Full Federal Court decision confirms creditors can be impending

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 decision.

Background

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 Following the issue of a media release that private rulings of the kind the Bankrupt obtained were going to be withdrawn, the Bankrupt made contributions to his super fund, wound up the super fund, distributed the assets of the fund to himself as beneficiary and then gifted the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 trust.

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 September 2014.³

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 facts.

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 disposition.⁴

Conclusion

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).

Footnotes

¹[2014] FCA 80.
²(2006) 227 CLR 278.
³Windoval Pty Limited (Trustee) v Donnelly (Trustee), in the Matter of Donnelly (Trustee) [2014] 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 588.

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