Citation: Kang v Kwan & 2 Ors [2002] NSWSC 1187
Court: Supreme Court of New South Wales (Equity Division)
Date: 12 December 2002
Judge: Santow J
Background
The plaintiff had obtained a District Court judgment for approximately $108,345 against two defendants (referred to here as the Woowin defendants) for unpaid work he had performed on their residential property at Castlecrag between 1991 and 1995. That judgment remained wholly unsatisfied and had not been stayed.
Before and during the District Court hearing, a close personal friend and business associate of the Woowin defendants (the first defendant in these proceedings, referred to as Christopher) became involved in a series of property transactions affecting the Castlecrag property. In June 1999, a mortgage over the property was prepared in Christopher's favour, followed shortly after by a contract for sale of the property. The mortgage was later discharged and the property sold, effectively placing it beyond the reach of the plaintiff's judgment.
The plaintiff commenced proceedings in the Supreme Court challenging those transactions as shams and as fraudulent conveyances. He sought relief on multiple grounds, including that the transactions constituted an alienation of property intended to defraud creditors under section 37A of the Conveyancing Act 1919, and that he held an equitable lien over the proceeds to secure the unpaid judgment.
Legal Issues
- Whether the loan and mortgage transactions were genuine or sham transactions liable to be set aside
- Whether the transactions constituted an alienation of property with intent to defraud creditors under section 37A of the Conveyancing Act 1919
- Whether the first defendant was a bona fide purchaser for value without notice, which would otherwise protect him under the Real Property Act 1900
- Whether the first defendant was estopped from asserting his entitlement to repayment of any loan or reliance on the mortgage, based on what had been said in court
- Whether the plaintiff held an equitable lien or charge to secure payment for the work done, as an alternative remedy for unconscionable conduct
- Whether the transactions constituted a civil conspiracy to injure the plaintiff
- Whether the plaintiff had suffered compensable damage as a result
Decision
Santow J found that the challenged transactions were sham transactions and constituted fraudulent conveyances. The loan and mortgage were not genuine; they were arranged to prevent the plaintiff from enforcing his anticipated or actual District Court judgment against the Castlecrag property. The court treated the conduct of all relevant parties as coordinated and deliberately designed to frustrate the plaintiff's legitimate legal entitlements.
The court held that the transactions amounted to an alienation of property within the meaning of section 37A of the Conveyancing Act 1919, carried out with intent to defraud creditors. The court found that the plaintiff qualified as a "creditor" for the purposes of that provision, even prior to final judgment being entered in the District Court, given that his claim was already on foot. The first defendant was found not to be a bona fide purchaser for value without notice in circumstances sufficient to attract the protections of the Real Property Act.
On the equitable lien question, the court recognised that such a lien could arise as an equitable remedy to prevent the consequences of unconscionable conduct, operating as an alternative to a constructive trust. The court found the plaintiff was entitled to an equitable lien or charge over the relevant property or its proceeds, secured by the work he had performed for which no payment had been received and which the subsequent transactions had been designed to defeat.
The court also accepted, were it necessary to determine the point, that the elements of a civil conspiracy to injure had been made out. The deliberate use of unlawful, sham transactions to defeat a plaintiff whose cause of action had already been vindicated constituted the kind of unlawful conduct capable of founding that claim. The plaintiff's damage was treated as remediable through the equitable remedies already available.
Orders Made
• The Plaintiff has succeeded in essentially all of its challenge to the Defendants' conduct
• Orders to be submitted by the parties by 19 December 2002 giving effect to the judgment
• Costs to follow the event (prima facie), with parties invited to address the court on costs if they wish
• Remedy to be provided through an account, a constructive trust and/or equitable lien
The judgment noted that the plaintiff had succeeded on essentially all grounds, and the parties were invited to submit agreed orders by 19 December 2002. Costs were indicated to follow the event, subject to any submissions from the parties.
Key Takeaways
- A person whose claim is already on foot in litigation can qualify as a "creditor" for the purposes of section 37A of the Conveyancing Act 1919, even before final judgment is entered, where transactions are deliberately structured to defeat that anticipated judgment.
- Sham transactions, in the sense described in cases such as Snook v London & West Riding Investments Ltd, can be set aside in equity regardless of their formal legal appearance, where the true intention of the parties was not to create the legal rights and obligations they purported to establish.
- An equitable lien can arise as a remedy for unconscionable conduct independently of a constructive trust, securing an unpaid claimant's interest in property that has been the subject of transactions designed to frustrate enforcement of a judgment.
- Registration under the Real Property Act 1900 does not provide indefeasibility to a party who cannot establish that they were a bona fide purchaser for value without notice, particularly where the relevant party had detailed knowledge of the underlying dispute.
- Where a court finds that unlawful sham transactions have been entered into with the deliberate purpose of defeating a plaintiff's rights, the elements of a civil conspiracy to injure may be established, with any damage treated as remediable through the available equitable orders.
Legislation and Cases Referenced
Legislation:
- Conveyancing Act 1919 (NSW), s 37A
- Real Property Act 1900 (NSW), ss 42 and 43
- Evidence Act, s 125
- District Court Act 1983 (NSW), s 83A
Cases:
- Snook v London & West Riding Investments Ltd [1967] 2 QB 786
- Bahr v Nicolay (No. 2) (1988) 164 CLR 604
- Hewett v Court (1983) 149 CLR 639
- Giumelli v Giumelli (1999) 196 CLR 101
- Jones v Dunkel (1959) 10 CLR 298
- Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 13 FCR 449
- Lonrho Limited v Shell Petroleum Co Limited [1982] AC 173
- Esanda Ltd v Burgess [1984] 2 NSWLR 139
- Morris v Morris (1982) 1 NSWLR 61
- ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640
- Roy Morgan Research Centre Pty Limited v Wilson Market Research Pty Limited (1996) 39 NSWLR 311
- Kang v Kwan [2001] NSWSC 698 (earlier interlocutory decision in same proceedings)