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Supreme Court 22 June 2011

Patel v Lal

[2011] NSWSC 603

Fraud & dishonesty
CONVEYANCING: FRAUDULENT CONVEYANCE INTENTION TO DEFRAUD CREDITORS AVOIDING TRANSFER WINDING CORPORATIONS ACT 2001 (CTH) S 471B.

Citation: Patel v Lal [2011] NSWSC 603
Court: Supreme Court of New South Wales
Date: 22 June 2011
Judge: Biscoe AJ

Background

The plaintiff had obtained a Local Court judgment against a company (H Lal & Associates Pty Ltd) and its sole director for approximately $58,000, representing a loan of around $23,000 plus interest and indemnity costs. The company had been placed into liquidation in December 2009 on the plaintiff's application. After the Local Court proceedings were commenced in May 2008 but before judgment was entered, the company's sole director caused the company to transfer a residential property in Brighton-le-Sands to his wife for the consideration of $1.

At the same time as the $1 transfer, the wife borrowed approximately $1 million from the Commonwealth Bank of Australia (CBA), secured by a mortgage over the property. The director and his family continued to live at the property. The company appeared to have had no other substantial asset with meaningful equity at the time of the transfer, making the property the plaintiff's only realistic prospect of recovering her judgment debt.

The plaintiff sought a declaration that the transfer was voidable under s 37A of the Conveyancing Act 1919 as a fraudulent conveyance, as well as leave to proceed against the company in liquidation under s 471B of the Corporations Act 2001 (Cth).

  • Whether the transfer of the property for $1 from the company to the director's wife was made with intent to defraud creditors within the meaning of s 37A of the Conveyancing Act 1919, rendering it voidable.
  • Whether the company held the property on trust for a family trust (as the defendants contended), which would have meant the property was not available to the company's creditors.
  • Whether the plaintiff should be granted leave to proceed against the company in liquidation under s 471B of the Corporations Act 2001 (Cth), including retrospectively (nunc pro tunc, meaning "now for then").

Decision

Biscoe AJ found that the transfer of the property was made with intent to defraud creditors and was therefore voidable under s 37A of the Conveyancing Act. The court applied the High Court's analysis in Marcolongo v Chen [2011] HCA 3, which confirmed that "defraud" in s 37A includes any intent to delay, hinder or defeat creditors. Intent to cause actual loss need not be shown; it is sufficient that the debtor acted dishonestly by putting assets beyond the reach of creditors. Importantly, this fraudulent intent need not be the sole or predominant purpose of the transfer.

The defendants argued the company had held the property as trustee for a family trust and had simply transferred it to the wife as the incoming trustee, explaining the nominal consideration. Biscoe AJ rejected this defence. The trust claim only surfaced when the director raised it with the liquidator after the company was wound up. The plaintiff had no prior knowledge of any trust, and the court was not satisfied the trust arrangement was genuine.

The director did not give evidence at the hearing. The court drew adverse inferences from that absence. The wife's own evidence made clear that she acted on her husband's instructions in financial matters, including in relation to the transfer and the mortgage. The court found the inference of fraudulent intent was readily drawn from the circumstances: the transfer occurred after the plaintiff commenced proceedings, for a nominal sum, to a related party, while the company had no other significant assets and substantial creditors.

On the question of leave to proceed against the company in liquidation, the court indicated it was inclined to grant leave nunc pro tunc (retrospectively), but directed that the liquidator and ASIC be given the opportunity to make submissions before final orders were made.

Orders Made

The court indicated the following orders were appropriate, subject to further submissions from the liquidator and ASIC:

  • Declaration that the transfer of the property is voidable under s 37A of the Conveyancing Act 1919 at the instance of the plaintiff.
  • Order that the CBA deliver a registrable transfer of the property back to the company (subject to the CBA's mortgage) to the wife within three working days, and that the wife execute and deliver the transfer to the company's liquidator within three working days thereafter.
  • If the wife fails to comply, the Registrar of the Court is authorised to execute the transfer on application by the plaintiff, the liquidator, or the CBA.
  • Grant of leave to the plaintiff to proceed against the company in liquidation nunc pro tunc.
  • Orders that the first, second and third defendants pay the plaintiff's costs of the proceedings.
  • Liberty to apply on two days' notice.
  • The CBA also proposed (subject to agreement) that it sell the property and pay net proceeds after satisfying its mortgage to the liquidator for distribution among creditors.

Key Takeaways

  • Under s 37A of the Conveyancing Act 1919, a voluntary transfer of property can be set aside as a fraudulent conveyance where the transferor intended to delay, hinder or defeat creditors. It is not necessary to show the debtor intended creditors to suffer a financial loss, nor that fraud was the sole or predominant purpose.
  • Where a transfer is voluntary, made for nominal consideration to a related party, and occurs after creditor proceedings have commenced, courts will readily infer the requisite fraudulent intent, particularly where the transferor chooses not to give evidence.
  • A late-emerging claim that a company held property on trust will be scrutinised carefully. In this case the trust defence failed because it was first raised with the liquidator after winding up, and the plaintiff had no prior notice of it.
  • The Supreme Court confirmed it has power to grant leave under s 471B of the Corporations Act to proceed against a company in liquidation retrospectively (nunc pro tunc), though it indicated the liquidator and ASIC should have an opportunity to be heard before such leave is formally granted.
  • Section 37A receives a liberal construction in order to fulfil its purpose of suppressing fraud, consistent with the High Court's analysis in Marcolongo v Chen [2011] HCA 3.

Legislation and Cases Referenced

Legislation
- Conveyancing Act 1919 (NSW), s 37A
- Corporations Act 2001 (Cth), ss 471A, 471B, 473, 601AD, 601AE, 601AF
- Bankruptcy Act 1966 (Cth), s 58(3)(b)

Cases
- Marcolongo v Chen [2011] HCA 3, 85 ALJR 380
- Langdon v Gruber [2001] NSWSC 276
- Commonwealth of Australia v Davis Samuel Pty Ltd [No 5] [2008] ACTSC 124
- Green v Official Trustee in Bankruptcy; in the matter of Schneller (Bankrupt) [2001] FCA 1644
- Hewlett Packard Australia Pty Ltd v Siltek Holdings Pty Ltd [2005] NSWSC 672
- Sihota v Pacific Sands Motel [2003] NSWSC 119, 56 NSWLR 721
- Webforge Australia Pty Ltd v Tecniskill Co-operation Pty Ltd [2008] NSWSC 517
- Patel v H Lal & Associates Pty Ltd [2008] NSWSC 964
- Lal v Patel (Schmidt J, 1 February 2010, unreported)
- Lal v Patel (Davies J, 12 February 2010, unreported)
- Jones v Dunkel (1959) 101 CLR 298