Presented by Jones Partners
Jess (Trustee), in the matter of Lostitch (Bankrupt) v Lostitch  FedCFamC2G 342
This case concerned the contest between the Trustees of the Bankrupts (Mr and Mrs Lostitch) and their daughter, Rebecca Goodie (‘Ms Goodie’) relating to funds used to acquire a property solely in Ms Goodie’s name.
The Bankrupts had recently sold their Berwick property and had used the funds to pay the deposit and the purchase price for a Pakenham property. The Pakenham property was registered under the name of Ms Goodie.
A pre-insolvency advisor had previously acted for the Bankrupts and indicated to the Bankruptcy Trustees that the payments made to Ms Goodie in relation to the purchase of the Pakenham property were “gifts.” Ms Goodie did not make any contributions to the purchase price. Mr and Mrs Lostitch additionally resided at the property between August of 2015 and August 2016.
Ms Goodie subsequently took out loans on behalf of BJC Paving (a company she was the director of), of which a mortgage over the Pakenham home was registered as a security.
In February of 2016, the Bankrupts both lodged a debtor’s petition, and Trustees were appointed to deal with the estate. The Trustees sought to recover the payments made to Ms Goodie for the benefit of the Bankrupts’ creditors.
LEGISLATION OF SIGNFICANCE
The Applicant/ Trustee’s Case
The Trustees sought to recover the payments made to Ms Goodie on several basis:
S 120 (1) Bankruptcy Act – Undervalued Transactions
(a) the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and
(b) Ms Goodie gave no consideration for the transfer or gave consideration of less than market value of the property.
Transfers to Defeat Creditors
S 121 (1) Bankruptcy Act -Transfers that are Void
- the property would probably have become part of the Lostitch’s estate or would probably have been available to creditors if the property had not been transferred; and
- Mr and Mrs Lostitch’s main purpose in making the transfer was:
- to prevent the Pakenham property from becoming divisible among the Lostitch’s creditors; or
- to hinder or delay the process of making property available for division among the Lostitch’s creditors.
S 121 (2) Bankruptcy Act – Main Purpose
Mr and Mrs Lostitch’s main purpose in making the transfer is taken to be the purpose described in paragraph 121 (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.
S 139DA Bankruptcy Act – Orders Relating to Property of a Natural Person
- Ms Goodie acquired the estate in the Pakenham property as a direct or indirect result of financial contributions made by the Bankrupts during the examinable period; and
- Mr and Mrs Lostitch used, or derived (whether directly or indirectly) a benefit from, the property at a time or times during the examinable period; and
- Ms Goodie still has the estate in the property.
The Respondent/ Daughter’s Case
Despite the evidence put forward relating to the nature of the payments being “gifts” in her opening statements, Ms Goodie indicated to the Court that the payments were treated as “loans”. Ms Goodie made several, self-represented arguments before the Court; including the following;
S 139DA Bankruptcy Act
That the Bankrupts (her parents) did not receive the necessary ‘benefit’ outlined in 139DA (b).
That she was unaware and could not reasonably have foreseen her parents’ insolvency.
S 139F Bankruptcy Act- Court to Take Account of Interests of Other Persons
- the nature and extent of any estate that any other person or entity has in the property and any hardship that the order might cause that other person or entity; and
- Ms Goodies’ current net worth and any hardship the order might cause the respondent entity‘s creditors.
Ms Goodie claimed she had provided consideration in the form of bank card (connected to BJC Paving Pty Ltd business account) given to her mother, with the understanding that the transactions would be repayment for the purchase price funds.
S 121 (4) Bankruptcy Act- Good Faith Defence
The transfer is not void if:
- the consideration that Ms Goodie gave for the transfer was at least as valuable as the market value of the property;
Were the transfers by the Lostitch’s to Ms Goodie void against the Trustee?
Did the Lostitchs’ make financial contributions towards Ms Goodie’s property such that the Court could make orders vesting part of the property in the Trustee?
The Court ruled that in the absence of consideration, and since the transfer fell within the examinable 5-year period, the transfer was void under S 120 (1) of the Bankruptcy Act.
The judge additionally found that under S 121 of the Act, the transfer had been made with the “main purpose of avoiding their creditors”.
The Good Faith defence under S 121 (4) failed for several reasons, but in the absence of consideration the defence is unavailable.
S 139DA Bankruptcy Act
The elements of S 139DA were met, and the Court was satisfied neither Ms Goodie nor any associated parties would be caused hardship as a result of the order.
The Court ordered that the property vests with the applicant (Trustee) because of the financial contributions made by the Bankrupts.
The Court also ordered the payments made by the Bankrupts towards the purchase of the Pakenham property for the benefit of Ms Goodie was void under s 121 (1) and 120 (1) of the Bankruptcy Act.
TAKEAWAYS FOR SIMILAR DEALINGS
- What was the nature of the transfer (gift or loan)?
- Are any presumptions arising from the nature of the relationship (e.g. wife or child)?
- Was market value consideration provided?
- A lack of knowledge of insolvency is not a sufficient defence where related parties are involved in the transaction.
- What was the timing of the settlements, and were they close together (such as that with the Pakenham and the Berwick property)?
- Did the Bankrupts share in any benefit (such as an extended period of residence within the contested property)?
- Is there any contradiction from the respondent (e.g., confusion over whether the transaction was a loan or a gift)? The uncertainty regarding the purpose of a transaction will be more common with related parties and where transactions were not documented.
- Will an order against the property cause any unfair detriment to other creditors (such as a creditor with the registered interest over the property in question)?
- Were there any rental payments made by the respondent or the respondents spouse?
*Jones Partners assumes no responsibility or liability for any errors or omissions in this content. Individuals should seek legal advice regarding their own unique circumstances.