On 7 March 2006, the High Court of Australia handed down a unanimous decision in The Trustees of the Property of John Daniel Cummins, A Bankrupt v Mary Elizabeth Cummins [2006] HCA 6, which addressed, among other things, the issue of the evidence required to draw an inference that a bankrupt had transferred property to defeat creditors.

Background

Bankruptcy

Mr Cummins, who was not a party to the proceedings, practised as a barrister since 1961 and had been a Queens Counsel since 1980.

Mr Cummins had not lodged an income tax return since 1955.  In February 2000, Mr Cummins lodged tax returns for the years ended 1992 to 1999.  His tax liability was assessed at $955,672.92.  Upon the ATO instituting proceedings to recover that amount, Mr Cummins filed a debtor’s petition with the Official Receiver, and became a bankrupt in December 2000.

Transfer of property

In the High Court, the trustees of Mr Cummins’ estate sought declarations and consequential relief in respect of two transactions.  They were:

1.             the transfer of Mr Cummins’ interest in a property located at Hunters Hill, NSW to his wife, in August 1987; and

2.             the transfer of shares in Mr Cummins’ barrister’s chambers to Ms Cummins, which entitled the holder of the shares to occupancy of a room in Wentworth Chambers, Sydney, also in August 1987.

The trustees claimed that these transfers were void pursuant to s.121 of the Bankruptcy Act 1966 (Cth).

Section 121 provides that the transfer is void:

1.             where a person who becomes bankrupt transfers property; and

2.             the main purpose of that transfer is to prevent the property becoming divisible amongst the bankrupt’s creditors; or

3.             to hinder or delay the property becoming available for division amongst creditors.

The issue

The central issue on appeal was whether the Court could draw the inference that Mr Cummins had the ‘main purpose’ required by s.121 in making the transfers.

At first instance Justice Sackville of the Federal Court had found that it was possible to draw this inference and that it should be drawn.

On appeal, a majority of Full Federal Court found that the inference should not be drawn.

 

Evidence of Mr Cummins’ main purpose

Justice Sackville had relied on the following matters to support the inference that Mr Cummins had the requisite ‘main purpose’ in making the transfers.

1.             Mr Cummins was well aware in August 1987 that he had incurred very substantial liabilities to the ATO, contingent only on the ATO issuing assessments in respect of past income years. 

2.             Mr Cummins was well aware at that time that the ATO would issue assessments once his longstanding tax delinquency became known, an event that could occur at any time. 

3.             Mr Cummins divested himself voluntarily of virtually all his substantial assets in August 1987. 

4.             In any event, the assets retained by Mr Cummins were not sufficient to meet his taxation liabilities, if the ATO decided to issue assessments. 

5.             Mr Cummins saw the transfers as increasing the chances that his assets would be protected from any claims made by the ATO.

The majority of the Full Court of the Federal Court reversed Justice Sackville’s decision on the basis that:

1.             there was insufficient evidence to suggest that in 1987 Mr Cummins anticipated being apprehended by the ATO as someone who had not filed tax returns or paid taxes; and

2.             there was no evidence that Mr Cummins had income of significance to give rise to an income tax liability.

The High Court’s decision

The High Court rejected the criticism of Justice Sackville’s reasoning.

Anticipation of apprehension

The High Court did not explicitly reject this ground.

Instead, it approved the reasons of Justice Tamberlin (dissenting in the Full Federal Court).

At the time of the transfers, there was a pending High Court special leave application in the matter of Giannarelli v Wraith (1988) 165 CLR 543.  This matter dealt with the law relating to the liability of barristers for negligence (in that barristers had been afforded immunity from negligence in certain aspects of their work). 

Justice Sackville had queried whether a desire on Mr Cummins’ part to avoid assets being at risk if a future client sued him, could support the necessary ‘main purpose’.  Justice Tamberline concluded that the pending decision in Giannarelli had focussed Mr Cummins on the need to protect his assets from pursuit by the ATO in light of his decision not to file tax returns for the preceding 35 years.

The High Court approved this reasoning.

It is important, here, to note the distinction between:

1.             the tax liability, which, while only contingent until an assessment had been made, was a liability to the extent that Mr Cummins was aware that he had earned income; and

2.             a concern that Mr Cummins might be liable to a future client, in negligence, which is not a liability, contingent or otherwise.

Evidence of income

The High Court was prepared to draw the inference that as a barrister and, later, Queens Counsel, Mr Cummins would have had taxable income and probably a significant taxable income.

This was in the absence of any evidence as to what the income may have been prior to 1987.

Decision

The High Court upheld the appeal, resulting in the transferred property being ordered to be returned to Mr Cummins’ estate.

Conclusion

This decision is significant because the High Court approved the drawing of inferences in a pragmatic fashion (as opposed to a strictly evidentiary manner) in determining a bankrupt’s purposes in disposing of property. 

In summary, the High Court’s reasons concluded that it was unrealistic to say that Mr Cummins did not have a significant income during the relevant years and that he was not concerned to protect his assets from the ATO.

This decision may result in courts concluding more readily that a bankrupt has engaged in a course of action for the purpose of defeating his or her creditors.