Trustees in bankruptcy should exercise great caution when "adopting" contracts for sale of land that were entered into by a bankrupt before the date of the bankruptcy. This is because a transfer effected post-bankruptcy may lose the protection of the avoidance provisions in the Bankruptcy Act 1966 (Cth). The Federal Court decision in Trustees of the Property of Camm v Linke Nominees Pty Ltd [2010] FCA 1148 (Camm v Linke) examines Trustees' rights to void a transfer of property if the transfer is intended to defeat creditors.
1. Facts
(a) Camm entered into a contract to sell a parcel of land to Linke on 26 October 1995.
(b) A sequestration order was made against Camm on 29 November 1995.
(c) The trustee of Camm’s bankrupt estate "adopted" the contract and it settled on 30 November 1995.
(d) Camm was discharged from bankruptcy in February 1999 and was made bankrupt again in November 2003.
(e) The trustees of Camm’s second bankrupt estate obtained evidence which suggested that the transfer of land in 1995 was effected with the intent to prevent the land from becoming available to his creditors.
(f) The trustees of the second bankrupt estate sought to void the transfer pursuant to section 121 of the Bankruptcy Act 1966 (Cth), as a transfer intended to defeat creditors.
2. Section 121
In order for Trustees to utilise section 121 and have a transfer of property declared void against them, they must establish, amongst other things, that the transfer was effected before the person was made bankrupt.
In Camm v Linke, the trustees contended that section 121 should be available to them because the transfer “occurred” at the time the contract for sale was executed, which was before the date the sequestration order was made. Linke countered, stating that the transfer occurred when the transfer was either lodged or registered with the Land Title Office, both of which occurred after the date of sequestration.
3. Decision
The Court accepted Linke’s arguments and held that the transfer of the property occurred either when the transfer document was lodged, or when it was registered. The Court did not find it necessary to specify whether the transfer was effected when the documents were lodged or the transfer was registered, because both occurred after the date of bankruptcy.
Accordingly, even though there appeared to be strong evidence that the bankrupt had improperly disposed of his interest in the land, the trustees could not rely on section 121 and have the transfer declared void because the transfer had occurred post-bankruptcy.
4. Conclusion
When Trustees encounter situations where a bankrupt has entered into a contract for sale before their appointment, it is crucial that they make all necessary enquiries in order to satisfy themselves that the sale is in the interests of the creditors. If transfer documents are lodged and registered with the consent of a Trustee, the transfer cannot later be declared void, even if new information suggests the intention of the transfer was to defeat creditors.
Gavin Davies | Lawyer
T +617 3100 5114
F +617 3100 5001
Scott Guthrie | Partner
T +617 3100 5019
F +617 3100 5001
