Cannane & Anor v Official Trustee in Bankruptcy

(1996) 65 FCR 453

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(Judgment by: Lehane J)

Andrew Vincent Cannane, First Appellant
Wisbeck Pty Ltd, Second Appellant
Official Trustee in Bankruptcy as Trustee of the Bankrupt Estate of John Vincent Cannane, Respondent
Denise Mary Cannane, First Appellant
J Cannane Pty Ltd (in liq), First Respondent
John Vouris (as Liquidator of J Cannane Pty Ltd (in liq)), Second Respondents

Court:

Judges: Beaumont
Hill

Subject References:
Bankruptcy
Application to set aside antecedent transactions
disposition of property with intent to defraud creditors under the Bankruptcy Act 1966, s121(1)
transfer of shares with no commercial value at time of disposition
whether commercial value a prerequisite to establishing an intention to defraud
payment of full consideration not determinative
existence of intention to defraud to be determined having regard to all the circumstances
Whether transferees purchasers in good faith
transferee with full notice of transferor's intention to place shares beyond reach of creditors
transferee without notice of purpose of transaction
transferee cannot deliberately eschew being put on notice of relevant facts and circumstances
settlement under the Bankruptcy Act 1966, s120
transfers of nominal value
retention of property must be contemplated
Valuation
shares in private company
price which a willing but not anxious vendor could reasonably expect to pay, and a willing but not anxious purchaser could reasonably expect to pay in friendly negotiation
events subsequent to date of valuation not to be taken directly into account
value to be determined without reference to warranties which may inhere to them
shares with no commercial value
prospect of company being used as investment vehicle for backdoor listing

Legislative References:
Bankruptcy Act 1966, ss120, 121 - ss 120; ss 121

Case References:
P T Garuda Indonesia Ltd v Grellman - (1992) 35 FCR 515
Freeman v Pope - (1870) LR 5 Ch App 538
Re Walters; Ex parte The Official Assignee - (1898) 19 LR (NSW) B & P 1
In re Tetley; ex parte Jeffrey - (1896) 66 LJQB 111
Lloyd's Bank Ltd v Marcan - [1973] 1 WLR 33
Trautwein v Richardson - (1946) 52 ARG LR 129
Re Barnes; Ex parte Stapleton - [1962] Qd R 231
Mogridge v Clapp - [1892] 3 Ch 38
The Official Trustee v Marchiori - (1983) 69 FLR 290
Official Trustee in Bankruptcy v Mitchell - (1992) 38 FCR 364
Caddy v McInnes - (1995) 131 ALR 277
Abrahams v The Federal Commissioner of Taxation - (1944) 70 CLR 23
Commissioner of Succession Duties (SA) v Executor Trustee & Agency Co (SA) Ltd - (1947) 74 CLR 358
St Helens Farm (ACT) Pty Ltd v Federal Commissioner of Taxation - (1979) 79 ATC 4161
Gorton v Federal Commissioner of Taxation - (1965) 113 CLR 604
Hardie v Hansen - (1960) 105 CLR 451

Hearing date: 29 February 1996
Judgment date: 22 March 1996

Sydney

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Judgment by:
Lehane J

I have had the advantage of reading the judgment delivered by Beaumont and Hill JJ. I gratefully adopt their Honours' statement of the background facts. I respectfully agree with their conclusions (and the reasons for them) as to the valuation of the shares in Wisbeck Pty Limited (Wisbeck), as to whether the transfers of shares in Wisbeck amounted to settlements for the purposes of s 120 of the Bankruptcy Act 1966 (the Act) and as to whether, on the assumption that those transfers constituted dispositions made with the intent described in s 121 of the Act, Mrs Cannane was a "person who has, in good faith and for valuable consideration, purchased or acquired the property". I confess to some doubt whether, on that assumption, Andrew Cannane was not such a person but, for reasons which will appear, it is unnecessary for me to resolve that doubt and I shall not attempt to do so.

The difficult question in this case, and the question to which most of the argument was directed, is whether the transfers of two shares in Wisbeck, one to Mrs Cannane and the other to Andrew Cannane, were dispositions of property with intent to defraud creditors and thus, under s 121 of the Act, void as against the respondents.

The aspects of the circumstances, as found by the primary judge, particularly important to a consideration of that question are, I think, the following. Each transfer was made for "full" consideration: that is, in exchange for a promise by the transferee, immediately enforceable, to pay an amount equal to the full value of the share. Each transfer was made with the object, on the part of the transferor, of putting the share beyond the reach of creditors. Each was made at a time when the financial ruin of the transferor was a clear and immediate prospect. At the time when the transfers were made, there was also a clear prospect that Mr Cannane would be able to bring about an acquisition by Wisbeck, directly or indirectly, of shares in Carbon Consulting International Pty Limited (CCI), using for the purpose money to be borrowed by Wisbeck. Equally, there was a prospect that Mr Cannane could, if he chose, bring about an acquisition of the CCI shares, directly or indirectly, by someone other than Wisbeck: for example, Mrs Cannane or a company newly incorporated or acquired for the purpose. Wisbeck, at the time of the transfers, had no legal rights in relation to the CCI shares; particularly, it had no right to require Mr Cannane to seek to acquire the shares for it or even to require Mr Cannane, should he arrange the acquisition of the CCI shares, to do it so as to cause Wisbeck to be the acquirer. No doubt it is true, as senior counsel for the appellants argued, that neither respondent would have had cause for complaint had Mr Cannane simply given up any attempt to acquire the shares in CCI or if, instead of arranging an acquisition by Wisbeck, he had instead arranged one by Mrs Cannane or a new company. Of course, this case is concerned not with what would have been the consequences of what might have been done but with the consequences of what in fact was done; it is, however, perhaps somewhat strange that the application of s 121 to the transaction should depend in this case greatly on the form, rather than the substance of what happened.

Two things are required in order that a transaction fall within s 121: one is that there be a disposition of property, the other that it be made with intent to defraud creditors. Each of the two transfers was a disposition of property and therefore void if made with that intent (other transactions which might have been entered into, with substantially the same result, need not have involved any disposition of property by either Mr Cannane or J Cannane Pty Limited (JCPL) so that the intent behind the transaction would not have mattered). The strength of the argument that Mr Cannane (whose intention is equally relevant to the transfer by JCPL as to his own transfer) had the intent described in the section lies in his admission that at least the predominant object of the transfers was to place the shares in Wisbeck beyond the reach of his own creditors and those of JCPL. The Court in P T Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 approved the following paragraph in Lewis' Australian Bankruptcy Law (4th Ed, 1955, pp 45-46):

The general principle may be stated that any dealing with property (other than by sale for a reasonable price) made with the object of putting it beyond the reach of present or future creditors comes within the definition of a fraudulent conveyance if the person concerned cannot immediately pay his debts or anticipates some event which may render him unable to pay his debts in future; such a dealing will be treated as fraudulent irrespective of the presence or absence of a conscious fraudulent intent on the part of the debtor if the necessary result of the dealing is to put the property beyond the reach of his creditors. Typical examples are transfers of property to the debtor's wife, transfers to a trustee to hold for the debtor, and transfers to one or a group of creditors to stave off threatened action. The word "fraudulent" indeed has received an interpretation in bankruptcy matters somewhat wider than its ordinary use, and it may be defined as equivalent to "with an intention to deprive creditors of recourse against all or any of his assets".

If that statement of general principle is literally applied to the facts of this case, the result follows that the transfers were made with the fraudulent intent: the admitted object of the two transfers was to place the shares in Wisbeck beyond the reach of present and future creditors of Mr Cannane and JCPL and equally with the object of depriving creditors of recourse against those shares. I would not dispute, if it were open to me to do so, that the passage from Lewis is a useful and generally accurate statement of the principle for which s 121 stands. The facts of P T Garuda Indonesia, however, were at a considerable remove from those with which we are confronted and this case well illustrates, it seems to me, the pitfalls of an attempt to apply literally, in a novel case, a textwriter's exposition (even a judicially approved exposition) of a statutory provision rather than the language of the statute itself.

Thus, senior counsel for the appellants hung his hat vigorously and confidently on the peg provided by the words in parentheses "other than by sale for a reasonable price" and submitted that a sale for a reasonable price (or for "full consideration") was a form of disposition which would never be avoided by s 121. I agree with Beaumont and Hill JJ that while most sales for full consideration may be expected not to fall within s 121, some may do so: the circumstances of any such sale which the trustee in bankruptcy seeks to impugn must be examined in order to ascertain whether it was made with intent to defraud creditors. Counsel for the respondents, on the other hand, while arguing that a sale for a reasonable price will not always emerge unscathed, sought to have us apply literally the paraphrase in Lewis (in the parts of the text emphasised by the Full Court in P T Garuda Indonesia) of the statutory description of the relevant intent.

The statute, however, does not speak of "any dealing with property ... made with the object of putting it beyond the reach of present or future creditors". It speaks, in s 121(1), of "a disposition of property ... within intent to defraud creditors", a phrase the ambit of which is extended by s 6 to include a reference to defrauding any one or more of the person's creditors. It is, I think, no more necessarily the case that every disposition made with the object of placing property beyond the reach of creditors is a disposition within intent to defraud creditors than that every disposition made for full consideration is not a disposition with that intent.

Of course, the section is to be read in the light of its history and of authority. It seems clear, for example, that "intention to defraud creditors" is to be read as incorporating the "purpose of delaying, hindering or defrauding creditors ..." appearing in the statute 13 Eliz I, c 5: P T Garuda Indonesia at 521, 522; Lloyds Bank Ltd v Marcan [1973] 1 WLR 339 at 344 (though compare the contrary view of Pincus JA in World Expo Park Pty Ltd v EFG Australia Ltd (1995) 129 ALR 685 at 708); and decisions on the Elizabethan statute are relevant to the construction of s 121 (P T Garuda Indonesia at 522).

In Freeman v Pope (1870) LR 5 Ch App 538 at 541 Lord Hatherley LC, speaking of situations in which the relevant intent might be inferred, spoke of circumstances where "a person owing debts makes a settlement which subtracts from the property which is the proper fund for the payment of those debts, an amount without which the debts cannot be paid". In Lloyds Bank Ltd v Marcan supra at 344 Pennycuick V-C said:

The word "defraud" in the context of section 172, and having regard to the history of its statutory predecessor, must, I think, carry the meaning of depriving creditors of timely recourse to property which would otherwise be applicable for their benefit.

Hardie v Hansen (1960) 105 CLR 451 had to do with a provision of company law imposing liability on directors in cases of fraudulent trading. However, Dixon CJ said, at 456:

The phrase "intent to defraud creditors of the company" suggests that present or future creditors of the company will, if the intent is effectuated, be cheated of their rights. An intent to defraud creditors has been described, for the purposes of the bankruptcy legislation, as an intent by deceit to deprive creditors of something to which they are entitled: cf. per Hill J in Reg v Ingham (1850) Bell 181 at 185.

See also W A Lee, "Trusts and Bankruptcy", (1953) 47 ALJ 365 at 367; Brian F J Langstaff, "The Cheat's Charter?", (1975) 91 LQR 86 at 92 ff; see also the note on the same subject by Brian Elkan (1975) 91 LQR 317 at 318.

Of course, where he speaks of cheating creditors of their rights or depriving creditors of something to which they are entitled Dixon CJ cannot be speaking literally of legal rights or something to which creditors are legally entitled. The purpose of the section is, after all, to avoid certain transactions which otherwise a debtor has the right to enter into. But I find difficulty in seeing how creditors are defrauded, or for that matter hindered or delayed, for the purposes of the section except by a transaction which in some way depletes, or makes less accessible or advantageous, the assets which will be available for creditors if the debtor becomes bankrupt. If that is right, then an intent to defraud, for the purposes of the section, is an intent by a disposition to bring about a result of that kind.

It is perhaps desirable to turn from generalisations to the facts of this case. The shares in Wisbeck were one of them an asset of Mr Cannane and the other an asset of JCPL. To the extent that they had value, they were something to which creditors, in the terms used by Dixon CJ, were entitled. The opportunity to acquire, or direct the acquisition of, shares in CCI was not. Creditors had no such entitlement in relation to those shares. That was so both before the shares in Wisbeck were transferred and afterwards. The transfers of the shares did not, of themselves, operate to defraud creditors either of Mr Cannane or of JCPL. Nor did the acquisition by Wisbeck of the shares in CCI, or the part played in that acquisition by Mr Cannane. I cannot see why Mr Cannane's intention, at the time the transfers were made, to arrange, if he could, for the acquisition by Wisbeck of the CCI shares converted the transfers into dispositions the effect of which was to deprive creditors of something to which they were "entitled". That being so, I do not think that the admitted intention of Mr Cannane converts the transfers into dispositions which are avoided. The intention that the shares should be put out of the reach of creditors is not itself necessarily an intention that creditors be defrauded; nor is an intention to direct to Wisbeck an opportunity to which creditors had no entitlement, so as to increase, after the transfers (and all going well), the "wealth" represented by the Wisbeck shares.

I would therefore hold that the transfers of the shares in Wisbeck, one by Mr Cannane and the other by JCPL, are not avoided by s 121. Since the other issues have been decided favourably to the appellants, I would allow the appeals.