QUESTIONS FROM LECTURE 5

QUESTION RE SECTION 40(1)(b) Section 40(1)(b) provides that a debtor commits an act of bankruptcy if in Australia or elsewhere: (i) he or she makes a conveyance, transfer, settlement or other disposition of his or her property or of any part of his or her property; (ii)he or she creates a charge on his or her property or on any part of his or her property; (iii)he or she makes a payment; or (iv)he or she incurs an obligation: that would, if he or she became a bankrupt, be void as against the trustee.

QUESTION RE SECTION 40(1)(b) The question: How is it ascertained which property would be void as against the trustee for this Section? Do we go to Sections 120, 121, 122 for this definition? This seems like a lot of work for the court at that point in time. The phrase “void against the trustee” does direct attention to Sections 120, 121 and 122. To establish a void transaction as an act of bankruptcy, it would be necessary for the petitioning creditor to prove all that the trustee would have to prove if a transaction was challenged under one of these Sections.

QUESTION RE SECTION 40(1)(b) It would be a lot of work for both the court and the petitioning creditor, but it has been done in relation to Section 122 (void preferences). While the argument was not always successful, the High Court has recognised in three cases that giving a void preference is capable of being an act of bankruptcy upon which a petition can be founded: –Burns v Stapleton (1959) 102 CLR 97 –Radio Corporation Pty Limited v Bear (1961) 108 CLR 414 –Robert Reid Pty Limited v Cassidy ( ) 114 CLR 558 The trustee was the person challenging the void preference, but in addition tried to show that the preference was itself an act of bankruptcy, so as to extend the relation-back period.

QUESTION RE BURDEN OF PROOF Question: In relation to Sections 120, 121 and 122 (transfers void against the trustee) does the burden shift to the trustee and then to the transferee to rebut the relevant presumption in the Sections? Section the trustee bears the onus of proving that the transaction is undervalued. Section 120(3) provides that a transfer is not void against the trustee if the relevant transferee proves that, at the time of the transfer, the transferor was solvent. The burden of proving the issue of solvency (which may provide a defence) rests on the transferee. Section 120(3A) provides for a rebuttable presumption of insolvency. The trustee has the benefit of this rebuttable presumption and the burden lies upon the transferee to rebut the presumption of insolvency.

QUESTION RE BURDEN OF PROOF In summary, the trustee bears the burden of proving an undervalued transaction under Section 120, but the burden shifts to the transferee to prove a defence relating to solvency.

QUESTION RE BURDEN OF PROOF Section the trustee bears the burden of proving that the transferor’s main purpose in making the transfer was to defeat creditors. The main purpose can be inferred from all the circumstances, including that the transferor was or was about to become insolvent - Section 121(2). Section 121(4) provides a “defence” if the transferee gave market value consideration, did not know the main purpose and did not know of the insolvency - in this regard there is an “evidentiary onus” upon the transferee. Who else is going to call this evidence? There is a rebuttable presumption of insolvency contained in Section 121(4A). The trustee has the benefit of this rebuttable presumption of insolvency and it is up to the transferee to call evidence to rebut it.

QUESTION RE BURDEN OF PROOF Section the trustee bears the onus of proving that the transfer had the effect of giving a creditor a preference. Section 122(2) provides for “defences” including purchaser in good faith for market value. The burden of proving this specifically lies upon the transferee - Section 122(3). Section 122(4)(c) contains a deeming provision. The trustee bears the onus of proving the matters which will lead to the deeming taking effect.

QUESTION RE PROTECTION OF SUCCESSORS IN TITLE - SECTION 120(6) Question: Does the trustee refund the price paid by an innocent third party, or if the property is passed to an innocent third party does that mean the trustee cannot obtain the property. The trustee attacks a transfer of property by a person who later becomes a bankrupt - Section 120(1). If the property has been transferred by the bankrupt and is still held by the original transferee, then if the trustee proves an undervalued transaction, the trustee obtains the property but is obliged to pay to the transferee the value of any consideration which the transferee gave for the transfer - Section 120(4). However, if the transferee has onsold to a third party, who has acquired in good faith and by paying market value, that transfer cannot be attacked and the title of the innocent third party is secure - Section 120(6).