Voidable Property Transfer & Director Liability

BANKRUPTCY ISSUES

Case Highlights that Time was Not a Factor in Transfer of Home

A Federal Circuit Court decision highlights the attitude that the judiciary takes towards transfers of property that are perceived as being intended to frustrate or evade legitimate creditors, even many years down the track.

In the case of Turner in his Capacity as Trustee of the Bankrupt Estate of Wallace v Wallace [2016] FCCA 963, the court voided a transfer of a bankrupt husband's interest in the family home to his wife - even though that transfer occurred 10 years before his eventual bankruptcy, and there were no clear issues relating to his solvency at that time.

Nonetheless, the court's conclusion that the property was transferred with the intention of defeating future creditors, based in large part on the fact that Gregory Wallace continued to represent that he retained ownership in the family home, was sufficient to permit a "clawing back" of the transfer.

Background Facts

Mr Wallace was declared bankrupt on 28 January 2014. Ten years before the date of bankruptcy, in October 2004, Mr Wallace took steps to transfer his interest in the family home to his wife. The consideration for the transfer was stated to be love and affection. The transfer was finalised on 11 October 2004.

Only three days later, on 14 October 2004, Mr Wallace executed an unlimited guarantee and indemnity for a loan of up to $9 million to a family-run motor vehicle dealership, in which he had an interest. Mr Wallace had left his former employment as a chartered accountant in order to work in the business, where he was subsequently appointed as a director and provided with an equitable interest.
  
Despite the long passage of time between the transfer and the bankruptcy, the Trustee in bankruptcy sought to void the transfer, in accordance with the provisions of section 121 of the Bankruptcy Act 1966 (Cth).

Provisions of the Bankruptcy Act

The key provisions of the Bankruptcy Act to this matter are (as abbreviated) as follows:

s121(1) the transfer was done to hinder or delay the availability of the property to creditors.
s121(2) the transfer was done at a time when the Bankrupt was, or was about to become, insolvent.
s121(6) natural love and affection is not considered to be valid consideration for transfers.

Factors Relevant to the Court's Decision

Burchardt J made particular note of the fact that Mr Wallace had made representations to third parties that he continued to own the home, notwithstanding the transfer, specifically:

• In 2010, he noted on a statement of assets and liabilities to St George Bank (“St George”) that he held his residence, with a value of $2 million, in his own name.
• In 2011, he again listed as an asset a residence valued at $2.25 million. The same asset was listed in a further document to St George in June 2012.

Of particular relevance is that St George, which was the recipient of those representations as to Mr Wallace's solvency, was ultimately a creditor pursuing debt repayment.

Burchardt J also noted that Mrs Wallace largely left financial matters to her husband.

Mr Wallace's Defence

As the respondent owner of the home, Mrs Wallace argued that she and Mr Wallace had begun discussing in 2003 and 2004 an intention to sell a property held at Port Melbourne, with the view to demolishing the family home at Brighton VIC, and building a new one. In order to effect this, Mr Wallace transferred his interest in the Brighton property to his wife.

She argued that she had no idea of the state of her husband's finances at the time of the transfer, which Mr Wallace also maintained.

Findings as to Credit

Burchardt J concluded that Mrs Wallace was occasionally evasive in her evidence, and that her evidence at times appeared to have been made up on the run.  He found that although Mr Wallace gave coherent testimony in relation to his employment history and other ancillary matters, he was not credible in relation to the issues of the property transfer and the statement of assets provided to St George.

The Decision

Ultimately, the court concluded that the property transfer be voided. In reaching this decision, Burchardt J found that Mr Wallace had deliberately transferred his share of the property to his wife with reference to the specific timing of the significant guarantee and indemnity provided shortly after the transfer. The significance of this financial obligation was considered to outweigh the fact that there was no suggestion that Mr Wallace was insolvent at the time of the transfer.

This led the court to conclude that the intended reason behind the transfer was to either defeat creditors or to increase the difficulty of creditors accessing funds. Accordingly, Burchardt J found that sections 121(1) and 121(2) of the Bankruptcy Act were established.

CORPORATE INSOLVENCY ISSUES

Panayi v Deputy Commissioner of Taxation (2017) NSWCA 93

This recent decision of the NSW Court of Appeal related to the issue of a Director's Penalty Notice (“DPN”) in the sum of $369,904.86.

Peter Panayi was appointed as a director of AAMAC Transport (NSW) Pty Ltd on 1 January 2011. However, he argued that his role did not involve the administrative aspects of the business, but was limited to overseeing maintenance on the fleet of trucks and supervising mechanical workers.

The company ran into trouble when it was discovered that, although PAYG tax amounts were properly deducted from employees' salaries, they were never paid to the ATO. In November 2012, the ATO advised Mr Panayi that he would need to pay a penalty equal to the amount not remitted (the DPN). On that same day it was resolved that the company be wound up.

In seeking to set aside the DPN, Mr Panayi raised the following defences:

• S269-35(1) of the Taxation Administration Act 1953 (Cth): the director is not liable to a penalty if, because of illness or for some other good reason, it would have been unreasonable to expect the director to take part in the management of the company. 
• He was not a director at the relevant times.
• The payment of the PAYG amounts should be deemed to have been remitted, on the basis that the amounts were withheld prior to 29 June 2012.

What Happened on 29 June 2012?

One of the most important elements of Mr Panayi's defence was that a DPN would be remitted, prior to 30 June 2012, if a director took all reasonable steps to ensure that either:

a) The director had caused the company to comply with its obligation.
b) The director caused the appointment of an administrator within a certain period.
c) The director caused the company to be wound up within a certain period.

After 30 June 2012 however, a penalty would only be remitted if a director took one of the steps noted above and the company had lodged its Business Activity Statements (BAS) within three months of the due date.

Mr Panayi argued that he should fall within the pre-30 June 2012 construction of the law and the DPN should be remitted.

The court disagreed with this argument, and noted that the relevant time for consideration was when a director had stopped being obligated to make a payment - an obligation which did not cease on 30 June 2012.  Accordingly, the DPN stood.

Importance of the Decision

The clear conclusion which can be drawn from the Panayi decision is that, had a BAS been filed within reasonable proximity of its due date, the timely appointment of a Liquidator, after a DPN is issued, would see the director’s personal liability remitted.  It is crucial for practitioners and advisers to remember that, even if a company is insolvent or facing liquidation and cannot afford to pay any obligations to the ATO, the timely lodgement of BAS is essential.