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May 30, 2016

Bankruptcy, transfers and mortgages

The following is annotated. For full case: http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCCA/2016/683.html?stem=0&synonyms=0&query=family%20law%20act

Brown v Mikulski & Anor [2016] FCCA 683 (13 May 2016)

Introduction and background

These proceedings began with an application by Mr Brown seeking to set aside a notice issued to him purportedly pursuant to s.139ZQ of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) demanding payment from him of $134,425.33. An amended notice was issued on 12 February 2015.
The respondent trustee (Mr Mikulski) filed a response on 12 March 2015 in which he sought other relief against Mr Brown. That response was amended by leave at the trial of this matter on 30 March 2016. The trustee now seeks the following relief:
1. A declaration that the transfer of the property known as 7/9-9A Gannon Avenue, Dolls Point, NSW being Folio Identifier 7/33255 (Property) from Ms Angela Flora Moutinho-Brown (Bankrupt) to the Applicant on or about 30 May 2012 (Transfer) is void against the First Respondent.

2. A declaration that the Applicant holds the Property on trust for the benefit of the First Respondent.

4A. In the event that the First Respondent and the Applicant do not enter into a legally binding agreement for the payment of a sum of money by the Applicant to the First Respondent, or for the sale of the First Respondent’s interest in the Property to the Applicant within fourteen days of the date of these orders, then the following orders apply:

i. The Applicant and any other occupants of the Property are to vacate the Property within 30 days of the date of this order.

ii. The Applicant shall, within seven days of the date of written notification from the First Respondent, at the Applicant’s cost, supply to the First Respondent a duly executed Memorandum of Transfer in a form acceptable to the Registrar General of the Lands Titles Office in Sydney which effects the transfer of the Property from the Applicant to the First Respondent.

iii. In the event that the Applicant fails or refuses to supply an executed Memorandum of Transfer to the First Respondent as required by order (ii) hereof, then a Registrar of this Court shall be authorised to execute a Memorandum of Transfer prepared by the First Respondent for and on behalf of the Applicant, and a sealed copy of this Order shall be filed with the Registrar General of the Lands Titles Office at the time the aforesaid Memorandum of Transfer is lodged for registration.

iv. Subject to Orders (v) and (vi) hereof, the First Respondent is to assume liability for the discharge of mortgage registration number AG998414 from the proceeds of sale of the Property.

v. The First Respondent pay to the Applicant pursuant to s.121(5) of the Bankruptcy Act 1966 (Cth) the sum of $500,000 within 90 days of this order, but that the liability to make such payment may be discharged or satisfied by the First Respondent reducing the indebtedness of the loan secured by the said mortgage by $500,000 within the said period of 90 days.

vi. To the extent that the principal and interest on the aforesaid mortgage exceeds the sum of $500,000 as and from the date upon which the Property is vacated, then the Applicant shall be liable to indemnify the First Respondent for any amount in excess of $500,000.

vii. To the extent that there are any unpaid rates, taxes, levies and/or outgoings on the Property up until the date of vacant possession, the Applicant shall be liable to indemnify the First Respondent for any such outstanding rates, taxes, levies and outgoings.

viii. The Applicant shall pay to the First Respondent any costs, stamp duty and Lands Titles Office filing and registration fees arising from any breach of Order (ii) hereof by the Applicant.

5. A declaration that the creation of an equitable mortgage (Equitable Mortgage) granted pursuant to the Loan Agreement between the Bankrupt and the applicant dated 30 October 2011 (Second Loan Agreement) is void against the First Respondent.

6. A declaration that the Applicant is an unsecured creditor of the Bankrupt’s Estate for the amount of any actual advance pursuant to the Loan Agreement between the Bankrupt and the Applicant dated 10 October 2010 (First Loan Agreement) and the Second Loan Agreement.

7. Further, or in the alternate to Orders 1 to 6, an Order that Judgment be entered for the First Respondent against the Applicant in the sum of $200,000.00 pursuant to Section 139QZ(8) of the Bankruptcy Act 1966 (Act).

8. An Order that the Applicant pay the First Respondent’s costs.

It was agreed between the parties and the Court that the matter should proceed as if it were an application by the trustee pursuant to s.121 of the Bankruptcy Act and the trustee should therefore be treated as the moving party^[1].
The proceedings concern two transfers of property to Mr Brown by a bankrupt, Ms Angela Moutinho-Brown (the bankrupt) prior to the bankruptcy. The property transferred was:
1. Land located at 7/9-9A Gannon Avenue, Dolls Point, NSW (the Land), the transfer taking place on 30 May 2012; and
2. an equitable mortgage given over the Land on 30 October 2011 (the Mortgage).
Mr Mikulski is the trustee of the bankrupt’s estate (trustee). The trustee, as noted above, alleges that the two transfers are void under s.121 of the Bankruptcy Act.
The trustee took the administrative step provided for in the Bankruptcy Act of requesting the Official Receiver to issue a notice under s.139ZQ of the Bankruptcy Act. The Official Receiver issued the notice on 17 September 2014, and the notice was amended on 12 February 2015 (the notice).
Because the trustee has cross-claimed for relief (now restricted to s.121 of the Bankruptcy Act) it is unnecessary to consider the grounds on which Mr Brown originally applied to set aside the notice^[2]. It follows that the only issue requiring resolution is whether or not either of the transfers are void under s.121 of the Bankruptcy Act.
The following statement of background facts is derived from the submissions of the parties.
In December 2006, Mr Anthony Fors advanced the sum of $100,000 to the bankrupt and her husband, Mr Joseph Bishop, by way of a loan^[3].
The bankrupt and her husband stopped making repayments of the loan to Mr Fors in June 2007^[4].
In 2009, Mr Fors commenced proceedings against the bankrupt and her husband to recover the outstanding principal and interest under the loan^[5].
By about September 2009, the bankrupt owned no real property other than the Land. Between July 2006 and September 2009, the bankrupt had transferred three real properties registered in her name other than the Land, the last of which occurred in around September 2009^[6].
In 2010, Mr Brown became aware the bankrupt and her husband had undertaken a property development which “did not go well” for them, and was approached by them to loan them money “because they had run out of funds”. It appears that failed property investment lead to the bankrupt’s husband becoming bankrupt^[7].
On 10 October 2010, Mr Brown offered to loan the bankrupt $150,000 payable from the sale of the Land by 31 August 2011 (First Loan)^[8].
Between 12 September 2010 and 12 October 2011 Mr Brown expended money (and, in effect, drew down the Loan) on renovation works at the property comprised in the Land. Upon the completion of these works the Land was listed for sale by a real estate agent.
On 23 March 2011, the bankrupt’s husband became bankrupt^[9].
On 20 July 2011, Rockdale Council ordered the bankrupt to demolish unauthorised building work on the Land and reinstate the building on the Land to its previous design within 28 days, failing which an offence would be committed by her^[10].
As a consequence of the Council rectification notice, the Land was taken off the market on 26 September 2011.
On 31 August 2011, the bankrupt could not repay to Mr Brown any money loaned under the First Loan^[11].
On 30 October 2011, the bankrupt and Mr Brown extended the time for repayment of money loaned by entering into a further loan agreement making any money loaned repayable from the sale of the Land no later than 31 December 2012, with the loan secured by the Mortgage (Second Loan)^[12].
On 19 December 2011, Judgment was entered against the bankrupt by the District Court of NSW in the sum of $267,925.50 plus costs (Judgment)^[13].
In early 2012, the bankrupt informed Mr Brown that “she could not afford to undertake the necessary building works to comply with the notices”^[14].
At that point, the bankrupt informed Mr Brown that she “owed $500,000 to a bank” and was “happy to sell for the discharge sum in order to satisfy the mortgage”^[15].
On 8 March 2012, Mr Brown wrote to his conveyancer to inform her that he would buy the Land from the bankrupt. He made an enquiry about whether anyone else had a caveat on the Land and requested the conveyancer to “get this through quickly”^[16].
On 27 March 2012, the bankrupt and Mr Brown entered into a contract for sale of the Land recording a sale price of $500,000^[17].
On 30 May 2012, the Land was transferred by the bankrupt to Mr Brown, with the transfer lodged recording consideration of $500,000 being given for the Land^[18].
The sale of the Land to Mr Brown was assessed for stamp duty on the sum of $500,000^[19].
In July 2013 the bankrupt submitted a debtor’s petition, which was accepted. She lodged a Statement of Affairs on 16 July 2013. The Statement of Affairs records that she^[20]:
1. first had difficulty paying her debts in October 2010;
2. had less than $500 available cash;
1. had secured debts totalling $63,000; and
1. had unsecured debts totalling $437,000 ($305,801 of which related to the Judgment).

The evidence and submissions

Mr Mikulski relies upon the following evidence:
1. his own affidavit made on 17 April 2015;
2. the affidavit of his solicitor, Amanda Lee Crosbie made on 8 March 2016; and
1. the affidavit of Anthony Lynden Fors made on 16 April 2015.
Mr Mikulski and Mr Fors were cross-examined on their affidavits.
Mr Brown relies upon his own affidavit made on 2 December 2014. He was cross-examined on that affidavit.
I also received the following exhibits:
- R1 – Quanto Expert Report;
- R2 – Amended Notice, pages 181-192;
- Letter to Sullivans Solicitors from Roberts Legal, 22.07.2015.
The trustee and Mr Brown, through their counsel, made helpful oral and written submissions.

Consideration

The legal principles

Section 121 of the Bankruptcy Act is in the following terms:
Transfers that are void
(1) A transfer of property by a person who later becomes a bankrupt (the transferor ) to another person (the transferee ) is void against the trustee in the transferor’s bankruptcy if:
(a) the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and

(b) the transferor’s main purpose in making the transfer was:

(i) to prevent the transferred property from becoming divisible among the transferor’s creditors; or

(ii) to hinder or delay the process of making property available for division among the transferor’s creditors.

Note: For the application of this section where consideration is given to a third party rather than the transferor, see section 121A.

Showing the transferor’s main purpose in making a transfer

(2) The transferor’s main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.

Other ways of showing the transferor’s main purpose in making a transfer

(3) Subsection (2) does not limit the ways of establishing the transferor’s main purpose in making a transfer.

Transfer not void if transferee acted in good faith

(4) Despite subsection (1), a transfer of property is not void against the trustee if:

(a) the consideration that the transferee gave for the transfer was at least as valuable as the market value of the property; and

(b) the transferee did not know, and could not reasonably have inferred, that the transferor’s main purpose in making the transfer was the purpose described in paragraph (1)(b); and

(c) the transferee could not reasonably have inferred that, at the time of the transfer, the transferor was, or was about to become, insolvent.

Rebuttable presumption of insolvency

(4A) For the purposes of this section, a rebuttable presumption arises that the transferor was, or was about to become, insolvent at the time of the transfer if it is established that the transferor:

(a) had not, in respect of that time, kept such books, accounts and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor’s business transactions and financial position; or

(b) having kept such books, accounts and records, has not preserved them.

Refund of consideration

(5) The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.

What is not consideration

(6) For the purposes of subsections (4) and (5), the following have no value as consideration:

(a) the fact that the transferee is related to the transferor;

(b) if the transferee is the spouse or de facto partner of the transferor–the transferee making a deed in favour of the transferor;

(c) the transferee’s promise to marry, or to become the de facto partner of, the transferor;

(d) the transferee’s love or affection for the transferor;

(e) if the transferee is the spouse, or a former spouse, of the transferor–the transferee granting the transferor a right to live at the transferred property, unless the grant relates to a transfer or settlement of property, or an agreement, under the Family Law Act 1975 ;

(f) if the transferee is a former de facto partner of the transferor–the transferee granting the transferor a right to live at the transferred property, unless the grant relates to a transfer or settlement of property, or an agreement, under the Family Law Act 1975 .

Exemption of transfers of property under debt agreements

(7) This section does not apply to a transfer of property under a debt agreement.

Protection of successors in title

(8) This section does not affect the rights of a person who acquired property from the transferee in good faith and for at least the market value of the property.

Meaning of transfer of property and market value

(9) For the purposes of this section:

(a) transfer of property includes a payment of money; and

(b) a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person; and

(c) the market value of property transferred is its market value at the time of the transfer.

I accept that, having regard to the terms of ss.121(1) and (2) of the Bankruptcy Act, if the trustee can establish the following two things the transfers are deemed void:
1. the property transferred would probably have become part of the bankrupt’s estate or have been available to creditors if they had not been transferred;
2. it can be reasonably inferred from all of the circumstances that, at the time of each of the transfers, the bankrupt was, or was about to become, insolvent.
The deeming will apply unless Mr Brown can prove all of the following pursuant to s.121(4) of the Bankruptcy Act^[21]:
1. the applicant gave consideration for the Land and Mortgage equal to their market value;
2. the applicant did not know, and could not reasonably have inferred, that the bankrupt’s main purpose in making the transfers was to prevent the property transferred from becoming divisible among the bankrupt’s creditors or to hinder or delay the process of making the property available for division among the bankrupt’s creditors;
1. the applicant could not reasonably have inferred that, at the time of the transfers, the bankrupt was, or was about to become, insolvent.

Was the Land and Mortgage part of the bankrupt’s estate?

Upon entering into bankruptcy, all of a bankrupt’s “property” vests in the trustee (s.58 of the Bankruptcy Act) and, save for some exceptions, is divisible among the creditors of the bankrupt (s.116 of the Bankruptcy Act). “Property” is a defined term and includes real property and any interest arising out of real property (s.5 of the Bankruptcy Act).
It is settled that the interest in property created by a mortgage is “property” which can be transferred for the purpose of s.121 of the Bankruptcy Act^[22].
There is evidence that the bankrupt planned to dispose of the Land prior to her bankruptcy and prior to the transfers to Mr Brown. However, the Council orders requiring demolition and reinstatement work suggest that there was a considerable impediment to the bankrupt doing so.
Thus, the Land would probably have become part of the bankrupt’s estate, if it had not been transferred to Mr Brown.
It is hypothetically possible that the bank holding the first registered mortgage over the Land would have exercised its security in the event that Mr Brown had not bought the Land and that the bank would have sold the Land as a mortgagee in possession. This is, however, speculation as I have no evidence of whether or not the bankrupt was complying with the terms of that mortgage at the time of the transfer of the Land.
There is a conceptual difficulty with the proposition that the equitable Mortgage to Mr Brown would have become part of the bankrupt’s estate. Mr Brown was effectively a lender of last resort and if he had not taken the Mortgage there would have been no mortgage. I have proceeded on the basis that the Mortgage to Mr Brown was terminated upon the sale of the Land to him and, but for that sale, would have become part of the bankrupt’s estate to the extent that it was capable of doing so.

Reasonable inference the bankrupt was, or was about to become, insolvent

A person will be insolvent if they are unable to pay all their debts as and when they become due and payable (s.5 of the Bankruptcy Act).
It need not be proven that the bankrupt was actually insolvent or about to be become insolvent. It is sufficient if an inference of insolvency is reasonably open to be made, and is analogous to whether there is sufficient evidence to leave a matter open to a civil jury to decide^[23].
When assessing whether an inference of insolvency is reasonably open to be made, the Court may take into accounts events before and after the time of the impugned transfer^[24].
Where it can reasonably be inferred that at the time of an impugned transfer the bankrupt was, or was about to become, insolvent, there is no need to prove an actual intention on the part of the bankrupt to defeat creditors. The bankrupt’s intention is taken to be so where that inference can reasonably be inferred, meaning that the bankrupt’s subjective intention is irrelevant^[25].
Mr Mikulski submits that it can reasonably be inferred from the following evidence that the bankrupt was insolvent, or was about to become insolvent, at the time of the transfers:
1. the bankrupt having stopped making repayments to Mr Fors in June 2007, and Mr Fors having to sue the bankrupt to recover in 2009;
2. the bankrupt owning no real property other than the Land from September 2009, having disposed of three properties between July 2006 and then;
1. the bankrupt approaching Mr Brown in 2010 for money because the bankrupt had run out of funds, and had undertaken a property development that had not gone well;
1. the bankrupt’s own admission that she had difficulty paying her debts from October 2010;
2. the bankrupt’s husband becoming bankrupt on 23 March 2011;
3. the bankrupt incurring an obligation on 20 July 2011 to incur the cost of demolition and reinstatement work to the Land within 28 days;
4. the bankrupt failing to repay any money loaned pursuant to the First Loan by its due date of 31 August 2011;
5. the bankrupt and Mr Brown entering into a fresh loan agreement on 30 October 2011 extending the time for the payment of any money already loaned by Mr Brown, and the bankrupt offering the Mortgage as security at that stage;
6. entry of the Judgment on 19 December 2011;
7. the bankrupt informing Mr Brown in early 2012 that she could not afford to undertake the necessary building works to comply with the Council notice;
8. the bankrupt’s admission that she had less than $500 available cash, secured debts totalling $63,000, and unsecured debts totalling $437,000 when she became bankrupt;
The opinion of the Mr Mikulski, based on the above evidence, is that the bankrupt was in fact insolvent^[26].
Mr Brown disputes the opinion of Mr Mikulski.
Dealing with each matter referred to in the trustee’s submissions in turn, Mr Brown accepts that the repayments to Mr Fors stopped in 2008. He submits that the only available evidence is that the bankrupt denied indebtedness in September 2009.
Mr Brown further submits that:
1. the ownership of no other real property is an observation of little assistance without some explanation as to why other property was sold. The trustee could have sought information from the bankrupt in that regard;
2. an approach for money is hardly indicative of insolvency. What is to be inferred from the expression “property development did not go well”? It may have meant that anticipated profit was less than expected or that a significant loss was incurred. Nothing was put to Mr Brown as to what he understood by the words;
1. the so called admission by the bankrupt concerning her difficulty in paying debts was conceded by the trustee not to be an admission as to insolvency;
1. without some elucidation as to the finances of the bankrupt’s husband, his bankruptcy on 23 March 2011 gives rise to no inference concerning his wife;
2. it can hardly be suggested that the bankrupt willingly incurred liability to incur the cost of demolition and reinstatement work within 28 days. The cost of such works was not available at that time;
3. the bankrupt’s failure to repay money under the First Loan agreement was a consequence of not being able to sell the Land;
4. the extension of time and granting of security are matters of usual commerce in the ordinary course of business and not matters giving rise to inferences of insolvency;
5. there is no evidence that the bankrupt had $700,000 worth of debt^[27];
6. the entry of judgment is not of itself an act of bankruptcy. Failure to comply with a bankruptcy notice and the other matters in s.40(1) of the Bankruptcy Act are. The evidence of Mr Fors made no reference to any attempt by him at recovering his Judgment after 19 December 2011 by the issue of a writ of execution, the service of a bankruptcy notice or any other enforcement procedure;
7. the inability of the bankrupt to pay for necessary building works is not an indicator of insolvency but rather a cash flow issue, something which the trustee failed to consider;
8. the content of the bankrupt’s Statement of Affairs does not assist in evaluating her position at the time of the impugned transaction. However, what the Statement does reveal is that there were no other recorded judgments;
1. finally, it is asserted that the opinion of the trustee is of itself of assistance. For the reasons above, the matters said to be the basis for the trustee’s opinion, “clearly demonstrate a lack of insight on his part”. The weight to be attached to the trustee’s opinion ought to be negligible.
The definition of “solvency” is well known. In addition to the definition in s.5(2) of the Bankruptcy Act, it is useful to have regard to the well known test laid down by Barwick CJ inSandell v Porter^[28]. At 670, his Honour said:
… [T]he debtor’s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time — relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.
Plainly, no inference of insolvency can be drawn at the time the bankrupt and Mr Brown entered into the First Loan Agreement. The bankrupt and her husband, so it appears, had purchased and sold several properties and intended to improve the Land by adding a bedroom with a view to selling the Land for a significant capital gain. They had apparently suffered a reverse on a previous transaction but that carried no implication in relation to the scheme for the Land. Mr Brown was willing to advance money for the planned renovation works in the expectation that he would recover his money.
Regrettably, neither the bankrupt nor her husband obtained the approval of the Council for the works that were undertaken by Mr Brown and paid for from the First Loan. Rather than increasing the value of the Land those works created a detriment of $69,795^[29] once the Council issued its rectification notice, requiring the Land to be restored to its original condition. It was not Mr Brown’s responsibility to obtain the Council’s approval as financier of the works. It was the responsibility of the owners.
The Land had been listed for sale prior to the Council issuing the rectification notice but, once that notice became known, it was withdrawn from sale.
The circumstances presented the bankrupt, her husband and Mr Brown with a serious problem but it does not follow that an inference of insolvency should be drawn from those circumstances. The problem could have been overcome if the Council could have been persuaded to withdraw its notice and approve the works. Alternatively, the rectification works could have been undertaken and the Land once more listed for sale. Less than half of the Loan amount had been expended and the bankrupt also held equity of $50,000 in the Land, based on the purchase price of $550,000 and the bank mortgage of $500,000.
The Second Loan agreement was a rational approach to the resolution of the problem. No further money was advanced by Mr Brown. The term of the Loan was extended and he took security in the form of the equitable Mortgage. In my opinion, no inference of insolvency can be drawn from the circumstances at that time. The Loan provided the means to eventually re-present the Land for sale and for Mr Brown to recover his money.
The bankruptcy of Mr Bishop in 2011 carries no necessary implication for the solvency of the bankrupt. Mr Brown denied any knowledge at that time either of the claim by Mr Fors or the bankruptcy of Mr Bishop. I believe him. I have no evidence of whether the debt or debts causing Mr Bishop’s bankruptcy were joint debts with the bankrupt. The claim by Mr Fors was not at that time established as a debt. I have no evidence of other debts owed by the bankrupt at that time.
However, by the time of the transfer of the Land to Mr Brown, in my opinion an inference of insolvency can and should be drawn. The debt to Mr Fors had by then been established by the Judgment in his favour. Mr Brown knew that there was no prospect of the Land being placed in a saleable condition, which was the only way the Loan to him could be repaid. The bankrupt could not afford to undertake the rectification works herself and it can fairly be assumed that Mr Brown was unwilling to further draw down the Loan, so increasing the debt to him. The only solution was the transfer of the Land to Mr Brown. That transfer was probably a transfer for fair value, given the cost of the rectification works still required, but the transfer left the bankrupt with nothing to pay the judgment debt. She was, at the time of that transfer, insolvent.
Thus, the transfer of the Land is deemed under s.121 of the Bankruptcy Act to have been made for the main purpose of preventing the property from becoming divisible among the bankrupt’s creditors or hindering or delaying the process of making the property available for division among the bankrupt’s creditors.

Main purpose

I also accept from the following that, on balance, the bankrupt’s main purpose in making the transfer of the Land was to either prevent the Land from being divisible among creditors, or to hinder or delay the process of making the Land available for division among her creditors:
1. the bankrupt’s willingness to sell the Land to Mr Brown only for the sum required to discharge her bank mortgage ($500,000) at a time when her husband was bankrupt, she could not afford to do the work required to meet the Council order, and had the Judgment against her;
2. Mr Brown’s email sent to his conveyancer on 8 March 2012 requesting the conveyancer to get the sale of the Land through to him quickly, in circumstances where the bankrupt’s husband’s estate was being sequestrated and the bankrupt had recently acquired a judgment debt of $267,925;
1. Mr Brown asking his conveyancer to check if any other people have a caveat on the Land, which suggests he and/or the bankrupt was concerned that other creditors of the bankrupt might have an interest in the Land and wanted to have the transfer occur before any of those other creditors could place a caveat on the Land.

Section 121(4) of the Bankruptcy Act

To the extent that Mr Brown relies on the elements of s.121(4) of the Bankruptcy Act to overcome the deeming provision in s.121(2) of the Bankruptcy Act, Mr Mikulski submits that Mr Brown has not adduced evidence to satisfy the Court that those elements have all been met for the reasons set out below.
First, there is “no admissible evidence” of the market value of the Land^[30].
Secondly, the evidence is said to show that by the time the Mortgage was given, Mr Brown was aware:
1. the bankrupt and her husband had run out of funds and that things had not gone well for them with a property investment, which the applicant understood resulted in the bankrupt’s husband’s bankruptcy;
2. the applicant had entered into the First Loan to assist the bankrupt;
1. the applicant had not repaid any advances made under the First Loan by their due date.
Thirdly, by the time the Land was transferred to Mr Brown, he was also aware that the bankrupt could not afford to undertake the necessary building works to comply with the notices and wanted his conveyancer to get the sale to him through quickly.
It is apparent that Mr Brown could reasonably have inferred in the circumstances that:
1. the bankrupt’s main purpose was to prevent the property from becoming divisible among her creditors or to hinder or delay the process of making the property available for division among the bankrupt’s creditors;
2. the bankrupt was, or was about to become, insolvent.
Mr Brown submits that he satisfies the test of good faith in s.121(4). In relation to s.121(4)(a), I accept that the consideration Mr Brown gave for the transfer of the Land was at least market value. The bankrupt had purchased the Land for $550,000 but Mr Mikulski was forced to admit a valuation of $540,000 at the time of the transfer. This takes into account the known cost of the rectification works required by the Council. Further, Mr Brown had expended in excess of $63,000 pursuant to the First Loan agreement on the renovations. He was giving up his security in the form of the Mortgage which secured that debt.
In relation to s.121(4)(b), it is debatable whether, at the time of the transfer, Mr Brown knew that the bankrupt’s purpose was that proscribed by s.121(1)(b). He may have remained ignorant of the judgment debt obtained by Mr Fors and the consequence of the transfer for that debt. Ultimately, that does not matter because Mr Brown is unable to satisfy me that he could not have inferred that, at the time of the transfer of the Land, the bankrupt was, or was about to become, insolvent (s.121(4)(c)). Indeed, he must have inferred that she was insolvent as he knew she would not repay the debt to him and took steps to act quickly to secure his position, vis a vis any other creditors.
As all of the elements of s.121(4) of the Bankruptcy Act have not been made out, the transfer of the Land will be void by operation of ss.121(1) and 121(2) of the Bankruptcy Act.

Consideration to be refunded

As the transfer of the Land is void, s.121(5) of the Bankruptcy Act requires the trustee to refund to Mr Brown the consideration given by him. Thus, it is necessary for the Court to determine the value of the consideration given by him.
I accept that consideration is the contractual sale price of $500,000. It is unnecessary to consider Mr Brown’s contention that there is additional consideration in the form of a forbearance to suing the bankrupt to recover any money owing to him under the loan agreements. That is because I have found that Mr Brown did in fact loan money to the bankrupt. The Mortgage given to him by the bankrupt is not void as against the trustee, and, in consequence of the invalidity of the transfer of the Land to him, remains enforceable. He will be entitled to either rely upon his security or surrender it and prove for the amount he says he loaned the bankrupt in the sequestration of her estate in the same way as her other unsecured creditors.
The Mortgage therefore will likely need to be discharged on the sale of the Land if it is sold by the trustee. A remaining question then is what is the value of that Mortgage? Mr Brown has said that he did not give the bankrupt any funds but made payments toward the cost of renovating the Land, which are said by him to have been applied to sub-contractors in the sum of $78,281.75 and to suppliers in the sum of approximately $50,000^[31].
By subpoena, the trustee sought production by Mr Brown of all invoices and receipts evidencing payment of sub-contractors and suppliers. Mr Brown has produced invoices totalling $63,233.68^[32]. He resisted attacks upon his credibility under cross-examination in relation to those invoices. I find that the sum of $63,233.68 has been expended by Mr Brown pursuant to the Loan Agreements and that that sum is the value of the Mortgage.

Conclusion

Mr Mikulski has succeeded in establishing that the transfer of the Land to Mr Brown is void pursuant to s.121. He has failed to establish that the transfer of the Mortgage was so void. I will make the orders sought by Mr Mikulski in relation to the Land, and I will make other orders consequential upon my findings in relation to the Mortgage.

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