FCA: Unfair preferences recovered from trust property must benefit creditors
The Federal Court has held that payment from trust property recovered as an unfair preference must be applied by trustee in bankruptcy for the benefit of creditors of the trust.
Lane (Trustee), in the matter of Lee (Bankrupt) v Commissioner of Taxation (No 3) [2018] FCA 1572
Background
Mr Lee was the sole trustee of the Warwick Lee Family Trust (the Trust). Prior to his bankruptcy, Mr Lee paid the sum of $322,447.58 to the Commissioner of Taxation (the Commissioner) in discharge of taxation liabilities arising from the operation of a Subway franchise operated by the Trust. Mr Lee had funded that payment by using $171,659.00 of his own funds and $150,788.58 funds of the Trust, in doing so he exercised his right of exoneration as trustee[1]. The right of exoneration is the right of the Trustee to discharge obligations incurred in their capacity as trustee directly from the assets of the Trust.
After the bankruptcy of Mr Lee, the Commissioner agreed to return the sum of $322,447.58 to the trustee in bankruptcy in response to an assertion that the payment to the Commissioner constituted an unfair preference under section 122 of the Bankruptcy Act 1966 (Bankruptcy Act).
The issue for determination by Derrington J was whether, upon the recovery of the funds from the Commissioner, the trustee in bankruptcy held all funds for the benefit of all creditors of the estate of Mr Lee (both in his personal capacity and in his capacity as trustee of the Trust) or whether the trustee in bankruptcy held the sum of $150,788.58 (representing the amount initially paid by Mr Lee from funds of the Trust) for the benefit of Trust creditors only[2].
The Commissioner contended that the former view prevailed, whereas the trustee in bankruptcy contended that the latter view prevailed[3].
Decision
In reaching his determination, his Honour noted that section 122 of the Bankruptcy Act operated without the need for an order of the Court; that is, the payment is avoided upon the making of a sequestration order if the provision is applicable[4].
His Honour noted that as a matter of practical reality, however, that although the effect of the provision is to void a transfer to which it applies, transfers in effect remain effectual until a trustee in bankruptcy takes steps to avoid it[5]. Significantly, his Honour also noted that if a trustee in bankruptcy’s action to establish that a transfer was avoided by virtue of section 122 was successful, the “title in the property is to be regarded as not ever having passed”[6].
After undertaking an analysis of the basis of the trustee in bankruptcy’s entitlement to recover the preferential payment pursuant to section 122 of the Bankruptcy Act, his Honour concluded that:
Mr Lee’s entitlement to use trust funds only arose by reason of his position as trustee and because the debt arose from the administration of the trust. Outside of his office as trustee, he was not entitled to pay the funds to the Commissioner nor did he have any entitlement to recover them when the payment was found to be void. It necessarily follows that the right to recover the payments from a transaction which was avoided was a right which was held for the benefit of the trust[7].
After careful analysis of the Commissioner’s contention that any repayment by the Commissioner of an equivalent amount to that paid to it by Mr Lee utilising the right of exoneration from the Trust would be held by the trustee in bankruptcy free of all trust obligations and could be used to discharge debts to non-trust creditors, his Honour concluded that:
If a trustee acquires a chose in action as a consequence of the operation of a trust, that chose in action is held pursuant to the trustee’s rights and obligations, no less than other trust property. In this case, the taxation liability which was discharged by the payment of trust funds to the Commissioner arose as a result of the operation of the trust and Mr Lee paid the amount of $150,788.58 out of the trust funds to discharge that liability and, pro tanto, it reduced the trustee’s equitable lien over the trust assets. He was only entitled to use that money by reason of his position as trustee and the rights and entitlements he acquired as a result. When the transaction was avoided by reason of the making of the sequestration order, the right to recover the payment only existed because of Mr Lee’s position as trustee. His right to recover the amount paid is subject to the trust obligation to use the trust funds for the purposes of the trust. It is not possible to hive off from the other rights and obligations of a trustee, the right to recover payments made for the purposes of the trust which have been avoided. The right is necessarily a constituent element of the bundle of rights and obligations of the trustee and no principle was referred to which suggests that a trustee might exercise such rights independently of the other trust obligations [8]. [underlining added]
Conclusion
The decision is of assistance given that the issue in contention was not the subject of any direct Australian authority[9].
It now stands as authority for the proposition that when funds paid by a trustee in exercising their right of exoneration from trust assets are recovered as an unfair preference pursuant to section 122 of the Bankruptcy Act, the repaid funds are themselves “subject to the obligation to use them in the manner required of the original funds, being for the purposes of discharging trust debts”[10].
It should be noted, however, that his Honour’s conclusions arise as a result of his analysis of the terms and effect of the particular recovery provisions in the Bankruptcy Act and for that reason, caution ought be exercised before seeking to use the decision in the context of the broadly equivalent provisions of the Corporations Act 2001.
It should also be noted that at present, the decision of the Full Bench of the Supreme Court of Victoria in Commonwealth v Byrnes (as joint and several receivers and managers of Amerind Pty Ltd) (recs and mgrs apptd) (in liq) (2018) 354 ALR 789 is subject to appeal in the High Court of Australia. The High Court’s decision on the nature of a trustee’s right of exoneration may well alter the position further.
WA businessman jailed for $890k phoneix activity
A Western Australian Phoenix operator has been sentenced to five years and four months in prison for fraudulently obtaining more than $890 000 through illegal phoenix activity. He was also ordered to repay the money.
The proceeding ensued after an extensive investigation by the Australian Tax Office which revealed that Western Australian businessman Sung Jae Cho had intentionally accumulated debt, liquidated his business to avoid paying the bill and then set up operation through a different corporate entity. It was alleged that he also failed to report and remit the GST and Pay As You Go (PAYG) withholding while having sole and full control of the relevant entities.
The decision follows mounting scrutiny over the impact phoenixing operations are having on Australia's economy, which is estimated to cost the country between $1.8billion and $3.2 billion each year.
Assistant Commissioner Aislinn Walwyn claims this decision signals a "strong reminder to those involved in illegal phoenix activity that if you engage in this behaviour you will get caught." She warned that Australia's Phoenix taskforce will "continue to follow up phoenix operators despite their efforts to conceal their activities."
However the ATO believes the ruling significantly underscores the seriousness of the crime, asserting that it does not adequately reflect Mr Cho's conviction of 20 charges, spanning over 13 years from 1997.
Buyer Beware: Real Estate Agent Not Liable for Misleading Statement
In the matter of Hyder v McGrath Sales Pty Ltd [2018] NSWCA 223, the court was required to consider whether McGrath, in their capacity as a real estate agent, had engaged in misleading or deceptive conduct by making representations to a property purchaser about parking availability.
The proceedings commenced after Amy Hyder purchased a Sydney property for $9.4 million in February 2015, with her husband conducting the purchase negotiations and ultimately making the decision to proceed with the sale.
Acting on behalf of the property's seller, McGrath published printed and online advertising material which described the property as having 'plentiful parking' and highlighted that the property featured a "double garage plus private off-street and driveway parking.'
Both the online and printed material featured the following disclaimer:
"Scale in meters. Indicative only. Dimensions are approximate. All information contained herein is gathered from sources we believe to be reliable. However we cannot guarantee its accuracy and interested persons should rely on their enquiries."
Having inspected the property on at least four occasions, the Hyder's understood that it featured a double garage. There was also space in front of the garage for two more cars, however parking here would block access to the garage. Public parking was not permitted on the street.
The lot also included a strip of land which gave two other lots access to their homes, with these lots having right of way over the strip. However, prior to the Hyder's purchase, this space had been treated as parking for the property owners and at the time of purchase it featured two signs which read 'Private Parking Space 24'. '24' represented the street number of the relevant property.
Upon inspecting the property, the Hyder's had been informed by McGrath that the property owners had exclusive use of the 'private parking' area. The promotional material also included a detailed site plan showing images of three cars parked in this strip.
After agreeing to a purchase price of $9.4 million, Mrs Hyder signed a standard form contract of sale, which was accompanied by attachments including:
- copies of a title search that noted the relevant rights of way;
- the relevant deposited plan; and
- the memoranda of transfer creating the rights of way.
The contract also included special conditions which indicated that the purchaser had not relied on any statements, inducements or representations made by or on behalf of the vendor (including by any estate agent acting on their behalf).
Despite this, Mrs Hyder commenced proceedings against McGrath in April 2016, alleging that the agent's pre-sale representations about parking availability contravened s18 of Australian Consumer Law. In doing so, Mrs Hyder contended that she had suffered a loss as a result of McGrath's misleading and deceptive conduct, stating that she would not have purchased the property at the price of $9.4 million had the representation not been made.
At first instance the primary judge dismissed the appellant's claim, finding that although McGrath had engaged in misleading and deceptive conduct, Mrs Hyder had not suffered loss as a result.
On appeal, the court was required to consider whether the primary judge erred in finding that Mrs Hyder would have proceeded with the purchase.
Ultimately, the court dismissed the appeal, finding that McGrath had not engaged in misleading or deceptive conduct. In doing so, it held that the parking information was not endorsed by McGrath, but rather information which it expressly or impliedly disclaimed responsibility for. Moreover, it held that Mrs Hyder had failed to establish that she suffered loss as a result of the conduct. The appeal was dismissed with costs.
Federal Court: Bankruptcy Notice Valid Despite Use of Pseudonyms
A fundamental factor of bankruptcy is that the public are able to identify a bankrupt and that the relevant parties are able to identify each other. Typically, this would mean that all relevant documentation must clearly identify the relevant parties. However, a recent case in the Federal Court has deemed that the use of pseudonyms in a bankruptcy notice will not necessarily render the notice a nullity.
LFDB v MS S M [2018] FCA 1397 concerned a bankruptcy notice which the applicant alleged was a nullity on the basis that is did not fulfil certain essential criteria. Specifically; it failed to name the addressee or creditor, its ‘purported creditor’ was ambiguously described and it could not support the creditor’s petition or fulfil bankruptcy’s ‘public interest objectives’.
As shown in the image below, the creditor used the pseudonyms L F D B and MS S M to name the debtor and creditor respectively. These were pseudonyms used by the applicant and respondent in a series of proceedings before the courts in New Zealand, the Federal Circuit Court of Australia and the Federal Court of Australia. The amount claimed in the Bankruptcy Notice exceeded $6.5 million and was a result of a judgment debt arising from the party’s long litigation history.
Relevantly, the parties were subject to suppression orders in both the New Zealand courts and Federal Circuit Court of Australia (or Federal Magistrates Court as it was then). The orders provided, among other things, that no identifying information or information capable of identifying could be published in relation to the parties or the judgement.
The applicant essentially argued two grounds for having the notice set aside: first, the use of pseudonyms was not in accordance with the Bankruptcy Act and its subordinate legislation as they would not allow the public or other creditors to properly identify the debtor and any related proceeding; and second, that the use of pseudonyms would cause the applicant to be misled as to his creditor’s identity.
Markovich J mostly agreed with the submissions of the applicant, noting that bankruptcy was not simply inter partes litigation and that the public interest aspect had been recently reinforced. However, her Honour was of the opinion that the issues raised were not relevant at the service of a bankruptcy notice. Rather, her Honour noted that as a bankruptcy notice operates only as between the addressee and the creditor, it is not a public document and no other creditor of the same debtor can rely on that notice. As such, despite the link between the notice and a creditor’s petition, the use of pseudonyms would not impact other creditors rights.
In regard to the second submission, Markovich J rejected the contention that the use of the “MS S M” pseudonym would have misled the applicant. Her Honour noted the parties had been engaged in litigation for a number of years where the 'S M' pseudonym had been used and that it was difficult to accept that the addition of 'MS' would raise enough ambiguity to mislead the applicant. Further, the notice annexed copies of orders made in the various litigations between the parties.
Employee Reassignment Sufficient to Reduce Bullying
In Mr Andrew Hamer [2018] FWC 6037, the Fair Work Commission (“the Commission”) found that the reassignment of an employee alleging work place bullying was an acceptable means of reducing the risk of the employee experiencing further bullying.
Mr Hamer was employed by the Australian Taxation Office (“ATO”) in Perth. After making allegations of bullying against three other employees of the Perth office, Mr Hamer made an application under section 789FC of the Fair Work Act 2009 for an order to stop the bullying.
At a conference conducted by the Commission, representatives of the ATO advised that Mr Hamer had been moved to a temporary position where he was not required to report to, or engage with, the three people against whom bullying was alleged. The ATO also agreed to attempt to find a permanent position for Mr Hamer (at the same level) where he would continue to be separated from the three. After successfully finding a position for Mr Hamer, the ATO wrote to the Commission advising that Mr Hamer was to be transferred and that the s 789FC application could therefore be withdrawn. However, Mr Hamer sought determination of the application.
In submissions, Mr Hamer expanded upon the type of bullying experienced, claiming it was done for the purpose of having him charged and convicted of a breach of the ATO’s Code of Conduct. Further, he alleged that the ATO had failed to properly investigate his claims, asserting that they did not comply with policy and apparently sided with the three parties against whom bullying was alleged.
Despite recognising Mr Hamer's concerns, the Commission was not satisfied there was a risk he would continue to be bullied by the persons named in the Application. In doing so, the Commission noted that a number of measures taken by the ATO significantly reduced the risk of further bullying. These measures included:
- Mr Hamer now working in a different business line that had no crossover with the named person’s business lines;
- Mr Hamer working on a different floor in the office; and
- a provision that teams in other states would interact with Mr Hamer or the named persons if there was any need for the two lines to cross.
Ultimately, although the Commission deemed the ATO's actions to be acceptable in reducing the risk of future bullying, employers should be careful to ensure that the measures taken in such situations are not perceived as an act of reprisal or victimisation. The reassignment of an employee who has filed a complaint may be viewed as such.
