Bankruptcy and Sham Trusts
Trusts continue to be a complex and evolving issue for bankruptcy trustees. They are forever finding assets which the bankrupt claims is held in a trust or over which an unregistered security interest has attached.
Two cases, Aravanis (Trustee), in the matter of Gillespie (Bankrupt) v Gillespie  FCA 630, and Condon v Lewis  NSWSC 204, shed further light on this area.
Mary Gillespie was 75 years old. She had 5 children (including Ian and Peter). She had to sell the family home in order to pay a mortgage taken out by her and her husband, leaving her with $256,000 post-sale. A suitable new house was found selling for $371,000 – but the family believed that Mrs Gillespie would not be able to obtain the required loan for the rest of the purchase price. As such, Peter agreed to take out a loan for the amount required to make $371,000. The arrangement was that Peter would pay off the mortgage, so that Mrs Gillespie would have a place to live. The property was put in Peter’s name, and he would be repaid what he had borrowed to fund the purchase and all the interest payments he was to make, once the property was sold (presumably on Mary’s death).
Several transactions were made (both towards and against the mortgage), but before long, Peter’s payments towards the mortgage became scarce. Peter then refused to continue paying the mortgage, and it was agreed that Ian would take it over. Peter was to transfer the property to Ian so that their mother would not be homeless. On 1 August 2008, Peter sold the property to Ian, and Ian took a loan with ME Bank to pay out Peter’s mortgage on the house, as well as the agreed consideration to Peter for his transfer to Ian. Peter had made clear to Ian and ME Bank throughout the transaction that no further was owed to him for the transfer even though the sale to Ian was at an under-value ($304,000 where the market value was $430,000).
Ian continued paying the mortgage, selling the house a few years later (July 2013). From the sale proceeds, the mortgage (ME Bank) was paid out, Ian’s mortgage payments were paid, and the remaining $130,000 went into a trust account, as at the time, Peter had become a bankrupt.
Peter’s bankruptcy trustee argued that when the property was first purchased, Peter owned it legally and beneficially, and the sale to Ian at undervalue meant that Peter held an equitable lien over the property for the undervaluing (approximately $130,000 including interest). The Trustee’s alternative argument was that under s 120 Bankruptcy Act 1966, Peter’s undervalued sale to Ian made the transaction void, and so Peter was still entitled to ownership of the property proceeds, less Ian’s consideration in 2008. Alternatively, it was claimed that Peter had a resulting trust, having contributed 54.4% to the purchase price.
The Gillespies argued that there was a common intention between Mrs Gillespie, Ian and Peter that Peter was paying the mortgage and holding the property title on trust for Mrs Gillespie on the basis that he would be repaid when the property was sold. As such, Mrs Gillespie was the beneficiary of the constructive trust where Peter was the trustee. Upon transfer of title to Ian (August 2008), Peter had no interest in the property at all, and so has no claim to the $130,000 in the trust.
The FCA held that the evidence was inconsistent with there being a resulting trust for Peter. It was however, consistent with the common intention between Peter and Mrs Gillespie that he would hold the property on constructive trust for her, this role of constructive trustee later being held by Ian after the 2008 property transfer. This was the case because the evidence showed that at the time of purchase of the property, it was the intention of the parties to have Peter buy the properties so that Mrs Gillespie would ‘have a roof over her head’, and Peter was expecting repayment of his contributions to the mortgage payment that he had agreed to pay, once the property was later sold. The Court said that this arrangement is only logical if Peter was to have no beneficial interest in the property.
Resulting trust argument
A resulting trust is where the legal title is held by someone other than the person who has provided the purchase money and the circumstances are such that the payer intended to obtain a beneficial interest in the property.There is a presumption of a resulting trust where two or more parties fund the purchase money for a property acquired in one of their names (Chao v Chao (No 3)  NSWSC 1166), so that the named owner holds the property acquired upon trust for the other parties who also funded the purchase. However, this presumption is rebuttable by contrary common intention of the purchasers at the time of purchase. The common intention was made out in this case.
Constructive trust argument
A constructive trust is imposed where the parties had a common intention as to the ownership of the property – being that the claimant should have an interest in the property (held in the other’s name), and the legal owner has denied such rights, and the claimant has acted accordingly to their detriment on the faith of the common intention (Shepherd v Doolan  NSWSC 42). A constructive trust applied in this case.
Equitable lien argument
The Trustee could not claim an equitable lien over the remaining proceeds in the property sale ($130,000) as Ian did not owe Peter that amount. For there to be an equitable lien, it is required that there be actual or potential indebtedness (Hewett v Court (1983) 149 CLR 639). There was no equitable lien in this case.
Undervalue transaction argument
Additionally, an undervalued transaction is not void if the transfer occurred more than 4 years prior to the bankruptcy’s commencement (s120(3)(a) Bankruptcy Act), and the transferee can prove that when the transfer was made, the transferor was solvent. Peter was working and solvent at the time of transfer (August 2008), and he could pay his debts as they fell due. Section 120(3)(a) did not apply.
Prevent or delay division amongst creditors argument
There was no evidence showing that Peter desired to prevent or delay the property from being divided amongst his creditors. As such, s 37A Conveyancing Act was also inapplicable.
Condon v Lewis
In 2001, Colleen Lewis caused Appinville Pty Ltd (Appinville) , a company in respect of which her accountant was the sole director of and shareholder, to buy a property at Kenthurst.
By deed made dated 27 August 2001, the Kenthurst Investments Trust (“the Trust”) was established, naming Appinville as trustee and Colleen as appointor. Colleen was also the first corpus beneficiary and her two daughters, Louise and Melissa, were named as second/alternate corpus beneficiaries. Colleen’s grandchildren were third corpus beneficiaries.
On 26 August 2005, Colleen disclaimed her rights as a potential beneficiary of the trust. On 1 November 2005, two separate deeds were made between the same parties. The first stated that Colleen had retired as appointor and nominated Louise to replace her. The second listed Appinville as retiring trustee, Louise as the appointor and Colleen as the new trustee. On 29 June 2011, by deed between Louise, Colleen and Robana Pty Ltd, Louise purported to remove Colleen as trustee and appoint Robana as the new trustee.
On 14 May 2012, Colleen was made bankrupt, and Mr Condon became her trustee in bankruptcy. Mr Condon lodged a caveat, claiming he was entitled to be the registered proprietor in lieu of Colleen.
Was the trust a sham?
The primary judge rejected Mr Condon’s claim that the trust was a sham, that Louise’s nomination as appointor was a sham, and that the appointment of Colleen as trustee was also a sham. He also rejected Mr Condon’s claim that Robana had had not been validly appointed as trustee.
1. Was the Trust was a sham?
2. Did Mr Condon hold the property beneficially for Colleen’s creditors?
The Court concluded that while the trust was created with intent to deceive others, it was not a sham as legal consequences were intended.
The Court said that ‘sham’ was defined by the High Court in the Equuscorp case as “steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences.” Adopting the definition, the test for a sham trust is the common intention of the parties. The Court went on to say that it is essential that there be an intention that the true transaction be different from that which would ordinarily be attributed to the transaction on the face of the documents (Leeming JA at ).
Mr Condon, in becoming the registered proprietor of the property and acquiring legal title (by virtue of s 58 of the Bankruptcy Act), did not destroy the trust in respect of the property.
Even if Colleen were still the appointor, the power of appointment is a power and not property and therefore did not vest in Mr Condon.
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Mr Condon was not entitled to administer Colleen’s bankrupt estate on any other basis.
Debtors will continue to use trusts to evade creditors. Whether or not they succeed will ultimately depend on their intentions and the particular facts of the case.