Don't Bust the Trust!!
8TH ANNUAL NATIONAL BANKRUPTCY CONGRESS
7 DECEMBER 2020
MICHELLE PAINTER SC
9 SELBORNE CHAMBERS
INTRODUCTION
1. In July of this year, Justice Jacqueline Gleeson presided over the case of Micheletto (Trustee), in the matter of El-Debel (Bankrupt) v El Debel[1] in the Federal Court of Australia. With the benefit of hindsight, let’s call it one of her Honour’s last ‘hurrahs’ before her Honour takes up her place on the High Court next year.
2. Considering we are at the 8th Annual National Bankruptcy Congress today, it will come as no surprise that the case is one about bankruptcy – but, if I do say so myself, a rather interesting one throwing up somewhat of a scandalous and scheming plan by a bankrupt seeking to hide his true financial position.
3. There are secret plots, there are collaborators, there are lies and there is, above all, a judge who sees through it all.
4. Usually, trustees in bankruptcy are looking to ‘trust bust’: that is, to enable the recovery of assets or income which bankrupts have diverted into trust entities which they control. The Bankruptcy Act 1966 (Cth) envisages this, making quite extensive provision for it in Division 4A of the Act.
5. However, in this case, the trustees in bankruptcy did rather the opposite. Instead of seeking to portray the bankrupt as a person controlling a trust and concealing his true financial position by misusing this position, they instead sought to have the court recognise the bankrupt as the beneficiary of trusts that were, on the face of it, concealed and so hid his true financial position.
6. There’s a lot to get to in this worthwhile case study, so let’s get stuck into the facts of the case
FACTS OF THE CASE
7. At its crux, this is a case about whether resulting trusts existed in favour of a bankrupt who made financial contributions toward the purchase of four properties.
8. The bankrupt, Mr Bachar El-Debel, was a 43 year old electrician, who had previously been made a bankrupt in 2004. He had four children with his de facto spouse, Ms Ayad.
9. The bankrupt was in financial trouble by early 2015.[2] Thereafter, he concocted a plan to conceal his assets from his creditors,[3] the details of which I will get to in a moment. In December 2015, a sequestration order was made against the bankrupt and trustees in bankruptcy were appointed. Earlier that year, in April, the bankrupt had entered into a personal insolvency agreement, which identified Mr Aaron Lucan as controlling trustee, Shortly thereafter, Mr Lucan reported that the bankrupt attributed his insolvency to adverse legal action against him and the cost of defending those legal proceedings.[4]
10. In the proceedings, the trustees argued that the bankrupt’s true position was not revealed by simply accepting the state of affairs which the bankrupt described. Instead, they said that the bankrupt had a beneficial interest in four properties, identified as the Bankstown property; the Beverly Hills property; and the first and second Peakhurst properties. The trustees in bankruptcy sought to have the Court recognise that the bankrupt held the whole beneficial interest in the Bankstown and Beverly Hills properties, a 50% interest in the first Peakhurst property and a 43% interest in the second Peakhurst property.[5]
11. The trustees contended that these properties vested in them[6] and sought declarations pursuant to section 31(f) of the Bankruptcy Act 1966 (Cth) that each of the four properties be divisible amongst the bankrupt’s creditors. Relevantly, section 31(f) empowers the Court to hear and determine ‘applications to declare for or against the title of the trustee to any property’.
12. And to return to the specifics of the bankrupt’s scheme to conceal his beneficial interests in these properties: the trustees said that there were four parts to his plan –
a. First, divesting himself of his legal interest in the Bankstown property;
b. Second, removing himself from involvement with the Fallow Investments Trust (on which I will speak more later);
c. Third, having his mother, Mrs El-Debel, borrow money secured by the Bankstown property so that he could buy the Beverly Hills property in the name of one Ms Ayad; and
d. Fourth, installing other people to operate his business as an electrician and concealing cash generated by that business in his children’s bank accounts.[7] [I’m reliably informed about $6M]
13. The first three of these elements each had a role to play in concealing the bankrupt’s true financial position, by virtue of hiding his beneficial interest in each of the properties.[8]
14. Justice Gleeson had no difficulty in accepting that the bankrupt sought to conceal his assets, and that at least Ms Ayad knew of the plan too.[9] The evidence was damning, with one email that the bankrupt sent to his accountant saying: ‘confirming this will make us invisible to anyone searching for my properties …’.[10]
15. Before moving onto more specifics, there are a few legal duties and principles at play that are worth refreshing. Primarily, these are the duties of trustees in bankruptcy and relevant trusts principles underlying any beneficial interest which the bankrupt had in each of the properties. I’ll look at each in turn now.
TRUSTEES IN BANKRUPTCY
16. The Bankruptcy Act 1966 (Cth) oversees the management of bankrupt estates, and is supplemented by the Bankruptcy Regulations 1996 (Cth) and Insolvency Practice Rules (Bankruptcy) 2016 (Cth).
17. In pursuit of the broader aim to ensure the bankrupt’s estate fulfils its obligations (for example, to creditors), trustees in bankruptcy owe a number of duties. For example, the Bankruptcy Act says that the trustee must, among other things:
· Notify the bankrupt’s creditors of the bankruptcy;[11]
· Determine whether the estate includes property that can be realised to pay a dividend to creditors;[12]
· Take appropriate steps to recover property for the benefit of the estate;[13]
· Take whatever action is practicable to try to ensure that the bankrupt discharges all of their duties under the Act;[14]
· Consider whether the bankrupt has committed an offence against the Act, and refer to the Inspector-General or law enforcement agencies if so;[15]
· Administer the estate as efficiently as possible by avoiding unnecessary expense;[16] and
· Exercise powers and perform their functions in a commercially sound way.[17]
18. As early as 1874, it came to be recognised that trustees in bankruptcy are considered as officers of the court, and so must act fairly and justly in their dealings.[18] In the Federal Court of Australia, Justice Weinberg has said that ‘[n]o lesser standard is to be expected of them than of a court or judge’.[19]
19. And as might be assumed by their title, trustees in bankruptcy owe fiduciary duties. Their role imports all the general common law and any relevant statutory duties demanded of fiduciaries. One of these duties is that of avoiding conflicts of interest, and particularly so because in this context
[t]he objects of the Act are of public importance and it is of great importance to the community that the role given by the legislature to a trustee, is fulfilled only be persons who are, and who are seen to be, completely independent.[20]
20. As this passage makes clear, not only is independence a necessary virtue for trustees in bankruptcy, they must also be free of even the perception of conflicts.
21. Impartiality and fairness is also statutorily mandated – a trustee in bankruptcy must act honestly and impartially in relation to each administration.[21] If we think back to the list of general duties I recited a few minutes ago, they all appear to be in the interests of either the estate or the bankrupt’s creditors. But that is not so – trustees in bankruptcy are under a general duty to exercise their powers in such a way that furthers the objects of the Bankruptcy Act, including ‘those of equality between creditors and fairness to bankrupts and debtors’.[22]
22. The Insolvency Practice Rules (Bankruptcy) additionally demand that trustees in bankruptcy only realise those assets that: will give a cost-effective return to creditors; or contribute to the payment of the costs of the administration; or that may be realised in accordance with a personal insolvency agreement.[23]
23. Furthermore, in determining the ownership of, or an interest in, an asset that is part of divisible property, the trustee must act reasonably and claim only the amount that fairly represents the bankrupt’s interest in, or the value of, the asset.[24]
THE LAW OF RESULTING TRUSTS
24. And as to trusts: trusts come in a variety of forms. Here, we are most interested in resulting trusts.
25. Express trusts are oftentimes more easily identifiable because the settlor’s intention to create a trust can be more apparent in documents such as trust deeds. Resulting trusts, however, operate as a function of the law to prevent unconscionability. Intention is not the issue, per se, but rather whether the circumstances divulge features of a transaction which justify a trust being presumed.
26. Of the various kinds of resulting trusts which may be found to exist, we are concerned here with what is commonly termed a ‘purchase money resulting trust’. The High Court has described this trust as one which arises in favour of a person who buys property in another person’s name.[25] It is an exception to the ‘initial presumption’ that the beneficial ownership of real property is held in accordance with the legal title.[26] The proportion of the property which is held on trust for the purchaser is directly proportional to the amount which they contribute to the purchase price.[27]
27. Helpfully, Justice Gleeson set out the key propositions in respect of resulting trusts which are relevant to this case.[28] These are:
a. A resulting trust arises where a person provides the purchase price of property that is conveyed into the name of another person.
b. Where property is transferred from one to another without consideration, a presumption arises that a trust exists in favour of the transferor.
c. To determine whether a presumption of resulting trust is rebutted, the Court must consider the whole of the evidence and make a conclusion thus. This could include evidence as to who occupied and controlled the property, who paid outgoing on the property, who received any rent and other like indicators. Additionally, the presumption may be rebutted by evidence which manifests an intention contrary to the one imputed by a presumed resulting trust.
d. Where two or more people advance the purchase price in different proportions, it is presumed that a resulting trust arises in favour of each in the proportions that they paid the purchase price. The extent of their beneficial interests is to be determined at the time of the property’s purchase (i.e. when the trust comes into existence).
e. If part of the purchase price is being financed by mortgage, the monies raised on mortgage are treated as a contribution by the person who is liable to repay the money, for the purposes of presuming a resulting trust.
f. The existence of a resulting trust depends upon presumptions about the intention of the person(s) providing the purchase price of property registered in another’s name; not the intention of anyone else.
g. ‘Purchase’ price includes incidental costs, fees and disbursements involved in acquiring the property (for example, stamp duty, legal costs, etc).
28. I’ll add one more thing to her Honour’s list – a presumption which trumps the presumption of a resulting trust. Equity never gets boring, does it?
29. A resulting trust arises in favour of purchasers in the proportions in which they contributed the purchase money, subject to the presumption of advancement.
30. The presumption of advancement is a legal principle which assumes, as a starting point, that there are some relationships in which the purchase of property in another’s name is intended to be a gift.
31. A really ‘traditional’ example is that of husband to wife: a purchase of property in the wife’s name using the husband’s money, is considered to have been a gift, unless parties can prove otherwise.[29] And yes, it is unfortunate that I cannot proceed to rant about how this is an out-of-touch, heteronormative way of viewing the world which does not account for the modern realities of spouses’ relationships – relationships in which wives are ‘breadwinners’ but are not subject to the same presumption if they advance monies to their spouses, and also relationships in which homosexual people may now marry but are subject to the same presumption if they advance monies to their spouses. Okay, maybe I did get my chance to throw in a small rant.
32. But to return to the presumption of advancement – another key relationship recognised by the law is that of parent and child.[30] The common thread, as Gibbs CJ described it in the 1980s, is that these relationships are ones in which there is a ‘moral obligation’ or ‘natural obligation’ to provide for another.[31] Just like with the presumption that a resulting trust has arisen, the presumption of advancement can be rebutted by submitting evidence as to the true intention of the parties.[32]
THE LAW OF CONSTRUCTIVE TRUSTS
33. Briefly, Justice Gleeson also raised the law of constructive trusts in her judgment. Her Honour described the principle succinctly: ‘Conduct after the acquisition of title might provide a basis for someone who has made contributions to payment of mortgage instalments to claim a proprietary interest on the basis, relevantly, of a constructive trust’.[33]
DETERMINING BENEFICIAL OWNERSHIP
34. And now to return to the nitty gritty – how Justice Gleeson determined who were the beneficial owners of each of the four properties and in which proportions. Her Honour really went into some depth to determine who truly owned and held the beneficial interests in each of the four properties. I’ll set it all out first, and then elaborate on some key issues in the case.
Bankstown Property
35. First, let’s look at the Bankstown property. Very briefly: From just before the bankrupt’s first bankruptcy in 2004 until 2015, the bankrupt and his mother, Mrs El-Debel, held the legal title to the Bankstown property as tenants in common. Mrs El-Debel held a 99/100 share and the bankrupt held a 1/100 share.[34] From 2015 onwards, Mrs El-Debel had been the sole registered proprietor of the property.[35]
36. Dubious already, the transfer of title took place in even more damning circumstances. It happened seven months before the bankrupt’s next bankruptcy (the one subject of these proceedings), and within months of the bankrupt consulting his accountant with the aim of making himself and Ms Ayad ‘invisible to anyone searching for my properties’.[36] If you will remember back to what the trustees alleged was the bankrupt’s four point plan, point one was to divest himself of his legal title in this very Bankstown property.
37. Justice Gleeson started by looking at the contributions which each party had made to the purchase of the Bankstown property. The purchase price of the property was $258,000. $206,400 was paid by funds obtained from Commonwealth Bank, jointly by the bankrupt and Mrs El-Debel. Both their names were on the mortgage documents.[37]
38. In his public examination, the bankrupt claimed that all of the money used to purchase the property came from his mother. The trustees had tried to dispute this claim, but could not – except to the extent that they could point to the funds jointly loaned from Commonwealth Bank as an indication that both parties contributed to the purchase price.[38]
39. Her Honour did not stop here though. Looking at evidence provided by the bankrupt himself, that some months earlier to the purchase of the Bankstown property his mother had lent him $60,000, her Honour read between the lines a bit. She said:
If [the bankrupt’s statement about getting a loan from his mother] is to be believed, it is consistent with a conclusion that funds used to purchase the property apart from the joint Bankstown loan were, in fact, loaned to the bankrupt by Mrs El-Debel and, accordingly, were contributed to the purchase price by the bankrupt.[39]
40. Money part now done and dusted, her Honour next looked at the intention as to beneficial ownership of the property.
41. The respondents contended that the bankrupt and his mother mutually intended that the bankrupt’s 1/100 share in the title to the property be held on trust – express, or alternatively, constructive – for his mother.[40] In effect, they said that the title was split 99 to 1 parts because this was the minimum amount required by the Commonwealth Bank of Australia to permit the joint purchase.
42. The only evidence suggesting this to be the truth was Mrs El Debel’s.[41] Justice Gleeson did not find her to be a truthful witness, and was unwilling to accept her evidence in the absence of corroborating accounts – something which I will touch on further soon. For now, all that remains to be said is that there went the respondents’ argument that the proportions in which legal title was held was because of Commonwealth Bank’s requirements.
43. Instead, her Honour found that the ‘overall evidence suggests that [the proportioning of legal title] is reflective of a mutual intention to conceal the true intentions of the bankrupt and Mrs El-Debel as to beneficial ownership’.[42]
44. For this conclusion, there was evidence aplenty.
45. For one, the bankrupt had made admissions consistent with this conclusion. In both his public examination and in a solicitor’s file note, there were admissions relegating the whole of the beneficial interest in the property to the bankrupt.
46. The important thing to keep in mind here is that the time at which the parties’ intention was formed is important to determine whether or not a resulting trust comes into existence.
47. So far, we have heard so much about the bankrupt’s intentions to conceal the realities of his beneficial interest in the property, particularly in the lead up to his second bankruptcy. But when determining whether the presumption of a resulting trust is displaced, it is the purchaser’s intention at the time of purchasing the property that really matters. In Calverley v Green, the High Court clarified that ‘the intention of the parties [includes] their acts and declarations before or at the time of the purchase, or so immediately after it as to constitute a part of the transaction’.[43] Further, ‘[e]ven if the parties had no common intention, the intentions of each may be proved, for the purpose of proving or negating that one intended to make a gift to the other’.[44]
48. Here, no such issue arose. Justice Gleeson accepted that the public examination and solicitor’s file note indicated that, ‘at the time of the purchase of the Bankstown property, they each intended that Mrs El-Debel would hold her legal interest in the Bankstown property on trust for the bankrupt’.[45]
49. So, the presumption of resulting trust was not displaced in respect of the Bankstown property.
First Peakhurst Property
50. From 2011, the Fallow Investments Trust, a trust operated by the incorporated company ‘Fallow’, held the legal title to the first Peakhurst property.[46] To give some context on the company itself, first: it was incorporated just eleven days before it became the holder of legal title to the first Peakhurst property. Both the bankrupt and his brother were directors of the company at the date of incorporation. The Court had no minutes of meetings of the directors, and almost no company records.[47]
51. The bankrupt ceased to be a director of Fallow in 2014.[48]
52. A contract for the sale of the first Peakhurst property was executed for a price of $560,000 in May 2011. The nominated purchasers were the bankrupt and his brother.[49]
53. The trustees in bankruptcy submitted to the Court that the deposit for the purchase of this property was paid by the bankrupt himself. The funds were purported to have come from the ‘3 Phase’ account.[50] 3 Phase was a company registered in 2008, shortly after the bankrupt was discharged from his first bankruptcy. He was the sole director of that company. And to tell you what happened to the company: it would wound up shortly after, in 2012.[51]
54. Fallow contended that 3 Phase had provided funds for the deposit on its behalf.[52] Quickly, Justice Gleeson put a stop to this line of argument. Why? Fallow did not even exist at the time the funds were used to put the deposit on the property.[53] Instead, her Honour accepted that the bankrupt paid a $56,000 deposit (through 3 Phase), and this was a contribution made by him toward the purchase of the first Peakhurst property. Her Honour also noted that there was no documentation evidencing a loan from 3 Phase to the bankrupt or his brother to make the deposit.[54]
55. Only a couple of months later, the legal firm which provided their services to the bankrupt, Alphonse & Associates, wrote to the vendor’s solicitors about changing the purchaser’s details for the purchase.[55] At this point in time, Fallow had come into existence. The deed provided would rescind the contract between the vendor and the bankrupt and his brother, and simultaneously enter into a fresh contract for sale of land with Fallow.[56]
56. There was no evidence to suggest that Fallow had functional bank accounts or any assets (including cash) at the time of the purchase. Fallow accepted that $78,675.22 contributed toward the purchase price of the first Peakhurst property under this new contract for sale came from the bankrupt and Mrs El-Debel’s join Bankstown loan account.[57]
57. Her Honour did not believe that this amount of money was a loan from Mrs El-Debel to Fallow, as was contended by Mrs El-Debel and the bankrupt’s brother. Instead, her Honour determined that this money came from the bankrupt. Nevertheless, the contract for the sale of the property identified Fallow as the purchaser of the property.[58]
58. The trustees in bankruptcy contended that the bankrupt had a 50% interest in the property. Justice Gleeson noted that this was consistent with the evidence that the bankrupt and Bassam originally intended to purchase the property. Her Honour said that
When he contributed the whole of the purchase of the first Peakhurst property, the bankrupt intended that Fallow would hold the property on a resulting trust in his favour as to 50% of the property. The only record to the contrary is the identification of Fallow as purchaser on behalf of the Trust on the contract for purchase of the property.[59]
59. Her Honour again expressed the importance of contemporaneous documentary evidence that could suggest a different intention, but concluded that there was none.[60]
60. So, the presumption of resulting trust amounting to 50% of the beneficial interest in favour of the bankrupt was not displaced.
Second Peakhurst Property
61. Since 2013, Fallow held the legal title to the second Peakhurst property. The contracts for the sale of the property were between vendor and Fallow for a purchase price of $400,000.[61]
62. There was no evidence about where the $40,000 deposit came from.[62] However, the rest of the contributions, equalling just over $360,000, were from the following sources: $50,000 from Fallow’s bank account; $183,369.91 from Bassam; and $127,502.07 from TPS Group.[63]
63. The money sourced from Fallow’s bank account came from rents gathered from the first Peakhurst property. Having found that the first Peakhurst property was intended to be held on trust to a proportion of 50% for the bankrupt (and the rest for his brother), her Honour determined that the rents were held by Fallow on trust for the bankrupt and his brother in equal shares.[64]
64. In the absence of any documentation of any loan from Bassam, TPS Group or the bankrupt to Fallow, her Honour found that the identified contributions were contributions by the bankrupt and his brother to the purpose price of the second Peakhurst property. Altogether, based on these calculations, the bankrupt contributed $155,435.99 of the $360,000 purchase, equalling 43% of the identified contributions.[65] Her Honour also inferred that the deposit was contributed in the same proportions.[66]
65. For the same reasons as in respect of the first Peakhurst property, her Honour did not accept that Fallow acquired the property as trustee of the Trust.[67] The presumption of resulting trust amounting to 43% of the beneficial interest in favour of the bankrupt was not displaced.
Beverly Hills Property
66. Since 2015, Ms Ayad held the legal title to the Beverly Hills property.[68] The purchase price of the property was $1,610,000.[69]
67. Ms Ayad did her very best to attempt to destroy evidence related to the purchase of the property. Nevertheless, Alphonse & Associates had kept an electronic copy of a file note which recorded that Mrs El-Debel and the lawyers had shared a telephone call, in which she advised that ‘her son bought a property at auction’, and asked the lawyers ‘to give her son whatever he wants and whatever amount he needs’. It also said that she was aware the contract was made up in the name of Ms Ayad.[70] The firm had a trust account in which it held a pretty substantial amount of funds for the family — $198,569.14.
68. These instructions to give her son ‘whatever he wants and whatever amount he needs’, her Honour said, reflected the fact that the firm’s trust account held the bankrupt’s funds and that the bankrupt was seeking to purchase the Beverly Hills property.[71]
69. This was backed up by contemporaneous evidence provided to Mrs El-Debel by the law firm. On 22 August 2015, the law firm sent Mrs El-Debel a letter stating that the money held in their trust account had all been disbursed according to her instructions to assist Ms Ayad with her purchase. The law firm had accordingly distributed $161,000 to pay the deposit on the property and issued a further $37,469.14 as part payment of stamp duty.[72]
70. Her Honour thus accepted that Alphonse trust funds were used to purchase the Beverly Hills Property. Based on the earlier file note and the bankrupt’s sole operation of the joint Bankstown loan account, her Honour found that the Alphonse trust funds belonged to the bankrupt and were a contribution by the bankrupt to the purchase of the Beverly Hills property. This was also consistent with Mrs El-Debel’s own statement in her phone call to the lawyers, stating that her son had purchased a property.[73]
71. The balance of the purchase price was split into two. Ms Ayad had a mortgage taken out in the amount of $1,288,800 from NAB. There was no evidence as to the source of the remaining $123,431.86. In the absence of any evidence from Ms Ayad that she contributed this amount, her Honour found that this amount was contributed by the bankrupt.[74]
72. Cumulatively then, the bankrupt’s $322,001 contribution toward the total purchase price of $1,611,000 represented 20% of the total.[75]
73. It would be natural to assume that a resulting trust arose in favour of the bankrupt in this proportion. But Justice Gleeson dug a bit further, finding that Ms Ayad had obtained the loan from NAB by making false statements about her income.[76] In the circumstances, Justice Gleeson, acknowledging that there was no real chance that Ms Ayad could have paid off the loan herself as she claimed,[77] inferred that Ms Ayad entered the loan on the understanding that the bankrupt would repay the loan and that she was procuring the loan on his behalf.[78]
74. On this basis, the presumption of resulting trust arose amounting to 90% of the beneficial interest in favour of the bankrupt.[79]
EVIDENCE
75. Phew. You can all take a sigh of relief now – it took us a while to get to the end of that, but it is no understatement to say that there is a lot going on factually that made a difference to the outcome of this case. What really stands out in this case study is Justice Gleeson’s treatment of the evidence, or lack thereof.
Jones v Dunkel
76. To begin with, there was the glaringly obvious paucity of evidence from the bankrupt himself. Neither the bankrupt nor his de facto spouse, Ms Ayad, gave evidence before the Court.[80] Her Honour noted this and went on to cite the oft-quoted rule laid down in Jones v Dunkel[81]: that the unexplained failure to call a witness may, in appropriate circumstances, support an inference that the evidence would not have assisted the party’s case.[82]
77. Additionally, her Honour said that ‘the failure to call a witness may also permit the court to draw with greater confidence any inference that is unfavourable to the party that failed to call the witness, if that inference is open on the evidence and the uncalled witness appears to be in a position to cast light on whether the inference should be drawn’.[83] Indeed, her Honour accepted that where the absent witness is a party to the case, an adverse inference can more easily be drawn.[84]
78. Justice Gleeson proceeded to hold that the ‘bankrupt’s failure to give evidence permits the court to draw, with greater confidence, the inferences drawn … concerning his beneficial ownership in relation to each of the four properties’.[85]
79. When the likes of presumed resulting trusts are on the table, not calling key witnesses can be really devastating to your case. Her Honour did not need any evidence beyond the bankrupt’s contributions to the purchase price of each property to presume that a resulting trust came into existence. Equity demands no more – there is no need to prove the actual intention of the purchaser. By way of contrast, to displace the presumption, evidence as to the bankrupt’s actual intention at the time of purchase would have been necessary.
80. So this easily explains Justice Gleeson’s approach to the Bankstown and first Peakhurst properties. For both, her Honour had access to reliable information on the bankrupt’s contribution to the purchases.
81. It also serves to explain how liberally Justice Gleeson could assume the proportions in which the bankrupt contributed to the purchase of the second Peakhurst and Beverly Hills properties. To recap, there was no evidence as to where the $40,000 deposit came from for the second Peakhurst property and her Honour attributed both the Alphonse trust account funds, Ms Ayad’s NAB loan funds and the balance of $123,431.86 contributed toward the Beverly Hills property to the bankrupt.
82. Given the paucity of evidence, the knowledge of which was really exclusively in the bankrupt and Ms Ayad’s court, the rule in Jones v Dunkel meant that these matters were decided against them. Her Honour expressly acknowledged this, saying that Ms Ayad’s failure to give evidence allowed her Honour to more easily draw the inference that she held the Beverly Hills property substantially on trust for the bankrupt.[86]
Untrustworthy Witnesses
83. It also did no favour to the bankrupt’s case that his mother and brother were considered unreliable and untrustworthy witnesses by the Court.
84. Her Honour said that ‘Mrs El-Debel sought to portray herself as simultaneously forgetful and reliable’,[87] both admitting that her memory had been affected by a stroke but also giving a detailed account of the events, and even disputed aspects of Alphonse & Associates’ file notes.[88]
85. Mrs El-Debel insisted that she had expected to, and in fact did, pay home loan repayments from cash gifts from family and friends. She said it was part of her culture that people not come empty-handed when they visit another’s home, and so she was making repayments with this money.[89] Her Honour called this ‘fanciful’ and dismissed it, ultimately finding that her evidence ‘involved deliberate obfuscation’.[90] Her Honour was also not satisfied that her affidavit was a true recollection of her events, as she seemed not to understand key words such as ‘controlling trustee’ that were written in it when questioned on it during cross-examination.[91]
86. Similarly, the bankrupt’s brother, Bassam, was not a reliable witness. He, as director of Fallow, had not kept appropriate records or the like,[92] nor did he understand the nature of the Fallow trust,[93] among other things.[94]
87. It goes without saying that the combination of failing to call key witnesses and others being unreliable was really detrimental to the bankrupt’s case. Displacing a presumption of resulting trust will necessarily require something more than what the witnesses in this case could offer.
THE TRUSTEES’ GAME PLAN
88. Equally, the trustees’ reliance on the law of resulting trusts to recover the properties for the benefit of the bankrupt’s creditors was a really wise choice.
89. Trust-busting is certainly one way to recover assets from a bankrupt seeking to hide their interest in assets. Here, though, the trustees were greatly assisted by legal principles existing outside the Bankruptcy Act 1966 (Cth). Equity ‘filled in the gaps’ for them because of its presumption that people who contribute to the purchase price of a property have a beneficial interest in that property.
90. It’s a welcome reminder to be alive to the reality that people flirting with bankruptcy may seek to conceal or seemingly relinquish their interest in assets in more ways than one. The Bankruptcy Act 1966 (Cth) demands quite a high threshold of proof when it comes to trust-busting. Generally, to succeed on a claim, trustees in bankruptcy must prove that:
a. The bankrupt supplied personal services to, or for, or on behalf of, the trust/entity (into which they have funnelled assets) before the end of their bankruptcy, when the bankrupt controlled the entity in relation to the supply of those services; and
b. Either the bankrupt received no remuneration for those services or the remuneration was substantially less in amount or value than a person supplying those services in similar circumstances might reasonably have expected if they were dealing with the trust/entity at arm’s length; and
c. The trust/entity acquired an estate in particular property as a result of the bankrupt’s supply of services; and
d. The bankrupt used, or derived a benefit from, the property at a time when they controlled the trust/entity in relation to the property; and
e. The trust/entity still has an estate in the property.[95]
91. Only if this laundry list of prerequisites is satisfied can the court vest, in whole or in part, the property held by the trust/entity in the trustees in bankruptcy.[96]
92. Contrastingly, and as I have reiterated throughout this session, resulting trusts are far easier to establish in court, given the bulk of the hard work is done by equitable presumptions. The method of determining that a person holds a partial interest when they have contributed only part of the purchase monies is also an easy one to apply, because it is proportional to the contribution made.
CONCLUSION
93. In this case, making out the resulting trusts metaphorically changed the game for the trustees in bankruptcy, thereby realising assets which could be used to distribute amongst creditors.
94. And if you can make out resulting trusts: don’t bust the trust.
[1] [2020] FCA 1031 (herein referred to as ‘Judgment’).
[2] Judgment at [9].
[3] Ibid.
[4] Judgment at [22].
[5] Judgment at [3].
[6] See Bankruptcy Act 1966 (Cth) s 58(1)(a).
[7] Judgment at [3].
[8] Judgment at [10].
[9] Judgment at [11].
[10] Ibid.
[11] Bankruptcy Act 1966 (Cth) s 19(1)(a).
[12] Bankruptcy Act 1966 (Cth) s 19(1)(d).
[13] Bankruptcy Act 1966 (Cth) s 19(1)(f).
[14] Bankruptcy Act 1966 (Cth) s 19(1)(g).
[15] Bankruptcy Act 1966 (Cth) ss 19(1)(h)–(i).
[16] Bankruptcy Act 1966 (Cth) s 19(1)(j).
[17] Bankruptcy Act 1966 (Cth) s 19(1)(k).
[18] In re Condon; Ex parte James (1874) LR 9 Ch 609.
[19] Nguyen v Pattinson [2005] FCA 650, [86].
[20] Re Lamb; Ex parte Registrar in Bankruptcy (1984) 1 FCR 391, [24].
[21] Insolvency Practice Rules (Bankruptcy) 2016 (Cth) s 42-10.
[22] Re Lamb; Ex parte Registrar in Bankruptcy (1984) 1 FCR 391, [24].
[23] Insolvency Practice Rules (Bankruptcy) 2016 (Cth) s 42-40.
[24] Insolvency Practice Rules (Bankruptcy) 2016 (Cth) s 42-45.
[25] Calverley v Green (1984) 155 CLR 242 at 266 (Deane J).
[26] Judgment at [77], citing Foundas v Arambatzis [2020] NSWCA 47 at [47].
[27] Calverley v Green (1984) 155 CLR 242 at 266 (Deane J).
[28] See Judgment at [78].
[29] See, eg, Calverley v Green (1984) 155 CLR 242, 247 (Gibbs CJ).
[30] See, eg, Calverley v Green (1984) 155 CLR 242, 247 (Gibbs CJ).
[31] Calverley v Green (1984) 155 CLR 242, 247.
[32] Charles Marshall Pty Ltd v Grimsley (1956) 95 CLR 353; Cummins v Cummins (2006) 227 CLR 278.
[33] Judgment at [82].
[34] Judgment at [131].
[35] Judgment at [133].
[36] Ibid.
[37] Judgment at [139].
[38] Judgment at [141]–[142].
[39] Judgment at [143].
[40] Judgment at [145].
[41] Judgment at [146].
[42] Judgment at [147].
[43] (1984) 155 CLR 242, 262 (Mason and Brennan JJ).
[44] Ibid 251 (Gibbs CJ).
[45] Judgment at [155].
[46] Judgment at [178].
[47] Judgment at [40]–[43].
[48] Judgment at [44].
[49] Judgment at [180].
[50] Judgment at [182].
[51] Judgment at [65]–[66].
[52] Judgment at [183].
[53] Ibid.
[54] Judgment at [184].
[55] Judgment at [185].
[56] Ibid.
[57] Judgment at [191].
[58] Judgment at [192]–[193].
[59] Judgment at [200].
[60] Judgment at [201].
[61] Judgment at [203]–[204].
[62] Judgment at [205].
[63] Judgment at [206].
[64] Judgment at [208].
[65] Ibid.
[66] Ibid.
[67] Judgment at [210]–[211].
[68] Judgment at [213].
[69] Judgment at [214].
[70] Judgment at [214]–[216].
[71] Judgment at [215].
[72] Judgment at [219].
[73] Judgment at [220].
[74] Judgment at [221]–[222].
[75] Judgment at [223].
[76] Judgment at [224].
[77] See Judgment at [225]–[230].
[78] Judgment at [230].
[79] Judgment at [236].
[80] Judgment at [120].
[81] (1959) 101 CLR 298.
[82] Ibid at 308 (Kitto J), 312 (Menzies J), 320–1 (Windeyer J).
[83] Judgment at [122], citing Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361 at 384–5 [63].
[84] Judgment at [123].
[85] Judgment at [125].
[86] Ibid.
[87] Judgment at [85].
[88] Judgment at [84].
[89] Judgment at [88].
[90] Judgment at [94].
[91] Judgment at [96].
[92] Judgment at [106].
[93] Judgment at [109].
[94] See Judgment at [110]–[118].
[95] Bankruptcy Act 1966 (Cth) s 139D(1).
[96] Ibid s 139D(2)–(3).