Federal Court of Australia

Kirk as trustee of the Property of Smith (a Bankrupt) v Smith (No 2) [2024] FCA 773

ORDERS

THE COURT DECLARES THAT:

1.    The transfer of monies totalling $328,047.75 by Mr Richard John Smith (the Bankrupt) to the First Respondent on 23 March 2016 and 20 April 2016 (the Property Transfer) is void pursuant to sections 120 and 121 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act);

2.    The Bankrupt’s transfer of monies totalling $324,990.00 on 21 December 2016 and 23 December 2016 to the superannuation account of the First Respondent (the Superannuation Transfer) is void against the Applicant pursuant to s 128B of the Bankruptcy Act.

3.    The First Respondent purchased the property located at 1402/2865 Gold Coast Highway, Surfers Paradise, Queensland, more particularly described as Lot 80 on SP161863, Local Government: Gold Coast, Title Reference 50483118 (the Surfers Paradise Property) using monies including those the subject of the Property Transfer.

4.    26.36% of the Surfers Paradise Property is charged in favour of the Applicant.

AND THE COURT ORDERS THAT:

1.    Pursuant to s 79 of the Judiciary Act 1903 (Cth) and s 38 of the Property Law Act 1974 (Qld) (Property Law Act), Mr Darryl Edward Kirk, Registered Trustee in Bankruptcy and Registered Liquidator, of 201 Charlotte Street, Brisbane, Queensland 4000, and Mr Stephen Phillip Earel, Registered Liquidator, of 201 Charlotte Street, Brisbane, Queensland 4000 (Trustees for Sale), be appointed jointly and severally as statutory trustees for the sale of the Surfers Paradise Property.

2.    The Surfers Paradise Property be vested in the Trustees for Sale on a statutory trust for sale under Part 5 Division 2 of the Property Law Act.

3.    The First Respondent is to deliver up vacant possession of the Surfers Paradise Property to the Trustees for Sale within 42 days of the date of this Order.

4.    The Trustees for Sale be entitled to sell the Surfers Paradise Property by such method as they consider appropriate in the circumstances, including but not limited to sale by auction or private treaty.

5.    The First Respondent be at liberty to purchase the Surfers Paradise Property upon terms that she shall not be required to pay any deposit and that she may set off against the purchase price the value of her share in the Surfers Paradise Property.

6.    The Trustees for Sale distribute the sale proceeds of the Surfers Paradise Property in the following manner and order of priority:

(a)    First, in payment of all costs and expenses of and incidental to the sale, including those of any appointed real estate agent, agent’s commission, legal costs of sale, and marketing and advertising costs;

(b)    Second, in discharge of any valid encumbrance of title over the Surfers Paradise Property;

(c)    Third, in payment of the reasonable fees and disbursements of the Trustees for Sale incurred by them in performance of their obligations pursuant to these Orders; and

(d)    Fourth, any surplus is to be distributed in the following proportions:

(i)    To the Applicant, as trustee of the bankrupt estate of the Bankrupt – 26.36%; and

(ii)    To the First Respondent – 73.64%.

7.    Pursuant to s 30 of the Bankruptcy Act, the First Respondent pay the Applicant the sum of $121,095.50 (being the balance of monies transferred by the Bankrupt to the First Respondent pursuant to the Property Transfer, but not used in the purchase of the Surfers Paradise Property) plus interest on that amount in accordance with s 51A of the Federal Court of Australia Act 1976 (Cth) from 17 December 2020.

8.    Pursuant to s 30 of the Bankruptcy Act, in respect of the Superannuation Transfer:

(a)    The money held in Court pursuant to the Court’s order dated 30 September 2021, plus any accretions, be paid to the Applicant;

(b)    The First Respondent pay the Applicant the sum of $324,990.00 less the amount paid pursuant to Order 8(a) of these Orders; and

(c)    The First Respondent pay the Applicant interest on the sum of $324,990.00 in accordance with s 51A of the Federal Court of Australia Act 1976 (Cth) from 17 December 2020.

9.    The cross-claim filed 23 November 2021 be dismissed.

10.    The First Respondent pay 60% of the costs of the Applicant of and incidental to these proceedings, on a party and party basis, to be taxed if not otherwise agreed

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

REASONS FOR JUDGMENT

COLLIER J

1    On 15 March 2024, I delivered judgment regarding the substantive issues in this matter: Kirk as trustee of the Property of Smith (a Bankrupt) v Smith [2024] FCA 240 (the substantive Kirk judgment). I made the following Orders:

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.

2    The parties were unable to provide draft agreed orders referable to Order 1 of those Orders.

3    Draft timetabling orders however were provided by the parties referable to the filing of submissions. I made the following orders on 15 April 2024:

1.     By 4:00pm on 17 April 2024, the Applicant file and serve any affidavits, and an outline of submissions (limited to 10 pages), on which he intends to rely on the issues of the appropriate form of orders and costs;

2.     By 4:00pm on 1 May 2024, the First Respondent file and serve any affidavits, and an outline of submissions (limited to 10 pages), on which she intends to rely on the issues of the appropriate form of orders and costs;

3.     By 4:00pm on 8 May 2024, the Applicant file and serve any affidavit evidence, and any outline of submissions (limited to 5 pages), in reply;

4.     The issues of the appropriate form of order and costs be determined on the papers.

DRAFT ORDERS

Orders sought by the applicant

4    The applicant sought the following orders:

1.     Pursuant to section 21 of the Federal Court of Australia Act 1976 (Cth) (FCA Act), the Court declares that:

(a)     Mr Richard John Smith's (the Bankrupt) transfer of the sum of $328,047.75 to the First Respondent (the Property Transfer) is void pursuant to sections 120 and 121 of the Bankruptcy Act 1966 (Cth) (the Act);

(b)     the Bankrupt's transfer of the sum of $324,990 to the First Respondent's superannuation account (the Superannuation Transfer) is void pursuant to section 1288 of the Act;

(c)     the First Respondent purchased 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) using the funds the subject of the Property Transfer;

(d)    41.79% of the Surfers Paradise Property is charged in favour of the Applicant (the Charge).

2.     To enforce the Charge:

(a)     pursuant to s 30 of the Act and s 22 of the FCA Act, the Surfers Paradise Property vests in the Applicant on trust for sale and the Applicant stand possessed of the proceeds of sale;

(b)     the First Respondent is to deliver up vacant possession of the Surfers Paradise Property within 42 days of the date of this order;

(c)     the Applicant is entitled to sell the Surfers Paradise Property by such method as he considers appropriate in the circumstances, including but not limited to sale by auction or private treaty;

(d)     the First Respondent is at liberty to purchase the Surfers Paradise Property upon terms that she shall not be required to pay any deposit and that she may set-off against the purchase price the value of her share in the Surfers Paradise Property;

(e)     the Applicant shall distribute the sale proceeds in the following manner and order of priority:

(1)     in payment of all costs and expenses of and incidental to the sale, including those of any appointed real estate agent and agent's commission, legal costs of sale, and marketing and advertising costs;

(2)     in discharge of any valid encumbrance of title over the Surfers Paradise Property;

(3)     in payment of the Applicant's reasonable fees and disbursements incurred by him in performance of his obligations pursuant to these orders;

(4)     in payment of the costs order made in favour of the Applicant in paragraph 5 below;

(5)     any surplus to be paid to the Applicant, as trustee of the bankrupt estate of the Bankrupt and the First Respondent in the following proportions:

(A)     to the Applicant, as trustee of the bankrupt estate of the Bankrupt - 41.79%;

(B)     to the Respondent - 58.21 %.

3. Pursuant to section 30 of the Act, in respect of the Superannuation Transfer:

(a)     the money held in Court pursuant to the Court's order dated 30 September 2021, plus any accretions, be paid to the Applicant;

(b)     the First Respondent pay the Applicant the sum of $324,990 less the amount paid pursuant to paragraph 3(a) above;

(c)     the First Respondent pay interest in the amount of $60,277.28 on the sum of $324,990 in accordance with section 51A of the FCA Act from 17 December 2020.

4.     The Statement of Cross-Claim filed 23 November 2021 is dismissed.

5.     The First Respondent pay the Applicant's costs of proceedings numbered QUO 117 of 2021, QUO 217/2021 and QUO 251/2021 to be assessed, if not agreed:

(a)     up to an including 1 November 2021, on the standard basis;

(b)     after 1 November 2021, on the indemnity basis.

Orders sought by the first respondent

5    The first respondent sought the following orders:

Declaratory relief

1.     Pursuant to section 21 of the Federal Court of Australia Act 1976 (Cth) (FCA Act), the Court declares that:

(a)    the transfer of the sum of $328,047.75 made by Mr Richard John Smith (the Bankrupt) to the First Respondent on 23 March 2016 and 20 April 2016 (the Property Transfer) is void against the Applicant pursuant to sections 120 and 121 of the Bankruptcy Act 1966 (Cth) (the Act);

(b)     the Bankrupt’s transfer of the sum of $324,990 to the First Respondent’s superannuation account made on 21 December 2016 and 23 December 2016 (the Superannuation Transfer) is void against the Applicant pursuant to section 128B of the Act, upon the Applicant’s election;

(c)     the First Respondent received a part of 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 voidable against the Applicant upon the Applicant’s election; and

(d)     9.4% of the Surfers Paradise Property is charged in favour of the Applicant (the Charge).

Enforcement

2.     Pursuant to section 30 of the Act, in respect of the Property Transfer:

(a)     the First Respondent is to pay to the Applicant the sum of:

(1)    $254,236.35 (being the sum of $328,047.75 less $73,811.40); plus

(2)    interest in accordance with section 51A of the FCA Act from 17 December 2020;

(b)    the First Respondent is:

(1)     to appoint a licensed real estate agent to effect the sale of the Surfers Paradise Property within 14 days of the making of this order;

(2)     to take all reasonable steps to effect a sale of the Surfers Paradise Property to a third party within 42 days of the appointment of a real estate agent, by either private treaty or public auction, with such time to be extendable by agreement in writing between the Applicant and the First Respondent;

(3)    to give notice to the Applicant of all offers made for the purchase of the Surfers Paradise Property by a third party;

(4)     not, without the consent of the Applicant, to accept an offer for purchase of the Surfers Paradise Property by private treaty, or make a counter-offer for the sale of the property in negotiating the sale of it; and

(5)     prior to listing the Surfers Paradise Property for auction, to obtain a nominated reserve price for the auction from the Applicant and not accept an offer that is less than the price so nominated;

(c)     the Applicant is:

(1)     not to refuse unreasonably to give his consent to Ms Smith accepting an offer for the sale of the Surfers Paradise Property, or making a counter-offer for the sale of the property, by private treaty; and

(2)     not to act unreasonably in setting a reserve price for the auction of the Surfers Paradise Property;

(d)     if a sale is not effected by the time specified in order 2(b)(2) above, including any further time agreed in writing between the parties, then, immediately upon an affidavit being filed in Court and served on the First Respondent deposing to the absence of a sale of the Surfers Paradise Property:

(1)     the Surfers Paradise Property vests in the Applicant on trust for sale and the Applicant stands possessed of the proceeds of sale;

(2)     the First Respondent is to deliver up vacant possession of the Surfers Paradise Property within 14 days of the appointment of the Applicant as trustee; and

(3)     upon his appointment, the Applicant is entitled to sell the Surfers Paradise Property by such method as he considers appropriate in the circumstances, including but not limited to sale by auction or private treaty;

(e)     the sale proceeds of the Surfers Paradise Property be applied in the following manner and order of priority:

(1)     first, in payment of all costs and expenses of and incidental to the sale, including those of any appointed real estate agent and agent’s commission, legal costs of sale, and marketing and advertising costs;

(2)     second, in discharge of any valid encumbrance of title over the Surfers Paradise Property;

(3)     third, if the Applicant is appointed as a trustee for sale in accordance with order (d) above, in payment of the Applicant’s reasonable fees and disbursement incurred by him in performance of his obligations pursuant to these orders;

(4)     any surplus to be divided between:

(A)     the Applicant, as trustee of the bankrupt estate of the Bankrupt; and

(B)     the First Respondent,

in the following proportions:

(C)     to the Applicant, as trustee of the bankrupt estate of the Bankrupt – 9.4%; and

(D)     to the First Respondent – 90.6%.

(f)     any party has liberty apply to the Court to vary the enforcement orders with 2 days’ notice.

3.     Pursuant to section 30 of the Act, in respect of the Superannuation Transfer:

(a)     the money held in Court pursuant to the Court’s order dated 30 September 2021, plus any accretions, be paid to the Applicant; and

(b)     the First Respondent pay the Applicant the sum of $324,990 plus interest in accordance with section 51A of the FCA Act from 17 December 2020, less the amount paid pursuant to paragraph 3(a) above.

The Cross-Claim

4.     Pursuant to section 139ZS of the Act, the notice issued by the Official Receiver on 1 June 2021 pursuant to section 139ZQ of the Act, in so far as it requires the payment of the sums of $84,000 and $250,000, is set aside.

5.     The Statement of Cross-Claim filed 23 November 2021 is otherwise dismissed.

Costs

6.     The First Respondent pay 20% of the Applicant’s costs of this consolidated proceeding to be assessed on the standard basis, if not agreed.

Issues for determination

6    In light of my findings in the substantive Kirk judgment, it is common ground between the parties that:

    The transfer by Mr Smith of the sum of $328,047.75 to Mrs Smith (which funds were the result of the Property Transactions) was void pursuant to ss 120 and 121 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act); and

    The transfer by Mr Smith of the sum of $324,990.00 to Mrs Smith’s superannuation account (the Superannuation Transfer) was void pursuant to s 128B of the Bankruptcy Act.

7    Declarations and relevant orders to that effect can accordingly be made.

8    Remaining in contention between the parties in respect of dispositive orders are the following issues:

(1)    whether and the extent to which the Trustee was entitled to trace the void Property Transfer into the Surfers Paradise Property (the Tracing Issue);

(2)    whether the Trustee should be appointed to sell the Surfers Paradise Property or whether Mrs Smith should be given the opportunity to sell the Surfers Paradise Property (the Sale Issue);

(3)    the orders which should be made on the Cross-Claim (the Cross-Claim Issue); and

(4)    the orders which should be made in respect of the costs of the proceedings (the Costs Issue).

Submissions

Submissions of the Trustee

9    The Trustee submitted, in summary, the following:

    the Trustee’s position as to the Tracing Issue should be preferred.

    Mrs Smith’s approach is premised on an inference of fact which is directly contradictory to the first respondent's case at trial.

    the first respondent’s proposed orders in respect of the Sale Issue contradicts s 22 of the Federal Court of Australia Act 1976 (Cth) (the FCA Act) by failing to completely and finally determine all matters of controversy between the parties and avoid a multiplicity of proceedings.

    The Cross-Claim should be dismissed in its entirety because the Court found, in substance, that Pt VI, Div 4B, Subdivision J of the Bankruptcy Act applied on the basis of the facts and circumstances set out in the Second 139ZQ Notice.

    Costs of the proceedings should be awarded on an indemnity basis commencing from either of three alternative dates (1 November 2021, 3 February 2022 or 6 April 2023) reflecting the offers of compromise that the Trustee made in the proceedings. The Court should have regard to the fact that it was not until the final submissions that Mrs Smith conceded that the Bankrupt’s main purpose in entering into the contested transactions was to prevent, hinder or delay the process of his property becoming available to creditors.

    In respect of the Tracing Issue:

•    The Trustee’s interest in the property should be 41.79%.

•    Mrs Smith’s contention that the Trustee’s interest was “down to 26%” was not pleaded; was fundamentally inconsistent with her pleaded case; and was not the subject of any direct evidence or submission at trial.

•    Mrs Smith now pleads that there was an intention that there be a different order of priority between the portion of proceeds to which she was entitled, and the portion to which Mr Smith was entitled. Mrs Smith should not be permitted, at this stage after delivery of reasons, to advance an alternative defence.

    In respect of the Sale Issue:

•    Mrs Smith’s proposed orders would delay the sale of the Surfers Paradise Property for a further six months and risk, in the interim, a direct application by the Trustee seeking the appointment of statutory trustees for sale pursuant to s 38 of the Property Law Act 1974 (Qld) (Property Law Act).

•    Mrs Smith’s concerns about a conflict arising from some financial interest the Trustee may have in the sale are not well founded. If anything, that interest means the applicant has a greater interest in maximising the returns of the sale process and minimising the costs than any other statutory trustee who might be appointed. In circumstances where the orders provide directions as to how the sale is to occur and the allocation of those proceedings, there is limited scope for any discretionary exercise of preference between the beneficiaries of the statutory trust.

    In respect of the Cross-Claim Issue: the cross-claim must be dismissed as the Second 139ZQ Notice should not be set aside.

    In respect of the Costs Issue:

•    Mrs Smith should pay indemnity costs of the Trustee as a result of unconscionable conduct in unreasonably rejecting three settlement offers and delaying concessions in the defence until closing submissions; and

•    It was not appropriate to apportion costs.

Submissions of Mrs Smith

10    Mrs Smith submitted, in summary, the following:

    The orders made in respect of the Tracing Issue should recognise that the Trustee failed to prove that Mrs Smith received traceable proceeds from the Property Transactions that were used to acquire the Surfers Paradise Property that exceeded 9.4% of the purchase price.

    In the interest of saving costs, Mrs Smith should be given the opportunity to sell the Surfers Paradise Property before the appointment of a statutory trustee for sale.

    The Second 139ZQ Notice can and should be set aside in part.

    Mrs Smith should be ordered to pay 20% of the Trustee’s costs on the standard basis.

    In respect of the Tracing Issue:

•    The orders sought by the Trustee were inconsistent with the case run at trial.

•    The sum of $73,811.40, being 9.4% of the value, was the only amount of money that Mr Smith was entitled to receive, which was transferred to Mrs Smith.

    In respect of the Sale Issue:

•    Mrs Smith should be entitled to sell the Surfers Paradise Property herself to avoid costs associated with the appointment of a statutory trustee.

•    In the event Mrs Smith is unable to sell the property within 6 weeks after the appointment of a real estate agent, the Trustee is to be appointed as statutory trustee.

    In respect of the Cross-Claim Issue, the Second 139ZQ Notice was not valid insofar as it was referable to the amounts of $84,000 and $250,000.

    In respect of the Costs Issue:

•    It would be difficult to apportion costs on an issue by issue basis. Rather, the applicant should be entitled to a percentage of his costs.

•    Even if Mrs Smith had conceded earlier that an intention to defeat creditors could have been inferred, the length of the trial would not have been reduced significantly.

•    The portion of the Trustee’s costs should be substantially discounted to 20% to reflect the Trustee’s failure on the Loan Agreement issue and the serious nature of that allegation, in comparison to the success on the Property Transaction issues which concerned the resolution of legal questions applied to the facts.

•    Costs should be on a standard basis. The three offers made by the Trustee were not rejected on an unreasonable basis.

Reply submissions

11    In reply, the Trustee submitted, in summary:

•    In relation to the Tracing Issue, Mrs Smith’s case had significantly departed from her original position;

•    In relation to the Sale Issue, once the Court is satisfied that it is open for the Court to appoint a statutory trustee for sale, there is only a limited discretion for the Court to refuse that relief. Increased costs are not sufficient for this discretion to arise.

•    In relation to the Costs Issue, Mrs Smith overstated the significance of the Trustee’s failure on the Loan Agreement issue in the context of her concession of the intention issue.

Consideration

Tracing Issue

12    At [133] of the substantive Kirk judgment I found that Mrs Smith had an entitlement to 50% of the proceeds of sale of the Broadbeach Property and the Blue Mountain Heights Property.

13    To the extent that funds representing Mr Smith’s interest in proceeds of sale of those properties were transferred to Mrs Smith, such transfers were void. It is common ground that those funds totalled $328,047.75.

14    It is not in dispute that at least some of those funds received by Mrs Smith were used by her to purchase the Surfers Paradise Property. The amount of those funds used to purchase the Surfers Paradise Property however is in dispute.

15    The Trustee’s position was that the whole sum attributable to Mr Smith’s interest was traceable to the Surfers Paradise Property. As such, the Trustee submitted that his interest in the Surfers Paradise Property should be 41.79%, calculated as follows:

16    Further, the Trustee submitted that:

    Mrs Smith paid a deposit of $78,500 for the Surfers Paradise Property from the proceeds of sale of the Broadbeach Property.

    The balance of the purchase price for the Surfers Paradise Property was paid by Mrs Smith cumulatively from the money she received from sale of the Broadbeach Property, the Blue Mountain Heights Property and the Loan Agreement.

    Faloda used the net proceeds of sale of the North Street Property to purchase the Commonwealth Bank’s mortgage over the Broadbeach Property and Blue Mountain Heights Property.

    From the sale of the Broadbeach Property, half was paid to Mrs Smith and half was paid to Faloda notionally on account of the mortgage.

    From the sale of the Blue Mountain Heights Property, a sum was paid to Faloda which approximated the amount Faloda had paid the Bank, with the balance paid to Mrs Smith.

    The sum of $328,047.75 was the sum of property of the Bankrupt which Mrs Smith received as a result of the void Property Transactions. This sum may be traced or followed into the Surfers Paradise Property, it did not exist in specie or in some identifiable substitute form.

    The submission of Mrs Smith should be rejected as they are fundamentally inconsistent with the case that was pleaded.

17    Mrs Smith’s submission was that the Trustee’s interest in Surfers Paradise Property was limited to 9.4% of the value, being $73,811.38 divided by the purchase price of $785,000:

2     This amount differs slightly from the particulars at pp 9 and 10 of the Second Cocolas Affidavit because it includes the deposit of $30,100, and has no rounding.

3     This amount also differs from the particulars by $0.87 due to rounding.

18    Further, Mrs Smith submitted that:

    The Trustee did not establish that Mrs Smith received the sum of $328,528.50 which could be traced into the Surfers Paradise Property.

    Mr and Mrs Smith had agreed that Mr Smith’s share of the proceeds of sale of the Broadbeach Property and the Blue Mountain Heights Property would be used to repay the mortgage, and that Mrs Smith’s share would be used to buy the Surfers Paradise Property.

    The transfer of Mr Smith’s interest in the Broadbeach Property and the Blue Mountain Heights Property was effected by:

•    the discharge of the whole of the joint debt (totalling $506,543.00) using Mr Smith’s share of the net proceeds of sale; and

•    the payment to Mrs Smith of the residue of Mr Smith’s entitlement to the net proceeds of sale.

    The only money that Mr Smith was entitled to receive, which was transferred to Ms Smith, was the sum of $73,811.40.

    Although she had sufficient funds to purchase the Surfers Paradise Property, Mrs Smith used a fund that was mixed with that $73,811.40 and therefore accepted that the whole of the sum of $73,811.40 was traceable into the Surfers Paradise Property.

19    In relation to the concept of tracing, the Full Court in Frigger v Trenfield (No 3) [2023] FCAFC 49 observed that:

[373]     However, ‘tracing’ is a factual enquiry whether or not undertaken in support of a proprietary claim. It requires evidence. It involves demonstrating causal or transactional links from the original property to the property now said to be a substitute for the original property. It does not necessarily require that one asset is ‘substituted’ directly for another. In the process of demonstrating causal or transaction links “common sense and reasonable inference play their part”: Toksoz v Westpac Banking Corporation [2012] NSWCA 199; 289 ALR 577 at [7] –[10] . See, also, J Edelman, ‘Understanding Tracing Rules’ (2016) 16 QUT Law Review 1 at 7–11; Goldus Pty Ltd (Subject to a Deed of Company Arrangement) v Cummins (No 4) [2021] FCA 1095; 157 ACSR 118 at [265] –[283].

[374] The process of tracing funds (property) through bank accounts involving numerous transactions over many years can be complex and costly. It is usually undertaken with the assistance of a forensic accountant and evidence is given about the transactions underlying the entries in the bank statements and the links between those entries, such that the links between the claimant’s original property and the putative substitute property are proven. Sometimes it is not possible to identify the links and the property cannot be traced into and out of a bank account. Whatever the case may be, it necessary for there to be evidence to establish the transactional or causal links.

20    Generally, tracing involves an extensive assessment of bank accounts and transactions to determine the links between the original property and the substitute property: Frigger at [374].

21    In the substantive Kirk judgment I found that:

    the combined net proceeds of sale of the Broadbeach Property and the Blue Mountain Heights Property amounted to $1,162,639.36;

    after payment of the mortgages the combined net proceeds of sale was $656,095.49; and

    Mr Smith and Mrs Smith were each entitled to receive 50% of the net proceeds of sale of those properties, being for each person the amount of $328,047.74.

22    Key evidence before the Court was Transaction Listings for Accounts in Mrs Smith’s name. Annexure GSS-02 to the affidavit of Mrs Smith filed 29 July 2021 contained a copy of the Transaction Listing for Account S26, being a Heritage Bank Account, for the period 28 February 2015 until 31 October 2020. Annexure GSS-05 to the same affidavit of Mrs Smith contained a copy of the Transaction Listing for Account S1, also a Heritage Bank Account, for the period 6 March 2015 until 2 November 2020.

23    The amount of money actually received by Mrs Smith following the sales of these properties totalled $655,131.07 (paras [20]-[21] of the substantive Kirk judgment). This is also plain from Transaction Listings that Mrs Smith received a total sum of $655,131.07 from the proceeds of sale from both the Broadbeach Property and the Blue Mountain Heights Property, and those funds were ultimately transferred into either or both Account S26 and Account S1. This amount represented Mrs Smith’s entitlement to net proceeds as well as an amount representing slightly less than Mr Smith’s entitlement.

24    It is further clear that monies were paid out of Account S26 and Account S1, and that those monies were used to purchase the Surfers Paradise Property. In particular I note the following evidence:

    At the opening of 23 March 2016, the balance of Account S1 was $3,956.12.

    From the sale of the Broadbeach Property, on 23 March 2016 an amount of $194,386.33 was paid into Account S1. The balance of Account S1 at the close of 23 March 2016 was $198,342.45.

    At the opening of 24 March 2016, the balance of Account S26 was $1,088.58.

    On 24 March 2016 the amount of $30,100.00 was paid into Account S26. This amount was paid into the account by Professionals Real Estate. This sum represented the deposit paid to the real estate agent by the purchasers of the Broadbeach Property from Mr and Mrs Smith (substantive Kirk judgment at [20]).

    At the opening of 25 March 2016, the balance of Account S1 was $198,342.45.

    On 25 March 2016, Mrs Smith transferred the amount of $195,000.00 from Account S1 to Account S26, which she deposed included monies that she had received from the sale of the Broadbeach Property.

    On 12 April 2016, an amount of $78,500.00 was deposited into Account S1 with the description “Transfer from S26 Deposit #1240372220”. On the same day, an amount of $78,500 was transferred out of Account S1 with the description “Counter Chq to BH1 PTY LTD TRUST ACCOUNT”. In her affidavit filed 29 July 2021 Mrs Smith deposed at [111] that on or around 12 April 2016 she paid a deposit of $78,500.00 to secure the purchase of the Surfers Paradise Property. I am satisfied that the amount of $78,500.00 transferred out of Account S1 was the deposit for the Surfers Paradise Property.

    As at the close of 12 April 2016 (after the amount of $78,500 was transferred out of Account S26), the balance of Account S26 was $108,001.93.

    At the opening of 20 April 2016, the balance of Account S1 was $3,218.45.

    From the net proceeds of sale of the Blue Mountain Heights Property, on 20 April 2016 the amount of $430,644.74 was paid into Account S1.

    At the opening of 20 April 2016, the balance of Account S26 was $105,001.93.

    On 20 April 2016, Mrs Smith transferred $431,000 from Account S1 to Account S26, which she deposed included monies that she had received from the sale of the Blue Mountain Heights Property.

    At the close of 20 April 2016, the balance of Account S26 was $536,001.93.

    At the opening of 26 April 2016, the balance of Account S26 was $536,001.93.

    On 26 April 2016, the amount of $250,000 was transferred from lawyers Wonderley & Hall to Account S26. The amount of $250,000 represented the loan from Faloda to Mrs Smith.

    At the close of 26 April 2016, after an RTGS payment fee of $10.00 was deducted from Account S26, the balance of Account S26 was $785,991.93.

    At the opening of 3 May 2016 the balance of Account S26 was $786,659.80. This sum included interest credit of $667.87.

    On 3 May 2016 the amount of $734,265.65 was paid from Account S26 to an account. Mrs Smith deposed in her affidavit of 29 July 2021 at [112] that this money was paid in settlement of the Surfers Paradise Property.

    Further, during cross-examination Mr Smith gave the following evidence:

From the previous proposition, Mr Smith, that she received a larger portion of the proceeds of sale to repay her. If she has received more money from the proceeds of sale to repay it, it can’t be still owing, can it, Mr Smith?---No. The reason she got the larger proportion of the proceeds of sale was because she invested all that money.

And she used those funds to but [SIC] the Surfer’s Paradise property?---Yes.

(Transcript p 57)

25    During cross-examination, Mrs Smith gave evidence that the whole of the proceeds of sale received from the sale of the Broadbeach Property and Blue Mountain Heights Property were used to purchase the Surfers Paradise Property, and that Mrs Smith did not have other funds she was able to use to purchase that property:

And you would use your share to buy a new property?---He told us to go out and buy a property between 700 and a million dollars.

And you followed that advice?---No – well, we went out and bought something but not to those amounts and I couldn’t figure out why those amounts - - -

The proceeds of sale of the Broadbeach and Blue Mountain Heights properties were not enough to pay that amount?---Yes.

You needed to get some more money to complete the purchase of the Surfers Paradise unit; that’s right?---That’s right.

(Transcript p 107)

26    Mrs Smith further gave evidence that her children did not contribute to the purchase of the Surfers Paradise Property:

The only thing that comes close is the sentence beginning, “My unit on the coast was purchased as my place of residence. My children assisted me.”?---Mmm.

Your children did not assist you to purchase the Surfer’s Paradise unit?---My children have been assisting me all along the line.

They didn’t contribute to the purchase price of the Surfer’s Paradise unit?---They didn’t – they didn’t contribute to the purchase price

(Transcript p 114)

27    I reject the submission of Mrs Smith that she and Mr Smith had agreed that Mr Smith’s share of the residential properties would be used to repay the mortgage and Mrs Smith share would be used to buy a new property. This claim was never pleaded. Further, Mrs Smith has not pointed to any evidence in support of the claim. The mortgages over the Broadbeach Property and the Blue Mountain Heights Property were plainly joint debts. Further, in the circumstances as existed at the time of the discharge of those mortgages, I do not accept that Mr Smith and Mrs Smith could between themselves effectively agree that only Mr Smith’s portion of the proceeds of sale of both properties was attributable to the discharge of the respective mortgages.

28    I am satisfied that the property of Mr Smith which Mrs Smith received as a result of the void property transactions, namely, the sum of $328,047.75, ceased to exist at the time of the bankruptcy in specie or in an identifiable form. However, I am also satisfied on the basis of the evidence before the Court that part or all of it may be traced or followed into the Surfers Paradise Property. In this respect I particularly have regard to the following observations of Lindgren J in Anscor Pty Ltd v Clout (Trustee) [2004] FCAFC 71:

43.    …

…

(i)     If the property the subject of a transfer made void by s 120 as a result of the trustee’s election to avoid, no longer exists in specie as at the commencement of the bankruptcy, but can be seen to exist as at that date in an identifiable substitute form of property, such as a fund representing the proceeds of sale of the property, that substitute property will vest in the trustee in bankruptcy forthwith upon the debtor’s becoming a bankrupt, if that substitute property, or an identifiable substitute for it, still exists then, subject, as ever, to the exceptions and the protections given to third parties found in s 120: cf Alvaro at 426-427; Halfey; In re Mouat; Kingston Cotton Mills Co v Mouat [1899] 1 Ch 831 (‘Mouat’) at 834-835; Brady v Stapleton at 332-333; Lumsden v Snelson [2001] FCA 83 at [24]–[27].

(j)     If, at the commencement of the bankruptcy, property the subject of a transfer made void by s 120 exists neither in specie nor in an identifiable substitute form, equitable relief founded in equity’s auxiliary jurisdiction may nonetheless be available to the trustee in bankruptcy. This may occur where, for example, the property, such as money, can be ‘followed’ or ‘traced’ into, other property which is not, however, simply an identifiable substitute for it: cf Mouat at 834–835; Trautwein v Richardson [1946] Arg LR 129; Issitch at [36]; O’Halloran at [80] per Allsop J and works cited by his Honour. In such a case an equitable charge over that other property in favour of the trustee in bankruptcy for the amount of the value of the property, or the amount of money which the debtor/bankrupt transferred plus interest, will often be found to be an appropriate remedy: for a recent illustration, see Fodare Pty Limited v Official Trustee in Bankruptcy [2000] FCA 1721.

29    In relation to tracing into mixed funds, Mrs Smith deposed in her affidavit filed 29 July 2021:

111.    On or around 12 April 2016, I paid a deposit of $78,500.00 to secure the purchase of the Surfers Paradise Property.

112.    On or about 3 May 2016, I paid the balance of the purchase price for the Surfers Paradise Property, being $734,265.65 using funds held in Account S26.

…..

114.    The purchase of the Surfers Paradise Property was funded using:

(a)    the $250,000.00 which I obtained from Faloda pursuant to the Loan Agreement; and

(b)    part of my GSS Equity Entitlement of (which, including part of my Additional Equity Entitlement, was approximately $647,917.30).

30    In Re Global Finance Group (In Liq)(Supervisor Appointed) [2002] WASC 63; (2002) 26 WAR 385 McLure J said:

100    … [W]here a trustee mixes its own money with trust money, makes a withdrawal and dissipates the money, the trustee is assumed to have had an honest intention and drawn out its own money first. The beneficiaries of the trust are entitled to an equitable charge or lien on the whole of the remaining unused fund for the amount of the trust money: Re Hallett's Estate (1880) 13 Ch D 696; Brady v Stapleton [1952] HCA 62; (1952) 88 CLR 322 at 337-338.

(emphasis added)

31    In the present case the sale price of the Surfers Paradise Property was $785,000.00. The funds used to purchase the Surfers Paradise Property should properly be ascribed as follows:

(1)    $250,000, being the loan to Mrs Smith from Faloda which, as I found in the substantive Kirk judgment, was not a void transaction; and

(2)    $535,000.00, being the balance of the purchase price before adjustments which as I have found was attributable to the proceeds of sale of the Broadbeach Property and the Blue Mountain Heights Property. Of the proceeds of sale of those properties, $328,047.75 were monies to which Mrs Smith was entitled.

32    I am satisfied that, of the $785,000.00 being the value of the Surfers Paradise Property, the interest of the Trustee is the balance after deduction of:

    the loan amount of $250,000 and

    Mrs Smith’s proportion of the net proceeds of sale, being $328,047.75.

33    The monetary interest of the Trustee in the Surfers Paradise Property accordingly is $206,952.25, representing 26.36% of the value of that property. I will make an Order to this effect.

34    It also follows that Mrs Smith, pursuant to the void transfer, has received and retained the difference between Mr Smith’s proportion of the net proceeds of sale of the Broadbeach Property and the Blue Mountain Heights Property (being $328,047.75) and the amount of those monies attributable to the purchase of the Surfers Paradise Property (being $206,952.25), which difference is in the amount of $121,095.50. I will also make an order that this money be paid by Mrs Smith to the Trustee.

35    I note that Mr Smith’s proportions of the net proceeds of sale of the Broadbeach Property and the Blue Mountain Heights Property were transferred to Mrs Smith at the same time as her entitlements to those proceeds were transferred, in transactions on 23 March 2016, 24 March 2016, and 20 April 2016. However I further note that on 17 December 2020 the Trustee’s solicitor elected to treat the Property Transfers and the Superannuation Transfers as void, and that interest could properly accrue from that date. I will order that interest on the amount of $121,095.50 similarly accrue from that date pursuant to s 51A of the FCA Act.

Sale Issue

36    The draft orders advanced by Trustee sought that the Surfers Paradise Property vest in him and on trust for sale. In submissions however the Trustee proposed that he and Mr Stephen Earel be appointed as statutory trustees. Both the trustee in bankruptcy (Mr Kirk) and Mr Earel swore affidavits on 18 April 2024 in which they consented to being appointed as statutory trustees to effect the sale of the Surfers Paradise Property.

37    In support of this proposition the applicant relied on s 79 of the Judiciary Act 1903 (Cth) (Judiciary Act) and s 38 of the Property Law Act.

38    To avoid an unnecessary increase of costs, Mrs Smith sought orders that she first be given the opportunity to attempt to sell the Surfers Paradise Property before any appointment of a statutory trustee.

39    Section 38 of the Property Law Act relevantly provides:

38 STATUTORY TRUSTS FOR SALE OR PARTITION OF PROPERTY HELD IN CO-OWNERSHIP

(1)    Where any property (other than chattels personal) is held in co-ownership the court may, on the application of any 1 or more of the co-owners, and despite any other Act, appoint trustees of the property and vest the same in such trustees, subject to encumbrances affecting the entirety, but free from encumbrances affecting any undivided shares, to be held by them on the statutory trust for sale or on the statutory trust for partition.

(2)    …

(3)    Where the entirety of the property is vested at law in co-owners the court may appoint a trustee corporation either alone or with 1 or 2 individuals (whether or not being co-owners), or 2 or more individuals, not exceeding 4 (whether or not including 1 or more of the co-owners), to be trustees of the property on either of such statutory trusts.

40    Further, s 37 of the Property Law Act relevantly provides:

37 DEFINITIONS FOR DIV 2

In this division—

"co-owner" has a corresponding meaning and includes an encumbrancee of the interest of a joint tenant or tenant in common.

"co-ownership" means ownership whether at law or in equity in possession by 2 or more persons as joint tenants or as tenants in common.

41    “Property” is defined by s 2 of the Acts Interpretation Act 1954 (Qld) as meaning any legal or equitable estate or interest (whether present or future, vested or contingent, or tangible or intangible) in real or personal property of any description (including money), and includes things in action.

42    The New South Wales equivalents of the provisions of the Property Law Act (namely, sections 66G and 66F(1) Conveyancing Act 1919 (NSW)), in the context of an application by a trustee in bankruptcy to sell property of which it was co-owner with a non-bankrupt, were considered by the Full Court in Coshott v Prentice [2014] FCAFC 88. Relevantly, their Honours accepted (at [128]) that the trustee in bankruptcy in that case was a co-owner of the relevant property because the definition of “co-owner” included ownership whether at law or in equity in possession. Their Honours also accepted that the Court had power to appoint trustees of sale in respect of the relevant property pursuant to the State property law provisions and s 79 of the Judiciary Act.

43    In Coshott the question arose whether the trustee in bankruptcy had the requisite degree of independence to be appointed as a trustee for sale. Their Honours accepted the importance of ensuring that the trustee for sale was independent, and continued:

130.    … As Young J held in Dixon v Roy (1991) 5 BPR 11,655, one of the obligations upon trustees for sale appointed under s 66G is that they “must hold the scales equally between the beneficiaries.” In that case, the Court found that the requirement was not met where the trustee had retained the same solicitors as one of the principal beneficiaries. It held that an impartial observer would believe, if there were a “showdown” between the beneficiaries, that the solicitors would prefer the interests of that beneficiary and, therefore, if the trustees sought advice, the solicitors would be biased in this regard.

131.    No conflict of interest was identified by the appellants with any specificity in this case. However, given that we consider that the appointment of the trustee in bankruptcy as the trustee for sale did not comply with s 66G because it required the appointment of at least two individual trustees, it is unnecessary for us to decide this issue. The appropriate course is for the question of who should be appointed as trustee in sale to be remitted to the trial judge. However, we note that the trustee in bankruptcy appropriately indicated at the hearing of the appeal that he accepted that a decision as to who might be appointed as the trustees for sale was a matter for the Court and not one on which he took a particular position. In all of the circumstances, the primary judge may well consider it prudent not to appoint the trustee in bankruptcy as one of the trustees for sale.

44    Principles relevant to the exercise of power by the Court to appoint trustees for sale pursuant to s 38 of the Property Law Act were explained by Bowskill CJ in McPaul v Massignani [2023] QSC 98. There her Honour said:

[24]    The purpose of orders for sale by statutory trust is “to provide a statutory mechanism for terminating the co-ownership of land when the co-owners fail themselves to agree on the manner in which the co-ownership shall be terminated”. As Wilson J (with the agreement of Muir and Gotterson JJA) said in Bunnings Group Ltd v Asden Developments Pty Ltd [2014] 1 Qd R 493 at [45]: “The statutory scheme for the appointment of statutory trustees for sale reflects the commercial reality that it is generally easier to sell the entirety than it is to sell a fractional interest, let alone a fractional interest that is encumbered.

[25]     Whilst it has been confirmed that the power to appoint a statutory trustee under s 38 is discretionary, the circumstances in which that discretion would be exercised against the making of an order, when one is sought by a co-owner, are very limited.

[26]     As McMurdo JA said in Wilson v Strzelcykowski [2016] QCA 227 at 2-3: “The nature of a court’s discretion under s 38(1) of the Property Law Act 1974 is confined in that ordinarily the discretion will be ordered in favour of the appointment of trustees for sale, essentially because the remedy under s 38 is a valuable ingredient of a co-owner’s proprietary interest.”

[27]     His Honour referred to the statement made in Goodwin v Goodwin [2004] QCA 50, by McPherson JA with the agreement of Williams JA and McMurdo J (as his Honour then was), that “[i]t is well settled that, to an application under s 38 of the Property Law Act… there is practically speaking no defence”.

[28]     In relation to the New South Wales equivalent, in Foundas v Arambatzis [2020] NSWCA 47 at [63] the Court of Appeal of New South Wales (White JA, Bell P and Basten JA agreeing) said: “Although an order under s 66G is discretionary, such an order is almost as of right, unless on settled principles it would be inequitable to make the order. An order may be refused if the appointment of trustees for sale would be inconsistent with a proprietary right, or the applicant for the order is acting in breach of contract or fiduciary duty, or is estopped from seeking or obtaining the order … Hardship or general unfairness is not a sufficient ground for declining relief under s 66G …

45    As was contemplated by the Full Court in Coshott, it appears, having regard to s 38(1) and (3) of the Property Law Act, that where individuals are concerned, there must be “2 or more individuals” appointed as trustees for sale: McPaul at [53]. The qualifications of a trustee appointed pursuant to s 38 are not prescribed – rather as Bowskill CJ explained in McPaul:

[54]    …There is no necessary qualification for such a trustee. In many of the cases, the trustee (s) is an accountant. The person simply needs to understand their role – and be responsible for undertaking in a diligent way the role of effecting the sale of the property , in accordance with the court’s order….

46    In the present case, to minimise costs, Mrs Smith has sought orders that she appoint a licensed real estate agent to effect the sale of the Surfers Paradise Property and that she take all reasonable steps to effect a sale to a third party within 42 days of the appointment of the real estate agent.

47    In my view it is appropriate that a trustee for sale of the Surfers Paradise Property be appointed by the Court, rather than Mrs Smith being ascribed the task of selling it. The fact that costs will be incurred in the appointment of independent statutory trustees is insufficient to deter the Court from making such appointment – as was explained by the Court of Appeal of New South Wales in Foundas v Arambatzis [2020] NSWCA 47 at [63] hardship or general unfairness is not a sufficient ground for declining relief under s 38 Property Law Act or its equivalents.

48    There is authority that a trustee in bankruptcy who asserts co-ownership is not an independent person for the purposes of appointment as a trustee of sale: Re Naushad Rahmat Aley Also Known As Neil Ali [1996] FCA 1235 at [30]. Notwithstanding this, as a general proposition trustees in bankruptcy are considered to be independent third parties (see e.g Wu v Roufeil as Trustee of the Bankrupt Estate of Yan Wu [2019] FCA 1099 at [20]).

49    Both Mr Kirk and Mr Earel are registered liquidators. As such, they are required to have an appropriate level of expertise, behave ethically, and maintain adequate insurance (Corporations Act 2001 (Cth), Sch 2 s 1-1(1)). In my view they should be appointed as statutory trustees to sell the Surfers Paradise Property.

50    The Full Court in Coshott observed at [132]-[134] that no rationale was advanced supporting an order that the expenditure of the trustees for sale referable to the sale in that case be paid from the proceeds of the sale attributable to the co-owner in priority to the distribution of the proceeds of sale to them as co-owner. However, in respect of the expenditure to be incurred by Mr Kirk and Mr Earel in relation to the sale of the Surfers Paradise Property, no such argument has been put to me. Accordingly, it is appropriate for me to make an orthodox order for the payment of expenditure of the trustees for sale referable to the sale of the property, namely that their reasonable fees and disbursements be paid in priority to distribution of proceeds of sale of that property.

Cross-Claim Issue

51    The cross-claim before the Court was filed by Mrs Smith and Mr Smith and sought to challenge two notices issues pursuant to s 139ZQ of the Bankruptcy Act: see [214]–[230] of substantive Kirk judgment.

52    The Trustee submitted that the cross-claim should be entirely dismissed. Mrs Smith however rejected this submission, and contended that the cross-claim should be upheld to the extent that the Second 139ZQ Notice required payment of monies referable to transactions which ultimately were not void against the Trustee.

53    Section 139ZS of the Bankruptcy Act provides that:

Power of Court to set aside notice

(1)     If the Court, on application by a person to whom a notice has been given under section 139ZQ or by any other interested person, is satisfied that this Subdivision does not apply to the person on the basis of the alleged facts and circumstances set out in the notice, the Court may make an order setting aside the notice.

(1A)     The application must be made:

(a)     not later than 60 days after the day the notice under section 139ZQ was given to the applicant; or

(b)     if the applicant is another interested person--not later than 60 days after the day the applicant became aware that the notice has been given.

(2)     A notice that has been set aside is taken not to have been given.

54    The First 139ZQ Notice was a notice served by the Trustee on Colonial First State in respect of the amount of $244,651.71 (First Superannuation Transfer): see substantive Kirk judgment at [214].

55    The First 139ZQ Notice detailed facts which have now been substantiated. Plainly, to the extent that the cross-claim seeks to have that notice set aside, the cross-claim should be dismissed.

56    The particulars of the Second 139ZQ Notice were set out at [221] to [222] of the substantive Kirk judgment as follows:

221    The second notice under s 139ZQ of the Bankruptcy Act, dated 1 June 2021, was a notice served by the Trustee on Mrs Smith in respect of the amount of $662,528.50, or alternatively payment of $84,000.00 (being an amount referable to the Second Superannuation Transfer) and transfer of the title of the Surfers Paradise Property (Second 139ZQ Notice).

222    The amount of $662,528.50 sought in the Second 139ZQ Notice is a composite of four requested payments, namely as follows:

(1)    $313,528.50 – Mr Smith’s 50% interest from the sale of Broadbeach Property and Blue Mountain Property;

(2)    $15,000.00 – Mr Smith’s 50% interest of the balance of the deposit monies for the Broadbeach Property that were paid to Mrs Smith;

(3)    $250,000.00 – Mr Smith’s distribution from the Trust assigned to Mrs Smith as a loan by Faloda; and

(4)    $84,000.000 – Funds withdrawn from Mr Smith’s superannuation accounts and transferred to Mrs Smith’s Heritage bank account.

57    I made the following findings in the substantive Kirk judgment referable to the Second 139ZQ Notice:

229    It follows that the portion of the Second 139ZQ Notice referable to the amount of $84,000.00, being the Second Superannuation Transfer, is not valid.

230    The balance of the claimed amounts sought under the second 139ZQ Notice stand or fall with the findings made by the Court in the substantive hearing. I have found that the Loan Agreement in respect of the loan of $250,000 was not a sham, and accordingly to the extent that the Second 139ZQ Notice refers to that amount it is not valid. However, I have found that the remaining amounts of $313,528.50 (being Mr Smith’s 50% interest from the sale of Broadbeach Property and Blue Mountain Property) and $15,000.00 (being Mr Smith’s 50% interest of the balance of the deposit monies for the Broadbeach Property that were paid to Mrs Smith) were not the subject of a constructive trust in Mrs Smith’s favour, and in respect of those amounts the Second 139ZQ Notice was valid.

58    As I observed in the substantive Kirk judgment, the Second 139ZQ Notice set out facts which have partly been substantiated, but partly not.

59    In Official Trustee in Bankruptcy v Lopatinsky [2003] FCAFC 109 the Full Court relevantly observed:

[147]     The finding that Mrs Lopatinsky had an equitable interest of at least 60–65% is sufficient to lead to a conclusion that the facts and circumstances set out in the notice under s 139ZQ were not correct. This is because the notice stated that Mr Lopatinsky “should have received one half of the net proceeds of sale being $131,387”. The statement that Mr Lopatinsky “was entitled to a further sum of $81,387” on the sale of the Peakhurst property was also incorrect.

[148]     The question which then arises is whether the court should be satisfied, under s 139ZS(1) that subdiv J of the Bankruptcy Act does not apply because the facts stated in the notice were inaccurate.

[149]     A person who receives a notice under s 139ZQ may challenge the statement of facts and circumstances set out in the notice: see Re Lucera; Ex parte Official Trustee in Bankruptcy v Lucera (1994) 53 FCR 329 at 336 (per Olney J). As his Honour observed, if this were not the case, the recipient of a notice would have no defence to a claim under s 139ZQ(8) which provides that an amount payable under the section is recoverable as a debt.

……

[151]     Nevertheless, it does not seem to us that the inaccuracies in the present notice to which we have referred are without more, sufficient to result in an order under s 139ZS setting aside the notice. This is because the court must be satisfied under s 139ZS(1) that subdiv J does not apply. That is to say, the court must be satisfied that the transaction was not void under s 120: see Halse as trustee of property of Payne (a bankrupt) v Norton (1997) 76 FCR 389 at 398 (per Lee and R D Nicholson JJ); see also Re Pearson; Ex parte Wansley (1993) 46 FCR 55 at 60 ; 17 Fam LR 224 at 228–9 (per Wilcox J).

[152]     The Official Receiver bears the onus of satisfying the court that s 120 does apply: see Halse v Norton at 398, 399. But it seems to us that the Official Receiver does not have to show that all of the facts and circumstances are made out. It is sufficient if a part of the alleged facts and circumstances satisfy the court that s 120 is applicable. Here, s 120 would be applicable if Mrs Lopatinsky's equitable interest is more than 65% but less than 81% because there would have been a transfer to her of so much of the proceeds of sale of Peakhurst as was less than the 81% proportion which she received: see Re Bond; Ex parte Bond v Caddy (No 1) (1994) 11 WAR 330 at 336 ; 115 FLR 152 at 158–9 (Ex parte Bond).

[153]     Ex parte Bond was not a decision under s 139ZS. It was concerned with the construction of ss 139ZL and 139ZM of the Bankruptcy Act.

[154]     Section 139ZL enables the Official Receiver to give a notice to a person who holds money for or on account of a bankrupt who is liable to pay contributions under s 139P. As Seaman J said in Ex parte Bond (at WAR 335; FLR 158), the section confers exceptional powers on the Official Receiver to facilitate the collection of contributions in cases where a bankrupt might otherwise escape payment.

[155]     Section 139ZL(2) requires the notice to set out the facts and circumstances and, in particular, it must specify the money or property because of which the Official Receiver considers that subdiv I of the Bankruptcy Act applies.

[156]     Seaman J was of the view (at WAR 336; FLR 158–9) that it was sufficient if the notice under s 139ZL(2) stated facts and circumstances, any part of which satisfied the court that the division applied.

[157]     It seems to us that the same approach is applicable under s 139ZQ(2). Thus, even if, as we find, the notice overstated Mr Lopatinsky's entitlement of his share of the net proceeds, the notice will not be set aside if he had an entitlement to some part of the proceeds which were paid to Mrs Lopatinsky.

(emphasis added)

60    As explained in Lopatinsky, an overstatement of entitlements itself is not sufficient to warrant a s 139ZQ Notice being set aside unless the Court is satisfied that the relevant transaction was not void against the trustee in bankruptcy as contemplated by Subdivision J of Part 4B of the Bankruptcy Act. These findings are consistent with the decision of the High Court in Vale v Sutherland [2009] HCA 26.

61    That the Second 139ZQ Notice referred to more than one transaction as being void against the Trustee does not of itself mean that it should be set aside where one of the relevant transactions identified was not, ultimately void. Section 139ZS of the Bankruptcy Act empowers the Court to set aside a notice given under s 139ZQ if the Court is satisfied that Subdivision J of Division 4B of the Bankruptcy Act does not apply to the person on the basis of alleged facts and circumstances set out in the notice. In the present case there were plainly circumstances supporting a finding that Subdivision J did apply to the first respondent because of facts and circumstances set out in the notice. As Flick J further pointed out in Chamberlain (Trustee) v Tilbrook [2017] FCA 1586 at [22]-[27]:

    the legislative objective of s 139ZQ is to provide an administrative mechanism for the recovery of dispositions of property that are void as against the Official Trustee or the registered trustee, to circumvent the necessity for protracted proceedings under ss 120, 121 and 122 of the Bankruptcy Act;

    the reference in s 139ZQ(1) to “a transaction that is void against the trustee” is but one of a number of provisions in the Bankruptcy Act directed at identifying transactions that are void, and at identifying the circumstances in which property transferred by a bankrupt as a result of such transactions is available to the Trustee for distribution to creditors; and

    inaccuracies in the statement of facts in a notice may not be sufficient, without more, to result in an order under s 139ZS setting aside the notice.

62    In my view it is inappropriate to set aside the Second 139ZQ Notice. The cross-claim filed 23 November 2021 should be dismissed.

Costs Issue

63    There appears to be no dispute that Mrs Smith should pay some portion of the Trustee’s costs. The question is that of quantum, and the basis on which such costs should be assessed.

64    The Trustee submitted that he was entitled to payment of his costs up until and including 1 November 2021 on a standard basis, and after 1 November 2021 on an indemnity basis, for the following reasons:

    The costs should not be calculated on an issue-by-issue basis;

    The expense and length of the proceeding could have been significantly reduced had the first respondent not pressed arguments only to concede them in the closing submissions, particularly where the bulk of the documentary evidence was directed towards the argument ultimately dropped; and

    Mrs Smith acted unreasonably or improperly in rejecting three settlement offers in circumstances where the outcome of the proceedings was more favourable to the Trustee than the offers made.

65    Mrs Smith submitted that she should pay 20% of the Trustee’s costs on a standard basis for the following reasons:

    Apportioning costs by issue would be difficult;

    Even had Mrs Smith earlier conceded that an intention to defeat creditors could have been inferred, the length of the trial would not have been significantly reduced;

    The Trustee’s entitlement to recover costs should be substantially discounted to account for the failure of the Trustee in respect of the Loan Agreement issue, which involved a serious allegation of fraud; and

    Mrs Smith’s rejection of settlement offers made by the Trustee was not unreasonable.

66    The award of costs is at the discretion of the Court: FCA Act, s 43. The power to award costs extends to costs assessed on an indemnity basis.

67    Generally, costs follow the event: Oshlack v Richmond River Council (1998) 193 CLR 72. In the present case however each party had some degree of success.

68    Principles referable to the award of indemnity costs are well-established and were summarised by Sheppard J in Colgate-Palmolive Co v Cussons Pty Ltd [1993] FCA 801:

4.     In consequence of the settled practice which exists, the Court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the Court in departing from the usual course. … Most judges dealing with the problem have resolved the particular case before them by dealing with the circumstances of that case and finding in it the presence or absence of factors which would be capable, if they existed, of warranting a departure from the usual rule. But as French J said (at p 8) in Tetijo, “The categories in which the discretion may be exercised are not closed”. Davies J expressed (at p 6) similar views in Ragata (supra).

5.    Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud (both referred to by Woodward J in Fountain and also by Gummow J in Thors v Weekes (1989) 92 ALR 131 at 152 ; evidence of particular misconduct that causes loss of time to the Court and to other parties (French J in Tetijo); the fact that the proceedings were commenced or continued for some ulterior motive (Davies J in Ragata) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J-Corp (supra)); the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions (Davies J in Ragata); an imprudent refusal of an offer to compromise (eg Messiter v Hutchinson (1987) 10 NSWLR 525 ; Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 (Court of Appeal); Crisp v Keng (unreported, Court of Appeal, NSW, Kirby P, Priestley JA, Cripps JA, No 40744/1992, 27 September 1993) and an award of costs on an indemnity basis against a contemnor (eg Megarry V-C in EMI Records (supra)). Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis.

69    Further, as observed by Gray J in Hamrod v New South Wales (2002) 188 ALR 659 at 665 (Carr and Goldberg JJ concurring):

Indemnity costs are not designed to punish a party for persisting with a case that turns out to fail. They are not awarded as a means of deterring litigants from putting forward arguments that might be attended by uncertainty. Rather, they serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the court takes the view that it was unreasonable for the party against whom the costs order is made to have subjected the innocent party to the expenditure of costs.

70    As I have noted, while the Trustee was to some extent successful in respect of his claims, so was Mrs Smith. In such circumstances I am not persuaded that the conduct of Mrs Smith justifies assessment of costs otherwise than on a party and party basis.

71    I consider that an award of 60% of the Trustee’s costs on a party and party basis is appropriate. I so find for the following reasons.

72    First, Mrs Smith should not be penalised, in costs or otherwise, for making concessions at the time of closing submissions. An award of indemnity costs is not to punish a party for persisting with a case that ultimately fails, nor are such costs to be used as a means of deterring litigants from advancing arguments that might be attended by uncertainty: Hamrod v New South Wales (2002) 188 ALR 659.

73    Second, I am not persuaded that Mrs Smith acted unreasonably or improperly in rejecting the three settlement offers made by the Trustee such as to warrant an award of costs against her on an indemnity basis.

74    Third, on balance the Trustee substantiated numerous claims against Mrs Smith. However Mrs Smith was successful in resisting claims in respect of the Loan Agreement, and the extent of the Trustee’s claim on the Surfers Paradise Property. It would not be appropriate to award total costs in favour of the Trustee, and it would not be practical to apportion costs on an issue by issue basis in this case. In the circumstances where each of the three issues dealt with (the Property Transactions, the Loan Agreement, and the Superannuation Transfers) all contained complexities, serious allegations, and were each for claims referable to amounts of $250,000 - $350,000, I do not consider it necessary to weigh each issue against one another.

75    Mrs Smith will be ordered to pay 60% of the Trustee’s costs of and incidental to this proceedings, on a party and party basis, to be taxed if not otherwise agreed.

76    I do not consider, however, that the Trustee’s costs should be treated as a charge on the proceeds of sale referable to the entirety of the proceeds of sale used to purchase the Surfers Paradise Property, and that they be paid from the sale proceeds of the Surfers Paradise Property in priority to distribution of the parties’ respective entitlements. The Trustee’s proposed order to that effect would prevent either party from accessing any equity arising from the Surfers Paradise Property until costs have been assessed in the event of dispute. The appropriate order is that Mrs Smith pay the costs awarded against her in the ordinary course, to be taxed if not otherwise agreed.

Associate:

Dated:    16 July 2024