Transfers to defeat creditors – contextualisation is all important

The Full Federal Court, overturning Flick’s J decision at first instance ([2020] FCA 1759), found that the bankrupt’s main purpose in transferring their property was, in substance, not to prevent, hinder or delay this property becoming divisible amongst his creditors in breach of s 121(1) of the Bankruptcy Act 1966 (Cth).

The Full Court outlined relevant principles in interpreting s 121(1). It determined on the facts that the absence of a temporal connection between the liabilities that may have led to the bankruptcy and the liabilities that existed at the time of the disputed transfer ‘was a significant consideration that should have been given significant weight in any determination of the main purpose of the Property Transfer’.

First Instance Decision

The trustee of the bankrupt estate of Mr Brian McMillan (the Bankrupt) alleged the Bankrupt’s transfer of his property interest at 23 Hedges Avenue, Strathfield, New South Wales (Strathfield property) to his wife, Mrs Karin Elisabeth McMillan, was void pursuant to ss 120 or 121 of the Bankruptcy Act 1966 (Cth) (Act).

The primary judge agreed with the case as pleaded by the bankruptcy trustee (the Main Purpose Particulars) and determined that the Bankrupt’s transfer of his interest in the Strathfield property in around May 2002 (Property Transfer) was void under s 121 of the Act.

Flick J held the Bankrupt’s main purpose for transferring his interest in the Strathfield property into the sole name of Mrs Karin Elisabeth McMillan was either to prevent this property becoming divisible among his creditors or to hinder or delay the process of making that property available for division among his creditors. Prior to the Property Transfer, the Strathfield property was held by the Bankrupt and Mrs McMillan jointly.

The primary judge held that ‘considered cumulatively and overall’ and ‘joining the dots’, the Bankrupt’s main purpose in terms of s 121 was made out and that the relief sought by the bankruptcy trustee should be granted.

Full Federal Court Appeal

On appeal, the Full Court determined that the primary judge had employed the appropriate tests in applying the operation of s 121 to the pleaded case. The primary judge’s approach in justifying his finding of a purpose that enlivens s 121(1) of the Act was ‘neither exceptional nor demonstrative of any error.’

The Full Court held that any evaluation of the main purpose of the Bankrupt alleged to arise from the Main Purpose Particulars needs to be assessed against all the objective circumstances to provide a necessary context to these Main Purpose Particulars, including for the purpose of undertaking a before and after comparison of the respective positions of the Bankrupt and Mrs McMillan. In this regard, the primary judge did not err by considering or otherwise having regard to matters that might go beyond those particularised in order to provide a necessary context to the Main Purpose Particulars, including for the purpose of undertaking a before and after comparison of the respective positions of the Bankrupt and Mrs McMillan.

Further, any inference as to the Bankrupt’s purpose in transferring his Strathfield property interest to Mrs McMillan must necessarily ‘be an inference primarily drawn from facts contemporaneous with or preceding May 2002’ and that ‘[e]vents which took place thereafter may nevertheless potentially be confirmatory of a purpose previously being pursued’. The Court indicated that ‘an apparent corollary of the second proposition is that subsequent events that might cast doubt on the existence of a postulated purpose may also be taken into account.’

However, the Full Court held that the primary judge in drawing his inferences from those Main Purpose Particulars had fallen into error in not taking all relevant subsequent events into account following the Property Transfer and giving appropriate weight to these events.

For example, the Bankrupt’s entry into a Bentley car dealership was not ‘a risky venture’ or ‘a rather reckless business’ in the Bankrupt’s circumstances. Accordingly, the primary judge had erred in placing significant weight on that finding in inferring that the main purpose contended for by the bankruptcy trustee of the Bankrupt placing his assets outside of the reach of his subsequent or anticipated creditors had been clearly established.

Relying on the High Court decision in The Trustees of the Property of Cummins (A Bankrupt) v Cummins [2006] HCA 6 at [34], ‘inferences of purpose of equal degrees of probability … are not sufficient to enliven s 121 of the Act.’ For a main purpose to be determined, it ‘must be a reasonable and definite inference, not merely one of a number of conflicting inferences with equal degree of probability: Cummins at [34].’

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Authored by:

Scott Couper, Partner
Elizabeth Ziegler, Associate