In April, we published an
article on the decision in Donnelly (Trustee) v Windovel
Pty Limited,1 which confirmed that the term
"creditors" under section 121(1) of the Bankruptcy Act
1966 (Cth) encompasses "impending creditors". This
decision was appealed to the Full Court of the Federal Court. The
Full Court recently delivered its judgment dismissing the appeal.
This article provides a short summary of the Full Court's
To recap, proceedings were brought by the bankruptcy trustee of
Mr Bonnell (Bankrupt) under section 121 of the
Bankruptcy Act 1966 (Cth) (Act) claiming
that a transfer of funds (made nine years prior to
bankruptcy) by the Bankrupt to his family trust in the amount of
five million dollars was void against the bankruptcy trustee as it
was made with the intention to put the amount beyond reach of his
creditors or, alternatively, was made at a time when the bankrupt
was insolvent or about to become insolvent.
In short, the Bankrupt obtained a private ruling from the then
Assistant Commissioner of Taxation to the effect that contributions
to his personal non-complying superannuation fund were tax
deductible. The Bankrupt set up his own non-complying superfund and
then earned several millions of dollars as a solicitor by assisting
clients with structuring their taxation affairs in accordance with
this private ruling. Following the issue of a media release that
private rulings of the kind the Bankrupt obtained were going to be
withdrawn, the Bankrupt made contributions to his super fund, wound
up the super fund, distributed the assets of the fund to himself as
beneficiary and then gifted the five million dollars to his family
The Court at first instance relied on the High Court authority
of the Trustees of the Property of Cummins (A Bankrupt) v
Cummins2 (Cummins) for the
proposition that in s121(1), the term "creditors",
encompasses future creditors. Based on the evidence led at trial,
the Court was satisfied that the Bankrupt knew that there was a
real possibility that the Commissioner of Taxation would disallow
the contributions made to the fund and that it was clear that the
bankrupt's 'main purpose' in the transfer was to put
the money out of reach of his "impending" creditors,
namely the ATO.
Appeal to the Full Court of the Federal Court
The Bankrupt appealed this decision. The Full Court of the
Federal Court delivered its judgment dismissing the appeal on 26
One of the grounds of appeal was that the finding of the
Commissioner of Taxation being an "impending creditor"
was incorrect because Cummins was distinguishable on the
In rejecting these submissions, the Full Court confirmed:
The primary judge accurately encapsulated the principles stated
in Cummins, that the term "creditors" in s121(1)
encompasses future creditors and that the relevant debt need not be
owing at the date of disposition – it is sufficient if the
debt is impending.
The facts in Cummins were homogeneous to this matter
and therefore was not distinguishable.
The authorities make it sufficiently clear that the relevant
intent to defeat creditors may be established even though there are
no existing creditors at the date of the
Whilst this decision is not ground-breaking, it does reiterate
that the voidable transfer provisions in s121(1), being a transfer
made by a bankrupt with the main purpose to defeat creditors, also
encompasses impending creditors. When instituting proceedings under
s121, practitioners can have regard to impending – and not
merely actual – creditors in establishing the bankrupt's
main purpose and in determining insolvency under s121(2).
1 FCA 80. 2(2006) 227 CLR 278. 3Windoval Pty Limited (Trustee) v Donnelly
(Trustee), in the Matter of Donnelly (Trustee)  FCAFC
127. 4Barton v Deputy Commissioner of Taxation
(1974) 131 CLR 370, P T Garuda Indonesia Ltd v Grellman
(1992) 35 FCR 515 at 525-526, citing Mackay v Douglas (1872) LR 14
Eq 106; Ex parte Russell; re Butterworth (1882) 19 Ch D
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