In McMillan v Warner (Trustee)  FCACF 20 the Full Court of the Federal Court of Australia allowed an appeal against a judgment made in favour of a trustee in bankruptcy who was successful in voiding a transfer of property from husband to wife made 16 years prior to the husband’s bankruptcy.
Mr McMillan owned a panel beating business. In 1995 Mr McMillan and his wife purchased a property in Strathfield (“Property”) as joint tenants. In 2001, Mr McMillan was approached by Rolls-Royce to open a car dealership. Mr McMillan subsequently entered into a dealership agreement with Rolls Royce, and proceeded to obtain finance from the Commonwealth Bank and St George Bank to help cover associated costs. Both Mr and Mrs McMillan gave personal guarantees and the Property was subject to two mortgages. In 2002, ownership of the Property was transferred into the sole name of Mrs McMillan for the stated consideration of $1.
In 2018, Mr McMillan became bankrupt.
Mr McMillan’s trustee in bankruptcy brought proceedings seeking to void the transfer of the Property pursuant to s.121 of the Bankruptcy Act 1966 (Cth)(“Act”). Pursuant to that section, a transfer of property made prior to bankruptcy will be void if the bankrupt’s “main purpose” in making the transfer was to prevent, hinder or delay the property from being divisible amongst creditors.
The decision at first instance
At first instance, the primary judge rejected Mr McMillan’s evidence that he had transferred the Property to his wife “out of love”. Rather, His Honour inferred, from the surrounding facts and circumstances, that the main purpose of the transfer was for Mr McMillan to protect the Property from the risks associated with his expanding business ventures. Accordingly, the Court ruled in favour of the trustee.
On appeal, Mrs McMillan took issue with the inferences drawn by the primary judge from the surrounding facts and circumstances as to Mr McMillan’s “main purpose” in making the transfer.
In allowing the appeal, the Full Court acknowledged that it can be “readily accepted” that a bankrupt’s creditors for the purposes of s.121 include “anticipated and future creditors.” However, the Full Court emphasised that the absence of a temporal connection between the liabilities that led to Mr McMillan’s bankruptcy, and the liabilities at the time of the impugned transfer, was a significant factor that should have been given “significant weight” in any determination of the main purpose of the transfer.
Further, the Federal Court noted at  that an inference that the main purpose of a bankrupt was to defeat creditors must be a “reasonable and definite inference, not merely one of a number of conflicting inferences with equal degree of probability.”
The Full Court identified many factors that suggested Mr McMillan’s main purpose in transferring the Property was not to protect it from creditors, including:-
- The fact that Rolls-Royce had written to Mr McMillan asserting that there was not enough separation between his personal finances and that of the business.
- There was no evidence that the creditors most affected by the Property transfer sought any security over the Property.
- Commonwealth Bank remained a mortgagee of the Property after the transfer.
- Mrs McMillan had given personal guarantees, as well as the mortgage over the Property, to support the loan from Commonwealth Bank.
- Mr McMillan’s business venture was not hazardous.
Mr McMillan was solvent at the time of the Property transfer.
Accordingly, the Full Court allowed the appeal and overturned the primary judgment.
It might be said that logic in this case prevailed. The passing of 16 years alone would seem to make it difficult to draw an inference that Mr McMillan’s main purpose of the transfer was to prevent the Property from becoming divisible among creditors.
No doubt this case will give some comfort to those many business people and professionals who structure their affairs so as to best protect their assets.
However, in principle, it remains possible for a court to draw an inference of the requisite intention in cases where the transfer was made at a time the transferor was solvent and also when there has been lengthy period of time between transfer and bankruptcy. As noted by the Full Court in McMillan v Warner, this might arise where a person makes a transfer before entering a financially hazardous venture in which the risk of insolvency is a real one.
~ with Sean Hollis, Graduate at Law