In the recent case of Bredenkamp (The Trustee of the Property of McKelt, a Bankrupt) v McKelt [2021] FCCA 468, Judge Street of the Federal Circuit Court of Australia considered the circumstances in which a series of dealings can be viewed as a “whole transaction” and a transfer to defeat creditors within the meaning of s.121 of the Bankruptcy Act 1966 (Cth) (“Act”).
Background
In November 2010, David McKelt (“the bankrupt”) and his wife, Kay McKelt, sold their jointly-owned (in equal shares) property in the Perth suburb of Subiaco for $1.88 million (“Subiaco property”). The sale proceeds were paid into two term deposit accounts held in the name of a trust entity controlled by the bankrupt (“the Trust”). At that time, the bankrupt had no other available funds; his retail stores were failing; and legal proceedings against him (including bankruptcy proceedings) were imminent.
In mid-2012, the bankrupt and Ms McKelt had a conversation about purchasing a property in Queensland. During that discussion, the bankrupt acknowledged that any legal proceedings, including bankruptcy proceedings, might inhibit that process.
In December 2012, Ms McKelt purchased a vacant lot in Maleny, Queensland, for $285,000 (“the Melany property”). The purchase was funded by a bank loan secured by a mortgage; part of the proceeds of sale of the Subiaco property; and funds withdrawn from the bankrupt’s superannuation account, the balance of which was spent on improvements to the property.
In November 2014, a sequestration order was made against the bankrupt. Thereafter, Ms McKelt refinanced the Maleny property, using further borrowings to make additional improvements.
The issues
The trustee alleged the bankrupt had transferred property to Ms McKelt with the purpose of hindering or defeating creditors within the meaning of s.121 of the Act, and that the relevant transfers were void as against the trustee. The trustee also sought constructive trust and/or resulting trust remedies, being recovery from Ms McKelt of the bankrupt’s half share in the proceeds of sale of the Subiaco property (“Subiaco Proceeds”), and the $41,000 withdrawn from his superannuation account
The decision
The Court accepted that the transfer of the Subiaco Proceeds into the Trust’s account, and then to purchase the Melany property, constituted a transfer of property within the meaning of s.121 the Act.
In reaching this conclusion, the Court rejected Ms McKelt’s argument that the only relevant transfer was from the bankrupt to the Trust. Rather, the Court found that transfer was part of an “overall whole transaction” by the bankrupt and Ms McKelt to transfer the Subiaco Proceeds to Ms McKelt. In those circumstances, it was not necessary for the Trust to be joined as a party to the proceeding.
Given the bankrupt’s admissions, the Court inferred that the main purpose of the transfer was to prevent the bankrupt’s property from becoming divisible among his creditors. The Court was also satisfied that Ms McKelt was aware of the bankrupt’s main purpose, and of his actual or imminent insolvency at the relevant times. Finally, Judge Street found that Ms McKelt provided no consideration for the transfer.
Regarding the $41,000 withdrawn from the bankrupt’s superannuation account, the Court found those funds were not protected by s.116 of the Act (which exempts a bankrupt’s superannuation from being divisible among creditors) by reason of their withdrawal from his superannuation account. The Court was satisfied that the transfer of those funds into the purchase and improvement of the Melany property enlivened section 121, for the same reasons discussed above.
Trust remedies
The Court accepted the trustee’s argument that, as section 121 applied in respect of the transfers, the property transferred to Ms McKelt was held by her on trust for the trustee. The presumption of advancement did not apply, given the parties’ “joint intention” to defeat the bankrupt’s creditors.
Accordingly, Judge Street declared that Ms McKelt held a half interest in the Melany property on trust for the trustee, and that the trustee was entitled to be registered on title in respect of that half interest. In doing so, His Honour rejected Ms McKelt’s argument that there should be a “fine accounting” in respect of the property, as her expenditures did not reflect the full benefit received from the transfer, including rental return. Further, the Court noted it was the bankrupt’s half interest in the property that facilitated Ms McKelt’s further borrowings, and additional improvements to the property.
Ultimately, Judge Street ordered, among other things, that the trustee be appointed as trustee for the sale of the Melany property; have sole conduct of the sale; and have the power to offer and sell the property and distribute the proceeds in accordance with priorities set by the Court. The respondent was also ordered to pay the trustee’s legal costs of $40,000.
Key takeaways
Whether a transfer by a bankrupt, prior to their bankruptcy, is one that a Court will find to be void against the bankrupt’s trustee will depend on both the bankrupt’s intention regarding the transfer and the complicity of the transferee.
A transfer of property that occurs in a series of steps spanning several years can still enliven section 121 of the Act, and can be viewed as a “whole transaction”, where the bankrupt’s property eventually makes its way to the intended transferee.
The Court may regard the main purpose of a transaction as being to defeat or hinder the bankrupt’s creditors even in circumstances where a significant amount of time passes between the transaction occurring and the transferor becoming bankrupt. What is relevant is not closeness in time but the likelihood, at the time of the transfer, that bankruptcy proceedings will arise at some future point.
Trustees in bankruptcy should act quickly to have a transfer declared void under section 121 because the liability of the transferee to hold the transferred property on trust for the bankrupt’s trustee will only arise once the Court has declared the transfer as void against the trustee.
~ with Michael Timlin, Graduate at Law
