Theo v. The Official Trustee in Bankruptcy

BC9501559

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(Judgment by: Ryan J., Sackville J., Kiefel J.) Court:

Judges:
Ryan J.
Sackville J.
Kiefel J.

Judgment date: 23 November 1995

PERTH

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Judgment by:
Ryan J.
Sackville J.
Kiefel J.

Introduction

This is an appeal from an order for costs made by Cooper J. His Honour ordered the present appellants (the applicants below) to pay 80% of the costs of the present respondent (also the respondent below).

The first appellant, Mr Sol Theo, presented his own petition for bankruptcy on 19 October 1990 and the petition was accepted by the Registrar on that day. The trustee of the estate was the Official Trustee in Bankruptcy. One creditor, the Australian Tax Office, proved in the estate in an amount of $86,975.

The proceedings below principally concerned two notices issued under s.139ZQ of the Bankruptcy Act 1966 (Cth) ("the Act") by the Acting Official Trustee to the first appellant's wife ("Mrs Theo"), dated, respectively, 27 May 1993 and 16 July 1993. The first appellant and the second appellants, the trustees of the S. Theo Family Trust, sought orders setting aside the notices. They succeeded in that claim, on the ground that the notices were unsupported by appropriate valuation evidence.

Nonetheless, his Honour made the costs order to which we have referred. He did so for the following reasons:

"Mr Theo has succeeded in his application to have the s.139ZQ notices set aside on the basis of the values alleged in the notices but on no other ground. The time taken on the hearing of this matter was almost entirely taken up on issues on which Mr Theo failed. Notwithstanding that the applicants were successful as to part of the application, they may nevertheless, because of their conduct of the litigation, be ordered to pay costs (Cummings v Lewis (1993) 41 FCR 559 at 603).

In the circumstances the applicants should pay eighty percent (80%) of the respondent's costs of and incidental to the application to be taxed."

The first appellant appeared in person both before Cooper J. and on the appeal. His major contention, as we followed him, was that the costs order should be set aside because his Honour had erroneously ruled against the appellants on a number of factual questions. It was these issues on which the appellants failed and which provided the foundation for his Honour's exercise of discretion.

Background

The sequence of events, insofar as relevant, was as follows:

(i)

In August 1966, the first appellant and Mrs Theo were registered as joint tenants of two properties located, respectively, at 15-17 Kipling Street, Caboolture and 69 Webster Road, Deception Bay.

(ii)

In 1983 and 1984, the Australian Taxation Office investigated the affairs of the first appellant. In April 1984, Mr Theo was presented with an asset betterment statement, covering the years 1980, 1981 and 1982. After further interviews, Mr Theo was presented, on 16 August 1984, with a second asset betterment statement for the years 1976-1983, inclusive. Mr Theo challenged the correctness of the betterment statement, but failed to produce statements in support of his contentions or to establish specific errors.

(iii)

On 11 December 1984 the Deputy Commissioner of Taxation wrote to Mr Theo, stating, inter alia, that amended assessments would issue in the near future.

(iv)

By two memoranda of transfer, each dated 27 December 1984 (that is, 16 days after the letter from the Deputy Commissioner), the first appellant and Mrs Theo transferred their interests in the Deception Bay land and the Caboolture land to Mrs Theo alone. The stated consideration was, in the case of the Deception Bay land, $40,000 and, in the case of the Caboolture land, $10,000. Mrs Theo became the sole registered proprietor of the Deception Bay land in January 1985 and of the Caboolture land in March 1985. It was common ground that the stated consideration was never paid by Mrs Theo.

(v)

On 27 May 1993, the Official Receiver issued and subsequently served upon Mrs Theo a notice pursuant to s.139ZQ of the Act. This notice required her to pay the sum of $60,000, representing one half of the claimed value of the Deception Bay property. The notice was based on the contention that Mrs Theo had provided no monetary consideration for the transfer and that she was not a purchaser in good faith and for valuable consideration. The Official Trustee in Bankruptcy contended that the transfer was a fraudulent disposition within s.121 of the Act and, not being made in favour of a purchaser in good faith and for valuable consideration, was voidable at the option of the Official Trustee by virtue of s.121 of the Act.

(vi)

On 16 July 1993 a similar notice was issued and served upon Mrs Theo in relation to the Caboolture property. This notice required the payment of $40,171, said to be one-half of the claimed value of the Caboolture property.

(vii)

By an application filed on 25 June 1993 and amended on 16 July 1993, the first appellant and "the trustees of S. Theo Family Trust" applied to the Court for orders:

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that the notices under s.139ZQ be set aside pursuant to s.139ZS of the Act;

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that the first appellant's bankruptcy be annulled pursuant to s.153B of the Act or "such other section as may be appropriate"; and

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that the Official Trustee pay damages to the appellant for "negligence and criminal inaction".

(viii)

(viii) The matter was heard over four hearing days in August 1993 and February 1994. Cooper J. delivered judgment on 24 August 1995 and made the orders to which we have referred.

The Judgment

The primary case mounted by the appellants at first instance was that the notices should be set aside because there had been no fraudulent disposition of the properties. The first appellant supported this case by two factual contentions which, as his Honour observed, were mutually inconsistent. The first appellant claimed that both properties were assets of the S. Theo Family Trust, which had operated since the mid-1960s. Accordingly, the transfers were no more than a reallocation of the bare legal title to the properties. Alternatively, the first appellant claimed that the transfers took place following the (temporary) break-down of his marriage and were part of an informal property settlement with his wife, for which she had given good consideration.

Cooper J. pointed out that the evidence adduced by the appellants to support the contention that the properties were trust assets expressly contradicted the alternative case upon which the appellants sought to rely. Since the first appellant persisted at the hearing in his contention that the properties were assets of the trust at the time of the transfers, the trial judge regarded the appellants as confined to the trust property argument.

Cooper J. identified the issues arising on the application to set aside the notices under s.139ZQ as follows:

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whether the 1984 transfers of the properties constituted a disposition of property by the first appellant;

•

whether that disposition was undertaken with the intent to defraud creditors; and

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whether the disposition was for valuable consideration and in favour of a person (Mrs Theo) who had acted in good faith.

On each issue, Cooper J. examined the evidence at considerable length and found against the appellant. He did so after hearing evidence both from the first appellant and Mrs Theo, each of whom was cross-examined.

In relation to the first issue, his Honour found that a deed of trust had been executed in September 1978 (but not earlier). However, he found that neither of the properties had ever become assets of the trust. In reaching this conclusion, his Honour took into account a number of factors. One factor was that a letter said to incorporate an agreement relating to marital assets between the first appellant and Mrs Theo (assuming it to be genuine) had predated the deed of trust. His Honour also took into account a range of contemporary documentation, which suggested strongly that the two properties were not held in trust, but were held absolutely by the first appellant and Mrs Theo. For example, no trust tax returns were filed until after the Commissioner of Taxation had commenced the audit of the first appellant's affairs. Moreover, the first appellant had claimed concessional deductions in respect of the Deception Bay property in each of the financial years from 1976 to 1982. The 1984 transfers themselves gave no indication that the properties were assets of the trust.

Cooper J. stated that the only evidence supporting the proposition that the properties were trust assets was that given by the first appellant and Mrs Theo. His Honour, in the face of the "unexplained inconsistencies between that evidence and the documentary evidence", was not prepared to accept the claim put forward by the first appellant.

On the second issue, his Honour found that the first appellant did intend to defraud his creditors, in the sense in which that phrase is used in the authorities: see PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 , at 523-526; Noaks v J. Harvy Holmes & Son (1979) 37 FLR 5 , at 10-11. His Honour reached this conclusion by finding that the

"necessary consequence of and only reasonable explanation for the 1984 transfers was to place Mr Theo's interest in the properties out of the reach of the ATO, [to] whom he knew he was soon to be indebted in a substantial sum. In those circumstances, I am entitled to and do infer an intention to defraud or defeat or delay creditors."

On the third issue, his Honour found, on the basis of the evidence given by the first appellant and Mrs Theo themselves, that the stated consideration was not paid in respect of either property. Accordingly, his Honour found that Mrs Theo was not a purchaser for valuable consideration. There was therefore no need to consider whether she had acted in good faith for the purposes of s.121 of the Act, since that section required that the purchaser both act bona fide and provide valuable consideration.

Despite rejecting the primary case put forward by the appellants, Cooper J. made orders setting aside the notices. As previously noted, he did so because each notice specified the "market value" of the property, but the alleged value was not supported by any valuations relating to the properties. Because of these deficiencies his Honour considered that the notices were irregular and should be set aside under s.139ZQ(1) or, alternatively, s.30 of the Act. Since, by s.139ZS(2), the notices were to be taken as not having been issued, no liability was created by reason of them: Re Lucera; Ex parte Official Trustee in Bankruptcy v Lucera (1994) 53 FCR 329 , at 338.

His Honour then went on to deal with the first appellant's application that the bankruptcy be annulled, notwithstanding that he had been discharged from the bankruptcy in the ordinary course on 20 October 1993. His Honour had no doubt that at the time the first appellant presented his own petition for bankruptcy he was insolvent and, indeed, had been insolvent for more than one year prior to the date of presentation of the petition. Moreover, his Honour found that there were strong discretionary reasons to refuse to annul the bankruptcy. In this connection, his Honour rejected a claim by the first appellant that he had been induced to present his own petition by a promise made by the Official Trustee to prosecute an appeal to this Court from the decision of the Administrative Appeals Tribunal relating to his taxation liability.

Cooper J. recorded that the first appellant had made numerous allegations relating to conduct of staff in the office of the Official Receiver in the administration of his estate in bankruptcy. He found those allegations to be without foundation. For example, no objective evidence was adduced to show that the Official Receiver had been negligent in failing to pursue an appeal to the Federal Court from the decision of the Administrative Appeals Tribunal. On the contrary, his Honour found that the appeal did not go on because the first appellant had been unable or unwilling to provide $12,000 security for costs. Other allegations were similarly found to be without foundation.

The Appeal

In his written submissions and in oral argument the first appellant raised a large number of issues. Few of these were, however, directed to any matters that would cast doubt on the findings made by the trial judge, or on the legal principles applied by his Honour.

In essence, Cooper J. made findings of fact in relation to the primary case advanced by the appellants. Those findings clearly involve an assessment of the credibility of both the first appellant and Mrs Theo. His Honour declined to accept their evidence on the critical questions. The High Court has said on many occasions that findings which are dependent to any substantial degree on the credibility of witnesses must stand unless the trial judge has failed to use or has palpably misused his advantage, or has acted on evidence inconsistent with facts or which is glaringly improbable. For a recent restatement of the principles, see the judgment of Brennan, Gaudron and McHugh JJ. in Devries v Australian National Railways Commission (1993) 177 CLR 472 , at 479. In the present case, the first appellant has failed to point to any material that would justify overturning the findings of the trial judge. Indeed, the documentation to which his Honour referred provides very powerful support for the conclusions expressed in the judgment.

Nor has the first appellant put anything that establishes any error of law in the principles applied by Cooper J. Although the first appellant referred to many cases in his written submissions, nothing in those submissions identified any error in the legal principles expressed by his Honour in the judgment.

For these reasons, there is no basis for overturning any of the findings of fact made by Cooper J.

A trial judge has a discretion as to costs, conferred by s.43(2) of the Federal Court of Australia Act 1976 (Cth). Ordinarily, costs follow the event. However, a successful party who has failed on certain issues may be deprived of the costs and ordered to pay the other parties' costs of those issues. For this purpose, "issue" means any disputed question of fact or law: Hughes v Western Australia Cricket Association (Inc) [1986] ATPR 48,134 (FCA/Toohey J.), at 48,136; Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1987) 17 FCR 211 , at 222. Having regard to our conclusion that no error has been shown either in relation to the findings of fact or the principles of law applied by Cooper J., no error has been demonstrated in the exercise of his Honour's discretion in relation to costs. His Honour did not act on a wrong principle, nor on a mistaken view of the facts. Nor did his Honour take into account irrelevant factual circumstances in making the costs order. Accordingly, there is no basis for an appellate court to review the exercise of his Honour's judicial discretion: House v The King (1935) 55 CLR 499 , at 504-505. It must be remembered, as the Full Court observed in Queensland Wire Industries v BHP, that the trial judge had the conduct of the trial, and thus a grasp of the issues as they emerged, which put him in a special position to make the appropriate orders as to costs.

For these reasons, the appeal should be dismissed, with costs.