bankrupt could avoid property being made divisible to creditors so long as he or she could show that its genesis was from a third party superannuation fund, irrespective how many hands such funds had passed through.

(emphasis added)

199    Third, in Bredenkamp (Trustee) v McKelt (Bankrupt) [2021] FCCA 468 a Judge of the Federal Circuit Court of Australia (as that Court then was) found, materially, that there was a transfer of the bankrupt’s half interest in the nett proceeds of real estate to the respondent, reflecting in substance a half interest that the bankrupt would otherwise have had in the property purchased in the respondent’s name. Judge Street referred to Worrell and Watson Wyatt Superannuation Pty Ltd v Oberlechner [2008] NSWSC 272, and relevantly continued:

33.    The Court has taken into account that there were proceeds from the superannuation fund to which the bankrupt was entitled that were then placed into a joint fund and also used in relation to the acquisition and fixture improvements of the Maleny property. The funds lost the protection of s 116(2)(d) of the Act upon being placed into the joint account of the bankrupt and the respondent. The Court accepts the applicant’s submissions in that regard, and will have identified the authorities referred to in paragraph 69 and 70:

(69) In Worrell (Trustee) v Kerr- Jones Spender J said at [23]:

“It is true to say that if the funds in question had remained in the MLC Five-Star Variable Income Plan, they would not have been available to the Trustee (or to the creditors), because subs 112(2)(d) would have operated to exclude the funds from the “property of the bankrupt” available for distribution to creditors. The fact is that the funds did not remain in the MLC Five-Star Variable Income Plan: prior to his bankruptcy the bankrupt directed the withdrawal of those funds and the payment of them to the respondent.”

(70) Worrell v Kerr-Jones was followed and applied by Brereton J in Watson Wyatt Superannuation Pty Ltd v Oberlechner at [27]-[28] where His Honour said:

“27. (CTH) Bankruptcy Act 1966, s 116(2)(d), relevantly provides that property divisible amongst the creditors of a bankrupt does not include the interest of a bankrupt in a regulated superannuation fund or a payment to the bankrupt from such a fund received on or after the date of bankruptcy, if it is not a pension. The Magistrate found that no part of the payment was an interest in the superannuation fund at the commencement of the bankruptcy, as it had been removed from the fund before the date of the bankruptcy. The payment having occurred on 7 August 1996, it was not a payment received on or after the date of the bankruptcy. Spender J recorded (at [16]) that those findings were not contested on the appeal, with the consequence that the payment was not excluded by s 116(2)(d) from being the property of the bankrupt divisible amongst his creditors. In other words, the $95,000, having been paid from the fund prior to the date of bankruptcy, was not at the relevant date the interest of the bankrupt in a superannuation fund. But his Honour added (at [23]):

‘It is true to say that if the funds in question had remained in the MLC Five Star variable income plan, they would not have been available to the trustee (or to the creditors) because sub-section 112(2)(d) would have operated to exclude the funds from the 'property of the bankrupt' available for distribution for creditors. The fact is that the funds did not remain in the MLC Five Star variable income plan. Prior to his bankruptcy the bankrupt directed the withdrawal of those funds and payment of them to the respondent.’

28. Those observations lend support to the view that it was the act of payment of the sum which removed it from the fund, not the existence of an entitlement to direct payment.”

(footnotes omitted)

200    In the present case before me, the proper conclusion to reach is that once Mr Smith removed the monies from his superannuation accounts to make the First Superannuation Transfer and the Second Superannuation Transfer, those monies ceased to be monies the subject of an interest on his part in a regulated superannuation fund for the purposes of the Bankruptcy Act. Once removed from Mr Smith’s superannuation account, those monies would probably have been available to creditors.

Quistclose trust

201    Section 116(2)(a) of the Bankruptcy Act provides that s 116(1) does not extend to property held by a bankrupt in trust for another person. Mrs Smith also submitted that there was evidence of Mr Smith’s purpose that the money he withdrew from his superannuation account was intended to be transferred to Mrs Smith such that a Quistclose trust arose while the money was in his hands and the monies accordingly would not have been available to his creditors had he become bankrupt before the superannuation transactions were completed.

202    As was explained by Professor Ong,

…if money is purportedly lent for the mutually agreed sole purpose of being used for a specific purpose, then that money becomes the subject matter of a trust the execution of which is the fulfilment of that purpose, although the trust will not be a mere purpose trust, since the putative borrower is under a duty to pay the money to a particular person or to a number of persons as the identified beneficiaries of a trust. If the purpose of the loan cannot, for any reason, be fulfilled, then the putative borrower will be obligated in equity to hold the money for the benefit of the lender, in view of the parties’ agreement that the loan should not be used for any other purpose. At no stage in the process, and in no contingency, does the equitable title to the money pass to the putative borrower.

If the putative borrower becomes bankrupt before the purpose of the loan is fulfilled, then that money, because it is not the equitable property of the bankrupt, does not pass to his trustee in bankruptcy….

(DSK Ong Trusts Law in Australia (Fifth edition) The Federation Press, Sydney, 2018 at 13)

203    The term “Quistclose trust” derives from the decision of the House of Lords in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 where the court held that the provision of funds to a company in financial difficulties for the specific purpose of paying a dividend gave rise to a relationship of a fiduciary character or trust in favour of the persons entitled to the dividend and, if the primary trust failed, of the party which advanced the money.

204    In the case before me the first respondent relied on the decision of the Federal Court in Re Veli; Ex parte AE Developments Ltd v Scott (1988) 18 FCR 204.

205    In Veli the applicant had drawn a cheque for $20,000.00, on an account in the ANZ Banking Group, in favour of the bankrupt on the basis that the bankrupt was to apply the monies to facilitate the release of certain vehicles for use in a business in which the applicant was interested. The bankrupt presented the cheque at the National Australia Bank. The trustee in bankruptcy demanded that the National Australia Bank account to him for the proceeds of the cheque, on the basis that it formed part of the bankrupt’s estate as after acquired property of the bankrupt. The applicant sought a declaration that the sum of $20,000.00 was not after-acquired property acquired by or devolved on the debtor, or otherwise available for distribution among his creditors. The applicant relied on Barclays. In Veli Ryan J said at 209-210:

In my opinion the present case is even stronger than Barclays Bank Ltd v Quistclose Investments Ltd because there was no loan of the $20,000 by the applicant to Mr Veli. He was merely the conduit through which the money was to pass from the applicant to Morlend Finance, presumably because Mr Agushi believed that it was only in that way that arrears of rent due under the leases could be reduced before the leases had been formally assigned to the applicant or Seventh Aries Pty Ltd. Mr Veli accordingly stood in a fiduciary relationship to the applicant which is entitled to follow the money in his hands and through him into the hands of the Trustee.

The present case is analogous, in my view, to Re Watson; Ex parte Schipper (1912) 107 LT 783 where money was advanced to a bankrupt who gave a receipt for it as on account of his shares of the prospective takings from a theatrical performance. The money was then paid to the sheriff to secure the release of certain costumes to be used in the performance which had been seized in execution of a judgment debt under the mistake that they were the property of the bankrupt. A majority of the Court of Appeal held that the Official Receiver was not entitled to the money in the hands of the sheriff. Hamilton LJ, observed (at 784):

“Whatever else the parties by this transaction meant they did not mean that the money found by Messrs Broadhead should be money divisible among the bankrupt's creditors, nor did anybody think that the money was going to the bankrupt. It was provided for one purpose only, and care was taken that it should be applied to that purpose and no other, and I can attach no meaning to the principle in Re Rogers; Ex parte Holland and Hannen (1891) 8 Morr 243 and Re Drucker; Ex parte Basden (No 1) [1902] 2 KB 55; [1902] 2 KB 237 that would not cover this case, and I can see nothing in the facts of this case to distinguish it.”

206    Justice Ryan concluded at 211:

Accordingly, I am led to conclude that as between the applicant and the Trustee, the sum of $20,000 paid on 19 May 1987 to the credit of Mr Veli's account at the Bentleigh branch of the National Bank is not property divisible amongst the creditors of the bankrupts but is repayable to the applicant. Mr Bigmore, at the outset of his submissions, suggested that an application under s 178 was an inappropriate vehicle for the resolution of the real question between the applicant and the Trustee, because at the time when the application was issued there had been nothing which could be identified as a relevant “act, omission or decision” of the Trustee. However, it was very properly accepted on behalf of the Trustee that the circumstances as they emerged in the course of the application raised a matter in connection with the administration of Mr Veli's estate, in respect of which it was appropriate for the Trustee to seek the directions of the Court pursuant to s 134 of the Act. In the light of my conclusions on the substantive issue I propose, therefore, to declare that as between the applicant and the Trustee the sum of $20,000 paid on 19 May 1987 to the credit of the account of Boni John Veli at the Bentleigh branch of the National Australia Bank is not property divisible amongst the creditors of the bankrupt, and to direct that so much of that sum as is now in the hands of the Trustee be paid to the applicant.

207    In Rambaldi (Trustee) v Commissioner of Taxation, in the matter of Alex (Bankrupt) [2017] FCAFC 217 the Full Court examined similar circumstances and arguments. In that case the Deputy Commissioner of Taxation had filed a petition in bankruptcy against the bankrupt on 18 March 2014, and a sequestration order was made on 8 December 2014. On 1 June 2014 a loan agreement was entered between the bankrupt, a company controlled by her, and a lender who provided moneys to the bankrupt. The loan agreement specifically provided that the bankrupt could only use the loan for the purpose of paying the income tax debt of the bankrupt to the Australian Taxation Office and to her legal representatives. The bankrupt used the money to pay the Commissioner. The bankrupt’s trustees in bankruptcy commenced proceedings against the Commissioner, seeking declarations pursuant to ss 30(1)(b), 116, 121 and 122 referable to the payment of moneys to the Commissioner. The Commissioner accepted that the effect of the transaction was to give him a preference, priority or advantage over other creditors, and that it was made during the relevant period. However before the primary Judge the Commissioner contended that the loan money was not the property of the bankrupt, but rather was held on a Quistclose trust for payment to the Commissioner, and, in default, on trust to be repaid to the lender. The primary Judge accepted this submission of the Commissioner.

208    The Full Court noted the following observation of Gibbs CJ (with Jacobs and Murphy JJ concurring) in Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liquidation) [1978] HCA 45; (1978) 141 CLR 335 at 353:

I must now deal with the argument advanced by counsel for the Bank in reliance on the decision in Barclays Bank Ltd. v. Quistclose Investments Ltd. That case is authority for the proposition that where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that if the purpose fails the money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust.

(Footnotes omitted.)

209    Their Honours also referred to subsequent decisions which recognised that principles regarding Quistclose trusts formed part of the law of Australia, including Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia [1991] FCA 344; (1991) 30 FCR 491; Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407; and Salvo v New Tel Ltd [2005] NSWCA 281. Their Honours were satisfied that there was no point at which ownership of the bank cheque, or the funds represented by it, passed to the bankrupt (at [37]). It followed that the appeal by the trustees failed.

210    In the present case I am satisfied that no Quistclose trust arose, and further the protection under s 116(2)(a) of the Bankruptcy Act was not enlivened. Mr Smith may have had a purpose of transferring monies in his superannuation accounts, through accounts with Heritage Bank, to the superannuation accounts of Mrs Smith. There was however no evidence at all of any mutual intention that the monies withdrawn by Mr Smith from his superannuation accounts should be used exclusively for a specific purpose, such that if the purpose failed the money would be repaid to Mr Smith’s superannuation accounts. The facts of this case simply do not paint such a picture, giving rise to any relationship of a fiduciary character or trust between Mr Smith and Mrs Smith, including during the period that Mr Smith held the superannuation monies prior to the transfer to Mrs Smith’s superannuation accounts.

211    Submissions by the first respondent in respect of this issue are without merit.

Conclusion

212    I am satisfied that the monies the subject of the First Superannuation Transfer and the Second Superannuation Transfer were monies which were or would probably have been available to Mr Smith’s creditors. The transfers of those monies were void against the Trustee under s 128B(1) of the Bankruptcy Act.

CROSS-CLAIMS

213    In the cross-claim currently before the Court, Mrs Smith and Mr Smith challenge two notices issued pursuant to s 139ZQ of the Bankruptcy Act.

First 139ZQ Notice

214    The first notice under s 139ZQ of the Bankruptcy Act, dated 22 April 2021, was a notice served by the Trustee on Colonial First State in respect of the amount of $244,651.71, which was the amount of the First Superannuation Transfer (First 139ZQ Notice). The Trustee claimed that the payment of the First Superannuation Transfer was void against the Trustee under s 128B of the Bankruptcy Act as a superannuation contribution made to defeat creditors.

215    In the First 139ZQ Notice, the Trustee submitted as follows:

13. Here, the essential elements of section 128B of the Act are satisfied with respect to the Transfer as follows:

A.     The transfer is made by way of a contribution to an eligible superannuation fund:

i.     The Transfer was made to Mrs Smith's Superannuation account held with Colonial First State;

ii.     Colonial First State is the issuer of the FirstChoice range of super products from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 which is a Regulated Superannuation Entity under the Superannuation Industry (Supervision) Act and is regulated by Australian Prudential Regulation Authority (APRA);

B.     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:

i.     the sum of $244,651.71 in the Debtor's Heritage account would probably have become part of the Debtor's estate or would probably have been available to creditors if it had not been transferred to Mrs Smith's Superannuation account;

C.     The Transfer was done by the Debtor for the main purpose:

i.     to prevent funds of $244,651.71 from becoming divisible among his creditors

…

In summary, the Trustee submits:

•    the effect of the Mortgage Transfer was essentially to circumvent the rights of various creditors of TFD who had lodged their caveats over the Debtor's share in the Broadbeach Property and the Blue Mountain Heights Property.

•    Investigations into the financial affairs of the Debtor, Faloda and the Trust indicate that the loan to Mrs Smith was a sham orchestrated to circumvent the Debtor receiving any distribution from the Trust to defeat his personal creditors.