A recent High Court decision highlights the breadth of the scope of section 37A of the Conveyancing Act 1919 (NSW), a long standing provision having its roots in an Elizabethan era statute which essentially prohibits dispositions of property by a debtor with the intent to defraud creditors. In doing so, this section (which has also been substantially incorporated into the laws of other Australian states) complements other similar statutory remedies available to creditors seeking redress from recalcitrant debtors. These include section 121 of the Bankruptcy Act 1966 (Cth), in the case of individual debtors and section 588FE of the Corporations Act 2001 (Cth), in the case of corporate debtors. However, section 37A a significant advantages over these provisions. The debtor need not necessarily be insolvent at or shortly after the time of this section's application.
In Marcolongo v Chen  HCA 3 the High Court unanimously allowed an appeal from the New South Wales Court of Appeal in deciding that section 37A applied to the facts, thereby rendering the relevant transfer of property void. This was despite the fact that the transfer was effected under the Real Property Act 1900 (NSW) with the indefeasibility of title notion being a bulwark of the Torrens title system implemented by this Act.
Mrs Marcolongo (M) owned a property adjoining a development site (Site 1) being developed by Lym International Pty Ltd (LIPL). During the course of the development, excavation works on Site 1 caused damage to M's property amounting to some $400,000 in respect of which she successfully sued LIPL. LIPL failed to pay M from the sale proceeds of the Site 1 development, despite certain steps taken by M to attempt to ensure this would be done. LIPL then proceeded to develop another site (Site 2). M's lawyers then ramped up their debt recovery efforts and threatened to obtain a freezing order to preserve the Site 2 property as an asset available for satisfaction of M's debt.
As a result of this, among other factors, Ms Yang (Y), a director of LIPL agreed to proceed with a proposal put to her by a trusted financial adviser, Mr Chen (C) that LIPL should transfer the Site 2 property to him in order to avoid "the freez[ing] of any dealing in relation to the development property". The evidence also tended to show that:
- this was not Y's (or LIPL's) sole motivating factor in making the decision to transfer the property
- Y was somewhat naďve and she was heavily reliant on, and easily persuaded by, C, and
- C's actions were less than honourable and his conduct was more culpable than LIPL's.
The transfer proceeded subject to a Contract for Sale of Land made in August 2006 (Contract) under which the price was recorded as $15,000,000 (Price). The Price was apparently less than the market value, which was $18,500,000 according to a valuation carried out in December 2005. Unusually for an arms length agreement, the Contract provided that the Price was payable in a prescribed manner: $7,625,000 to be paid to the mortgagee of the property, with the balance (Balance Price) to be applied to the debts owed to C by LIPL or a related entity of LIPL. There were also several other indicators strongly suggesting that the sale may not have been made on ordinary commercial terms.
The Contract was completed on the same day that C signed it and completion took place without reference to Y or LIPL. There was also some doubt as to whether the Balance Price was actually paid over by C to LIPL and also as to the nature and, possibly, existence of the relevant debts owing by LIPL to C.
At first instance, the primary judge found for M, holding that section 37A squarely applied on the facts. This judgment was appealed.
What the Court of Appeal had found
The Court of Appeal considered that in order for section 37A to apply, the relevant fraud of the debtor had to be actual rather than constructive fraud. Accordingly, this Court decided that section 37A did not apply in the circumstances because:
- there was no "actual" or "predominantly" fraudulent intent or purpose to deprive M of its rights or the fruit of its rights
- the "primary purpose" of the transaction was not to defraud creditors, and
- the necessary "element of dishonesty" or "serious finding of an actual and real intent to defraud" by LPIL were all missing from the relevant factual context.
This Court also regarded as material the facts that C was "the real fraudster" in the circumstances and that LIPL's intentions were heavily influenced by his misrepresentations and inaccurate and misleading advice.
What the High Court said
The High Court disagreed with the Court of Appeal's reasoning and overturned its decision, reinstating the primary judge's verdict.
In a joint judgment, French CJ, Gummow, Crennan and Bell JJ said that, in order for section 37A to apply, the relevant fraud need not be actual fraud but could be constructive or equitable fraud as the section was not qualified by a notion of constructive fraud. Their Honours also indicated that it is not necessary for the intent to defraud to be the debtor's sole intent. They observed that section 37A:
"requires a finding... of intent to achieve the proscribed prejudice. The section does not postulate a mixture of motives from which there must be extracted what is identified as a predominant intent to defraud.... Nor is it an answer to an application under the section that the transferor formed the intent of which it speaks by reason of the misconduct of another or, as here, of the transferee; the transferor, as in this case, will have remedies against that party but that does not deny the success on the application made under the section by the person prejudiced."
Their Honours considered that there was no good reason to reverse the historically broad, liberal interpretation of this provision and its predecessors by embarking on an exercise of assessing the degrees of moral turpitude of differing types of fraudulent conduct. They cited, with approval, Russell LJ's statement in Lloyds Bank Ltd v Marcan  3 All ER 754:
"I am not sure what is meant by a perfectly innocent defeat, hindrance or delay.... If [a debtor] disposes of an asset which would be available to his creditors with the intention of prejudicing them by putting it, or its worth, beyond their reach, he is in the ordinary case acting in a fashion not honest in the context of the relationship of debtor and creditor."
The Court did not feel constrained to interpret section 37A according to its strict terms. They imported into the current wording of the section words forming part of the original Elizabethan statute (and several intermediate pieces of legislation) which have not been expressly included in the drafting of section 37A. They imputed into the section the former words "delay, hinder or" (being part of the conduct originally proscribed, that is, where there has been an intention to "delay, hinder or defraud" creditors). This was on the basis that, after undertaking a detailed historical analysis of the evolution of this provision, their Honours formed the view that use of the term "defraud" in section 37A "was designed to reproduce the meaning of the expression 'delay, hinder or [otherwise] defraud' in the Elizabethan Statute".
Heydon J agreed with the conclusion of the joint judgment justices but arrived at that conclusion in a different way, setting out his reasons separately. His Honour considered that:
"Whatever the precise test called for by s 37A, the intent underlying the conduct of [LIPL and Y] was enough to satisfy it. It was as 'actual' and 'dishonest' an intent as it is possible to have... It was an intention that was primary and not 'merely incidental' to other intentions. The intent was not merely a minor element amidst a range of mental states."
None of the High Court justices believed that it was directly material to the application of section 37A that C's conduct was more morally reprehensible than LIPL's in the circumstances. They also all agreed that the fact that the relevant transfer was made for monetary consideration, rather than being voluntary, was not determinative. It was only one factor to be considered among many.
The High Court has now confirmed with some clarity that:
- the operation of section 37A is not confined to cases of actual fraudulent conduct by a debtor in disposing of its property with the intent to defeat creditors - it may extend to cases of constructive or equitable fraud
- the intent to defraud creditors may be one intention among many - it need not be the sole intent
- despite the express wording of section 37A, that section will cover conduct by a debtor which is not only intended to defraud creditors directly but also conduct with the intent of delaying or hindering the efforts of creditors to seek redress from the debtor, and
- the relevant intent to defraud creditors is that of the debtor (not some third party, such as C in the circumstances of this case).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.