In brief
A case handed down last week creates more road blocks for Trustees seeking to recover preferences from creditors of the bankrupt estate. In this case, a trust was implied into a loan agreement to have the effect that the loan moneys were not considered part of the bankrupt estate.
In the Federal Court case of Rambaldi (Trustee) v Commissioner of Taxation, in the matter of Alex (Bankrupt) [2017] FCA 567 handed down on 25 May 2017, the Court looks at whether the after acquired property vests in the Trustee.
The facts
The facts were not in dispute, and are as follows:
1. On 18 March 2014, the Deputy Commissioner of Taxation presented a creditors’ petition against the estate of Ms Alex after failing to comply with a Bankruptcy Notice.
2. On 1 June 2014, Quality Australia Investments Pty Ltd (QAI) entered into a loan agreement with Ms Alex and City Nominees Pty Ltd ATF The City No. 1 Trust (City Nominees) by which QAI agreed to lend Ms Alex and City Nominees $131,000.
3. The loan agreement stated words to the effect that:
a) Ms Alex had a net income tax debt with the ATO of approximately $85,000.00 (plus General Interest Charges (GIC) and penalties). The borrower is the sole director and shareholder of City Nominees Pty Ltd as trustee for The City Nominees no. 1 Trust (City Nominees).
b) Ms Alex wants to borrow $126,000.00 for the purpose of paying the income tax debt, GIC and penalties, plus $5,000 for Bongiorno lawyers.
4. On or about 7 July 2014, the ATO received a bank cheque for $118,071.62 which was applied in payment of an income tax that was then owed by Ms Alex.
5. On 8 December 2014, a sequestration order was made against the estate of Ms Alex and the trustees were appointed.
The Trustees’ argument
The Trustee argued:
- The loan amount was a preference pursuant to s 122 of the Bankruptcy Act 1966.
- The loan moneys were the property of Ms Alex and City Nominees, and paid to the ATO at their direction.
- The loan moneys therefore vested in the Trustee and were divisible amongst the estate’s creditors.
The ATO’s argument
The ATO argued:
- The loan money was not property of Ms Alex and City Nominees.
- The loan money was held on a Quistclose[1] trust for payment to the ATO, and, in default on trust to be repaid to QAI.
The Court
After a review of the authorities, the Court found:
- The loan money was intended to be provided only for the purpose of payment of the ATO and the solicitor. This was in the written loan agreement which indicated that this was the only purpose of the loan and the express intention of the parties.
- The substance of the transaction was identical to the Quistclose case save that in Quistclose money was paid into a special purpose bank account whereas in this case QAI sent the cheque directly to the ATO.
- The loan funds did not become the property of Ms Alex and City Nominees and were held on a Quistclose trust.
- The Trustee could not recover the money from the ATO.
Comment
In light of this case, it is possible that soon-to-be bankrupts awaiting the hearing of a creditor’s petition and their creditors may engineer situations to avoid the preference provisions of the Bankruptcy Act. The Court considered it significant in this case that loan agreement specifically said the loan was for the sole reason of paying the ATO and the solicitor.
If loan documents are produced in similar circumstances to this case, and:
- expressly outline the intentions of the parties; and
- create a trust;
then it indicates that the creditor of a bankrupt may be successful in defending preference payments brought by the Trustee.
We will be watching with interest to see if this case is appealed.
[1] Barclays Bank Limited v Quistclose Investments Limited [1970] AC 567
