PIR newsletter – September 2022

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Tim Beresford reflects on his first few months as Chief Executive

Welcome to the September 2022 edition of the PIR newsletter. It has been a pleasure to spend my first few months as AFSA’s Chief Executive learning about our personal insolvency and personal property securities systems. I’ve reflected on my recent experiences so far and share these with you in this short video.

It has been particularly beneficial to meet with stakeholders – for those I have met, thank you for your time and I look forward to building further relationships and connecting with more of you soon. 

If you haven’t already, I encourage you to read our newly released Corporate Plan which outlines our priorities over the next year as well as our Reconciliation Action Plan which outlines our commitment to enact real change and reconciliation. 

I have also recently published my first Chief Executive’s Column which discusses the importance of maintaining balance in the insolvency system. You can read it on my LinkedIn page and please follow me for further updates. 

AFSA releases Untrustworthy Advisors report

AFSA has released a report highlighting the impact untrustworthy advisors have in the personal insolvency system and the risks they present in an unpredictable economic environment. People facing financial hardship and those concerned about losing their assets and homes can be prime targets.

The report details common tactics which may be signs of untrustworthy advisor activity and discusses the consequences of bad advice.

The report also explains how debtors, creditors, insolvency practitioners and financial counsellors can work with AFSA to tackle the issue of untrustworthy advice in the insolvency system.

The full report is available on the AFSA website.

Compliance Program 2022–23 highlights AFSA’s priorities for year ahead

n July, AFSA published our Compliance Program for 2022–23, outlining how we will continue to maintain confidence in the systems we regulate.

For the first time, the single annual program covers both personal insolvency and personal property securities.

The 2022–23 Compliance Program has three focus areas:

  1. support at-risk users
  2. drive willing compliance and engagement
  3. address misuse in the system.

Read the program on our website.

Our redesigned AFSA website is launching soon

We’ve listened to your feedback and will soon be launching a new AFSA website to help our clients access our services and make informed financial decisions. We’ve been asking clients how we can improve so that we can bring them a new site that is easier to understand and use.

The new site features: 

  • tailored landing pages based on client types to help people find information relevant to their situation
  • reorganised content and reduced duplication
  • improved navigation and search so it’s easier to find what you need.

The changes don’t impact the way you access AFSA’s online services – these will still be available as normal.

The new site will be live in October 2022.

Personal bankruptcy and liquidation of a company guidance updated

AFSA, the Australian Securities and Investments Commission (ASIC) and Australian Restructuring and Insolvency Turnaround Association (ARITA) have together released an updated guide explaining the interaction between bankruptcy and liquidation.

The guide provides information for company directors and others in business to help them understand their rights and responsibilities when personal bankruptcy and corporate liquidation intersect. It also provides useful guidance for advisors about the potential consequences and options available if their client is a director and shareholder of a company in financial distress. The guide also highlights the importance of seeking appropriate professional advice.

To download the updated guide, visit our website.

Quorum requirements in cases where there is only one creditor

In July 2022, the Bankruptcy Act 1966 was updated to provide further information on quorum requirements.

Section 75-105 states that:

A quorum consists of:

  1. a) the trustee present in person; and
  2. b) one person entitled to vote present in person; and
  3. c) if the number of persons entitled to vote is 2 or more—one or more other persons entitled to vote present in person or by proxy or attorney.

We have received concerns that the new provision changes the quorum requirements in cases where there is only one creditor in the estate. AFSA’s view is that the phrase “[a] person entitled to vote” includes a proxy/attorney of a creditor, satisfying the quorum requirements. In the Inspector-General’s view, the words “or by proxy or attorney” in s75-105(1)(c) do not indicate a different requirement depending on whether there is only one, or more than one, creditor in an estate. This is reinforced by s75-85(1) which provides that “(A) person other than a creditor (or the creditor’s proxy or attorney) is not entitled to vote at a meeting of creditors”.

As a regulator, AFSA’s view is that where there is only one creditor in the estate, a quorum will exist if the trustee (or their representative if one has been appointed) is present and the creditor is also present in person or by proxy or attorney (provided the creditor’s proxy or attorney is not the trustee or their representative).

Example 1: Where only the trustee is present – no quorum exists regardless of how many creditors there are in the estate and regardless of whether the trustee hold proxies from, or has been appointed attorney by, any of those creditors.

Example 2: Where there is only one creditor in the estate – a quorum exists if the trustee is present and the creditor is also present in person or by proxy or attorney (provided the creditor’s proxy/attorney is not the trustee).

Example 3: Where there are two or more creditors in the estate – a quorum exists if the trustee is present and at least two creditors are also present in person or by proxy or attorney (provided those creditors’ proxies/attorneys are not the trustee). 

Note: References in the examples to ‘the trustee’ includes a representative of the trustee appointed under section 75-25 of Schedule 2 to the Bankruptcy Act.

For more information about the updates, visit our website.

Recent amendments to Debt agreement administrators' guidelines to certification requirements - IGPD 13  

Recent natural disasters and the COVID-19 pandemic have affected many people, including some who have ongoing debt agreements. Impacts for individuals may include the loss of work or income, loss or damage to property, and restricted communication.

The Inspector-General has amended the Debt agreement administrators' guidelines to certification requirements practice document (IGPD13) to alter expectations on RDAAs when proposing variations to debt agreements when there has been an impact caused by a pandemic or a natural disaster. 

Visit our website to read the guidelines.

Enhancing our tip-off process

We recently enhanced our tip-off process to more effectively collect data and intelligence to identify misconduct and harm to the insolvency system. Where it has been determined that a tip-off relates to a bankrupt estate or a debt agreement administered by a private practitioner, we will forward the tip-off to the practitioner and request updates on any outcome from the investigation. The information provided is important to AFSA and can be used to identify trends, emerging issues and potential harms at the system level or repeated rogue conduct of individuals. 

We will use this intelligence to prevent and deter misconduct, improve standards and behaviours within our regulated population, and reduce the risk of harm to the personal insolvency system.

If you have any questions, please email compliance@afsa.gov.au

Director ID – a legal obligation for directors

Company directors are required by law to apply for a director identification number (director ID). A director ID is a unique identifier that a director will apply for once to will help prevent the use of false or fraudulent director identities.

All directors of a company, registered Australian body, registered foreign company or Aboriginal and Torres Strait Islander corporation will need a director ID. The Australian Business Registry Services (ABRS) is responsible for delivering the director ID initiative. ABRS is administered by the Australian Taxation Office.

ASIC is responsible for enforcing director ID offences set out in the Corporations Act 2001. It is a criminal offence if directors do not apply on time and penalties may apply.

For more information about ABRS and director ID, visit abrs.gov.au

ATO update: Personal Insolvency Agreements

While personal insolvency agreements (PIAs) can produce beneficial outcomes, the Australian Taxation Office (ATO) must ensure taxpayers meet their obligations in full where able and take action to ensure future compliance when payment in full is not possible.

When considering PIAs, ATO staff refer to PS LA 2011/16 Insolvency - collection, recovery and enforcement issues for entities under external administration. Decisions are based on a consideration of each taxpayer’s individual circumstances, the interests of the ATO, the interests of other creditors and the wider community.

 Some of the factors considered when voting on a proposal are:

  • the type of debt
  • the details of the proposal (such as dividend amount, source of funds, dividend timeframe)
  • outstanding amounts
  • any association between the debtor and other creditors
  • compliance history financial information contained in the proposal
  • the debtor’s personal circumstances.

One of the most common issues encountered when assessing PIAs occurs when tax lodgement obligations are not up to date. This makes the ATO debt difficult to quantify and will likely cause a vote against the proposal. 

The ATO will always indicate the reasons for voting no to a PIA (on the voting form) unless there are privacy concerns.

If you have a concern with the ATO’s voting position or would like to discuss a matter, please email InsolvencyPractitionerServices@ato.gov.au

More information 

For general information refer to the insolvency practitioners’ section on ato.gov.au/Tax-professionals/Your-practice/Insolvency-practitioners 

Case notes

Jess v McNiven, in the matter of McNiven (No 2) [2022] FCA 446

Background

The case involves husband and wife, Cameron and Heather McNiven (the McNivens), who both separately became bankrupt in late 2010. The applicants were Matthew Jess and Paul Burness, and separately James Downey, as trustees of the respective bankrupt estates.

At the dates of bankruptcy, the McNivens owned two residential properties, one which they occupied and the other an investment property from which they received rental income. Both were subject to bank mortgages and both vested in the Trustees pursuant to ss 58 and 116 of the Bankruptcy Act.

Following a period of without prejudice negotiations between the trustees and the McNivens’ representatives, they could not reach a resolution to annul the bankrupt estates. The trustees then became the registered proprietors of both properties on 21 December 2017 and gave notice to the McNivens that they would be selling the properties and were required to vacate. The McNivens refused to comply and lodged caveats against the properties, leading to the commencement of proceedings in December 2018.

The trustees sought orders that they were the owners of the properties to realise their interests as outlined in the Bankruptcy Act.

The McNivens counter-claimed that the trustees were stopped from realising the properties (the estoppel claim) and sought “equitable accounting” from the trustees in relation to financial and personal contributions made in relation the properties (the unjust enrichment claim). These were the two main issues determined in the proceedings. [1]

Analysis

1. Estoppel claim

The first issue the court looked at was if an estoppel could be established against the vesting provisions of the Bankruptcy Act and, if so, whether the alleged representations of the trustees gave rise to an equitable estoppel against the trustees from asserting an interest in the properties.

Analysing the cases that had considered whether an estoppel could be founded against a trustee from claiming an interest in vesting property, [2] Anastassiou J concluded that the decision in O’Brien v Sheahan does not establish any generally applicable principle of law relating to the availability of a claim of estoppel in the face of the statutory provisions of the Bankruptcy Act and the question remain unresolved. His Honour also distinguished the facts and circumstances of this case from those in O’Brien v Sheahan.

To determine whether an estoppel can operate in the context of the trustees’ duties under the Bankruptcy Act, Anastassiou J adopted the approach taken by the Privy Council in Maritime Electric Company Ltd v General Dairies Ltd [3] , cited with approval by the Full Court of the Federal Court, [4] that:

“where . . . the statute imposes a duty of a positive kind, not avoidable by the performance of any formality, for the doing of the very act which the plaintiff seeks to do, it is not open to the defendant to set up an estoppel to prevent it . . . the Court should first of all determine the nature of the obligation imposed by the statute, and then consider whether the admission of an estoppel would nullify the statutory provisions.”

Anastassiou J concluded that the Bankruptcy Act creates a comprehensive scheme for the administration of bankrupt estates such that:

“there can be no estoppel of the type asserted by the McNivens because, as a matter of principle, that would have the effect of contradicting what the Bankruptcy Act specifically requires a trustee to do; namely, as I have said, to realise assets for the benefit of unsecured creditors. That reason alone is sufficient to preclude the doctrine of estoppel having a place in the working out of rights and obligations as between the different classes of interests governed by the Bankruptcy Act, being the bankrupt, the creditors and the trustee.” [5]

Outcome: no estoppel against the vesting provisions of the Bankruptcy Act.

Anastassiou J also considered whether the McNivens had established an estoppel on the evidence.

The McNivens alleged that they had relied on written representations, conduct, silence and inaction by the trustees since the commencement of their bankruptcies to form an assumption that the trustees had abandoned their interests in the properties.

His Honour found that “the alleged representations consist of a cacophony of indirect and qualified statements and there was no clear and unequivocal representation by the trustees sufficient to give rise to an equitable estoppel.” [6]

His Honour found that the McNivens had not acted reasonably in relying on the alleged representations nor was there any detrimental reliance by the McNivens. His Honour also rejected the contention that there was any unconscionability on the part of the trustees, finding that the conduct of the trustees, viewed in the context of the statutory scheme and the current factual circumstances, was objectively reasonable.

His Honour concluded that the McNivens’ estoppel claim was both “analytically flawed” and unsupported by the evidence. [7]

2. Unjust enrichment claim

In the alternative to the estoppel claim, the McNivens claimed for "equitable accounting” to account for their financial and personal contributions made towards the properties during and after their bankruptcies. The basis for the McNivens’ claim was for an award of restitution founded on unjust enrichment.

The trustees contended that in any "equitable accounting" that they are entitled to the capital growth in the properties as the legal and beneficial owners and that, to the extent credit is given for equity payments and personal efforts, the McNivens ought to give credit for rent received on the investment property and notional rent on the occupied property.

His Honour examined the leading authority of Draper v Official Trustee in Bankruptcy, [8] despite the facts being distinguishable in that, unlike Mrs Draper, the McNivens did not have a legal or beneficial interest in the properties. However, the court looked to the observations of their Honours in the Draper Case as providing a useful analogy for determining whether and to what extent the McNivens are entitled to an equitable accounting.

The various claims were assessed as follows:

  • Principal payments on mortgages: as the McNivens made no repayments of principal to reduce their bank mortgage balances, no credit was allowed.
  • Interest payments on mortgages: a credit was allowed for interest payments made by the McNivens from 7 March 2014 (day following discharge of bankruptcy) to 4 December 2017 (day trustees advised they would take action to obtain transfer of title and sell the properties).
  • Rates, taxes and outgoings: a credit was allowed for outgoings that are, in effect, an incident of ownership of the properties and which are payable irrespective of whether anyone occupies the properties, such as rates, land tax and building insurance. Claims for items relying on usage such as water, gas and electricity were excluded.
  • Capital improvements and maintenance: the court applied the approach taken in the Draper Case[9] that a party undertaking improvements, repairs and capital maintenance is restricted to the lesser of the cost of the improvements or the increase in the value of the property because of the improvements.
  • Occupation rent and rental income: the court applied the approach taken in Campbell v van der Velde[10] whereby where an occupier seeks contributions from a non-occupier co-owner, an occupation fee is payable as a set-off to any claim by the occupier to account. In this case, the McNivens gave credit for notional rent on the occupied property and rent received on the investment property.
  • Capital growth: the court refused the McNivens’ claim to any capital growth in the properties on the basis that, unlike the circumstances in the Draper Case, the McNivens did not make any contributions payments to the mortgage in reduction of the principal debts secured against the properties.

Reconciling the credits and set-offs, the result was that, while the McNivens were entitled to restitution based on unjust enrichment for some of the interest payments on the mortgages (rates,taxes and outgoings), and for a relatively small amount of capital improvements, those amounts were offset by the amounts received in rent from the investment property and notional rent on the occupied property. As such, the trustees were not required to make any contribution to the McNivens out of the proceeds of sale of the properties.

His Honour also ordered that the McNivens provide to the trustees a full account of all rent received in respect of the investment property.

Decision

His Honour dismissed the estoppel claim, on the basis that as a matter of principle, there can be no estoppel against the operation of the vesting provisions of the Bankruptcy Act and that there was no estoppel as a matter of fact in the present circumstances. [11]

His Honour also dismissed the claim for restitution on the basis that any unjust enrichment to the trustees was exceeded by the benefit to the McNivens of the exclusive use and occupation of the properties.

The court dismissed the McNivens' applications, declared the trustees the legal owners of the properties, ordered the withdraw of various caveats, and granted orders for vacant possession and sale of the properties. The court awarded costs in favour of the trustees.

Jess (Trustee), in the matter of Lostitch (Bankrupt) v Lostitch [2022] FedCFamC2G 342

Background

In this case, two bankrupt individuals used the proceeds of the sale of their family home to purchase another property ( the Pakenham property) in the name of their daughter, without any financial contribution from her, in circumstances where they were poised to live in that property. The circumstances in which this occurred were that each bankrupt individual knew they were about to have a large and immediately payable debt to the Australian Taxation Office (ATO). A relatively short time after that debt was quantified by the ATO, they each presented a debtor’s petition.

The bankrupt individuals became the registered proprietors of the family home on 18 January 2001. They sold the property for $590,000 pursuant to a contract of sale dated 28 December 2014.

The daughter entered a contract of sale to purchase the Pakenham property. The purchase price for the Pakenham property was $307,000. On 5 March 2015, the bankrupt individuals paid $29,700 from their Bendigo Bank account to Ray White real estate agent as a deposit for the purchase of that property. On 27 April 2015, settlement for both the Pakenham property and the family home occurred simultaneously. On that day, the bankrupt individuals drew cheques from the proceeds of sale from the family home to pay the balance of the purchase price and associated costs for the purchase of the Pakenham property in their daughter’s name.

On 1 May 2015, the daughter became the sole registered proprietor of the Pakenham property. At that time the Pakenham property was unencumbered. The daughter deposed that at the time she became registered proprietor of the Pakenham property, she understood that the bankrupt individuals (her parents), were helping her obtain finance. She did not accept that her parents had gifted her the purchase price and transaction costs for the Pakenham property from the proceeds of the sale of the family home.

The bankrupt individuals lived at the Pakenham property between August 2015 and August 2016. They listed the Pakenham property as their residential address and the business address of their business partnership in their Statements of Affairs.

On 21 August 2015, BJC Paving was registered as a company with the daughter as its sole director and shareholder. On 1 October 2015, the Pakenham property as used as security for BJC Paving loan and a mortgage was lodged (later refinanced with a different lender).

On 21 October 2015, the bankrupt individuals’ income tax returns for financial years 2007 to 2013 were processed by the ATO. On 17 February 2016, the bankrupt individuals each lodged a debtor’s petition. The applicants were appointed as trustees of the bankrupts’ estate on the same day.

On 11 March 2016, the ATO lodged proofs of debt for the bankrupt individuals for $768,270.68.41 and for $684,441.06 respectively.

The trustees for the bankrupt estate sought an order that the Pakenham Property vested in them. The trustees sought declarations, inter alia, that:

  • the transfers of both the deposit and the balance of the purchase price from the bankrupt individuals to the daughter were void against the trustees by virtue of section 120(1) of the Bankruptcy Act or alternatively section 121(1) of the Act. The court rehearsed the authorities concerning the application of ss 120 and 121.
  • that the daughter’s estate in fee simple of the Pakenham Property vest in the applicants pursuant to sections 139D(2)(a) and 139DA of the Act.

Analysis

Section 120

The court reviewed the leading authority with respect to the operation of section 120: Anscor Pty Ltd v Clout (Trustee), Lindgren J, with whom Wilcox and Moore JJ agreed, set out the twelve propositions, at [43], to which they added:

  • A payment of money arising from the sale of property owned by a person who later became bankrupt constitutes a transfer of property for the purposes of section 120.
  • Consideration for the transfer of property under section 120 must be in fact given and not simply consideration promised, agreed or intended to be given [at 67-68].

The court found that find that the transfers of deposit and the balance, and associated costs for the Pakenham property, were a gift made by the bankrupt individuals to their daughter. The daughter provided no consideration for those transfers when they were made. The Judge added that such a finding ‘entails rejection of any contention made by [the daughter] to the effect that such payments were in the nature of a loan by the bankrupt individuals to her’; and concluded that, properly characterised, she gave no consideration for impugned transfers when they were made.

The Judge held that transfers void against the applicants pursuant to section 120(1).

Section 121
The court began by noting that to succeed in an application under section 121 of the Bankruptcy Act a trustee must establish that the bankrupt individuals’ “main purpose” in making the transfer was to prevent the transferred property from becoming divisible among their creditors or to hinder or delay the process of making property available for such division. [69] And went on to explain that the “main purpose” is the “principal”, “leading” or “prevailing or most influential” purpose. To establish a bankrupt individual’s “main purpose”, a trustee must adduce evidence giving rise to “a reasonable and definite inference, not merely conflicting inferences of equal probability” that in making the relevant transfers the bankrupt individual had the “main purpose” required by the Bankruptcy Act: Trustees of the Property of Cummins (A Bankrupt) v Cummins (2006) 227 CLR 278 at 292, [34].

However, there is also the deeming provision in section 121(2), explained in Prentice v Cummins (No 5) by Sackville J in the following terms: “if reliance is placed on s 121(2), the transferor’s subjective intention is likely to be irrelevant: in other words, if it can be reasonably inferred that the transferor was insolvent at the time of transfer, it will not matter if their subjective intention”.

With respect to s121(1)(a) the Judge accepted that had the impugned transfers not occurred, the amounts which were the subject of those transfers would have been deposited into the bankrupt individuals’ bank accounts and been available for creditors. The Judge also accepted the bankrupt individuals sought to prevent, hinder or delay their creditors from accessing the proceeds of the sale of the family home. The evidence to support this conclusion was summarised as being:

  • the lack of consideration for the transfers of monies for the daughter to purchase the Pakenham property
  • the simultaneous settlements
  • the bankrupt individuals storing the property in the Pakenham property
  • moving in even though their relations with the daughter were not good
  • listing the Pakenham property as their address and
  • their knowledge that they had a large ATO debt at the relevant time.

The Judge concluded that the bankrupt individuals “made the impugned transfers to put the Pakenham property in their daughter’s name at least for the main purpose of avoiding their creditors. Indeed,I find that this was likely their sole purpose.” [90]

The Judge accepted that the applicants had established that, when the impugned transfers were made, the terms of s 121(2) were satisfied. That is, at that time of both of those transfers, each of the bankrupt individuals was, or was about to become, insolvent. Accordingly, each of the bankrupt individual’s deemed main purpose in making the impugned transfers was the purpose prohibited by s 121(1)(b).

The Judge went on to reject that the daughter had acted in good faith and hence the transfer is not void against the trustee pursuant to section 121(4) of the Bankruptcy Act. The Judge opined that in all of the circumstances, at relevant times the daughter could reasonably have inferred that her parents were or were about to become insolvent.

Part VI - Division 4A - Sections 139A, 139D, 139DA and 139F

The Judge noted that there have been very few reported decisions dealing with the provisions of Part VI Division 4A of the Bankruptcy Act. [12] However, Griffin & Khatri v Milne & Anor [2009] FMCA 68 was cited as having similar facts insofar as a property owned by the bankrupt individual in his capacity as trustee for his then infant daughter. The subject property had been purchased using funds solely derived from the sale of another property owned by the bankrupt individual, with no contribution made by his daughter to the purchase of the subject property.

When considering whether or not to make a vesting order pursuant to sections 139D and 139DA, the court is required by section 139F of the Bankruptcy Act to take account of certain matters. That section provides as follows:

Section 139F – Court to take account of interest of other persons

(1) In considering whether or not to make under section 139D or 139DA a particular order relating to property in which the respondent entity has an estate, the Court shall take account of:

(a) the nature and extent of any estate that any other person or entity has in the property and any hardship that the order might cause that other person or entity; and

(b) the respondent entity’s current net worth and any hardship the order might cause the respondent entity’s creditors .

In the Milne case after considering the hardship that would be caused to the bankrupt individual’s daughter and her sibling, both of whom resided in the subject property, the court held that the hardship must be balanced with “the rights of the bankrupt’s creditors to share in the property that should rightfully form part of his estate” and determined that “the type of transaction in this case seems to be that which is targeted by s139DA”.

On those facts the court in Milne ordered that, pursuant to section 139DA (order relating to property of natural person), the property be vested in the trustee in bankruptcy.

Applying the reasoning in Milne to the instant facts the Judge stated that to satisfy s 139DA and have an order made that the property vest in the applicants, they must first establish that:

(a) the daughter acquired her interest in the Pakenham Property during the examinable period as set out in s 139CA as a result of direct or indirect financial contributions made by the bankrupt individuals;

(b) The bankrupt individuals used or derived a direct or indirect benefit from the Pakenham Property during the examinable period; and

(c) the daughter still had the estate in the Pakenham Property.

After considering the evidence in this matter the Judge found that each of the elements in s139DA was satisfied.

The Judge held that the fact that the daughter and her sibling would need to find an alternative place to live did not outweigh the rights of the bankrupt individuals’ creditors to share in the property that should rightfully form part of the bankrupt individuals’ estate.

Decision

The court declared that the transfers were void pursuant to ss120 and 121 and the daughter’s estate in fee simple in the Pakenham Property vested in the applicants pursuant to sections and 139DA and 139D(2)(a) of the Bankruptcy Act. Orders were made to effect the change of registration.

Scott (Trustee), in the matter of Stolyar (Bankrupt) v Stolyar [2022] FCA 691

Background

The applicant, Andrew Scott, is the trustee in the bankrupt estates of Ian Stolyar and Beth Nguyen (also known as Beth Stolyar). They married on 24 December 2001. Ian and Beth became bankrupt on 29 September 2016. The commencement of their bankruptcies was 3 October 2014. The first respondent, Faina Stolyar (Faina) is Ian’s mother. The second respondent, Fanchel Pty Ltd (Fanchel), is a company of which Faina is the sole director and shareholder.

The trustee sought to recover several properties, or interests in those properties, that he contended were held by the respondents on trust for Ian or Ian and Beth, or otherwise were transferred by them in a manner that is void against the trustee as a result of transactions entered into between 2007 and 2015.

The trustee also made a monetary claim against Faina on the basis that she received a transfer of property (being a chose in action) that is rendered void by s 120 and/or s 121 of the Bankruptcy Act. Between 2007 and 2015, Ian and Beth went from being wealthy property owners and share investors, at one stage holding well over $10 million in net assets, to being bankrupt with no material explanation for the loss of that wealth (four of the five transactions related to real property transfers occurring in 2007, 2009, 2013 and 2015; the fifth related to the transfer of three parcels of shares).

During that same period Faina went from being an unemployed widow living on a pension to owning a substantial property portfolio and, via Fanchel, a substantial share portfolio.

The trustee’s contention was that the drastic changes in wealth were attributable to Ian and Beth transferring their wealth into assets held in Faina’s name. It is those assets that he sought to recover.

The respondents denied that to be so and claimed that Faina’s wealth has grown out of her own resources.

The trustee sought relief in relation to the five transactions identified above because each transaction is void against him pursuant to s 120 or s 121 of the Bankruptcy Act or on the basis that each asset (or a proportion of it), based on the contribution to its acquisition by Ian or Ian and Beth, is held on a resulting trust for him or, in one case, on an express trust.

Analysis

The court noted the trustee had not been able to adduce evidence from witnesses who could speak directly about the transactions the subject of this proceeding. Accordingly, in some cases the trustee asked the court to make findings which depend on a process of inferential reasoning rather than direct evidence.

Assessing the various witnesses, the court noted Ian ‘was in many respects an unsatisfactory witness and …in more instances than not, his account of what occurred cannot be accepted. His credibility was undermined…’. The court observed with respect to Faina that her ‘evidence (and it follows also of Ian’s) was that it became apparent that she and Ian colluded in the preparation of their evidence. That was most stark in relation to the evidence they each gave about the acquisition of the Campbell Parade …. The effect of having done so led me to question the reliability of Faina as a witness. That Faina was an unreliable witness was also highlighted by her limited recollection of events, including more significant events…’ Finally, the court remarked that ‘Beth gave evidence on only a few discrete topics. That was somewhat surprising. There were a number of matters about which one might have expected that Beth could give corroborating evidence … She did not give any evidence in relation to these issues.’

There was extensive documentary evidence relied on by the parties which was necessitated by the period over which the relevant transactions took place, the need to view the transactions in context and the need to unravel and understand the flow of funds for the acquisition, and in some cases divestment, of assets.

Decision

  1. The court declared that in respect of the first real property transfer in 2007, Ocean Street, that:

‘In the absence of any evidence other than Ian’s assertion of their sale, it may be open to infer that those AGM shares were transferred to other persons and entities. The trustee submitted that there is a powerful inference that they were transferred elsewhere without consideration at a time aligning with the transfer of the 1 million shares into Faina’s Berndale Securities account. In other words, the trustee urged me to find that 1 million of the AGM shares which Ian said were sold between June and November 2006 were the subject of an off-market transfer to Faina for no consideration.’ and accordingly it was funded as to:

(1) $824,681.70 from the sale of 1.1 million AGM shares which were owned by Ian; and

(2) $180,452.52 from the sale of 500,000 UXA shares which were beneficially owned by Ian or Ian and Beth.

  1. It was concluded that ‘In the absence of any evidence to the contrary, of which there is none, I conclude that Faina received 27/26 Ocean Street on a resulting trust in favour of Ian.’ [195-199] After reviewing the evidence about the 2009 Campbell Parade property, the court concluded that ‘given the findings I have made about the provenance of the funds for the Westpac bank cheque of $3.1 million and the CBA bank cheque of $1,071,580 and in the absence of any evidence of a contrary intention, that Faina holds the Campbell Parade Property on a resulting trust for Ian and Beth in the proportion to which they contributed to its purchase price, namely 58.17%.‘ [289]
  2. The third transaction which the trustee sought to impugn was the 2013 transfer of 11/2 Ocean Street by Ian to Faina. The court held that there was ‘no consideration for the transfer of 11/2 Ocean Street. It follows that pursuant to s 120 of the Bankruptcy Act the transfer is void against the trustee because the transfer took place in the period which was five years before the commencement of the bankruptcy and ending on the date of the bankruptcy (see [1] above) and Faina gave no consideration for the transfer.’ [306]
  3. The fourth transaction which the trustee sought to impugn the court considered to have arisen out of the arrangements referred to in the amended statement of claim. The trustee contended that either it was an undervalued transaction entered into to defeat creditors or, that he is owed several million dollars in respect of shares that were transferred and subsequently sold after his appointment and for which he has never been paid.
  4. The fifth and final transaction which the trustee sought to impugn concerns the 2015 Rose Bay property transaction. The court held that the contribution gave rise to a resulting trust in favour of Ian and Beth in the proportion to which the total of the May deposits bears to the purchase price of that property. That proportion is 6.6%. [565]

Turning then to the eBet shares the court reasoned that Faina had received the proceeds of sale of the eBet shares knowing that she was receiving trust property, with Ian’s knowledge as her agent.[362] The transfer of the proceeds of the sale of Ian’s WCL shares was held to be a transfer for which Faina gave no consideration. The transfer was thus void against the trustee pursuant to s 120 of the Bankruptcy Act. [394] Similarly the court held that an account was due to the trustee for the proceeds of sale of the 9,083,648 GUL shares. [414]

The court rejected three defences; the claim was statue barred pursuant to the Limitation Act 1969 (NSW); that there had been a significant delay in bringing the claim causing prejudice to Faina in the manner in which she has conducted and arranged her affairs so as to give rise to a defence of laches; and in relation to all of the claims, that it would be unfair in the sense described in Walton v Gardiner (1993) 177 CLR 378 to allow the proceeding to proceed to trial.

The court made the following findings at [598]:

  • Both 27/26 Ocean Street and the Campbell Parade properties were held on a resulting trust for Ian and Beth and thus the trustee in proportion to the contribution made by them to its purchase price, in the latter case namely 58.17%. The transfer of 11/2 Ocean Street was void against the trustee pursuant to s 120 of the Bankruptcy Act.
  • The shares: Faina and Fanchel were liable to account to the trustee for $3,537,340.95 received from the sale of the eBet shares; the transfer of the proceeds of sale of the WCL shares in an amount of $523,285.20, was void against the trustee pursuant to s 120 of the Bankruptcy Act; and Fanchel was liable to account to the trustee for the proceeds of sale of 9,083,648 GUL shares.
  • The Point Piper property: the second registered mortgage granted by Ian and Beth to Faina did not secure any indebtedness and the payment of the Point Piper repayment amount to Faina following the sale of that property ought not to have been made. It followed from that finding that the Point Piper repayment amount is held by Faina on resulting trust for Ian and Beth and thus the trustee; and
  • The Rose Bay property was held on a resulting trust for Ian and Beth and the trustee in the proportion to which they contributed to its purchase price. Their contribution was the sum of $3.6 million, which came for the Point Piper repayment amount (representing 31.5% of the Rose Bay property) and the May deposits (representing 6.6% of the Rose Bay property).

Orders were made for the parties to confer and to provide proposed giving effect to the findings made and in relation to the relief that should be granted as well as on the question of costs of the proceeding.

[1] There was a third claim by the McNivens for a constructive trust to be declared, which was not pursued as it was conceded that any such claim is effectively coextensive with the equitable estoppel claim. This issue is not examined in this case note.

[2] See Rankin v Official Trustee in Bankruptcy [2005] FCA 1084, [41], [44] per Heerey J; Draper v Official Trustee in Bankruptcy [2006] FCAFC 157, [139]-[142] per Besanko J.

[3] [1937] AC 610, 18-620, per Lord Maugham for the Court

[4] See, for example, Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5; 379 ALR 593, [527] per Besanko, Markovic and Banks-Smith JJ); Minister for Health v Nicholl Holdings Pty Ltd [2015] FCAFC 73; 231 FCR 539, [50] per Greenwood and Logan JJ.

[5] at [188].

[6] At [208].

[7] At [202].

[8] [2006] FCAFC 157; 156 FCR 53.

[9] at [163] per Besanko J. See also Commissioner of State Revenue (Vict) v Royal Insurance Australia Ltd [1994] HCA 61, [41] per Mason CJ.

[10] [2019] FCA 1871, [175] per Farrel J.

[11] At [253].

[12] Division 4A – Orders in relation to property of entity controlled by bankrupt or from which bankrupt derived a benefit.