On 7 March 2006, the High Court overturned the Full Federal Court’s decision concerning the estate of the senior counsel who had not lodged tax returns for 45 years (The Trustees of the Property of John Daniel Cummins, A Bankrupt v Cummins [2006] HCA 6).
Mr and Mrs Cummins bought vacant land in Hunters Hill in Sydney in 1970. Mrs Cummins paid about three-quarters of the purchase price and Mr Cummins paid about a quarter. They built a house on the land, which they then lived in for many years.
In 1987, Mr Cummins, a Sydney barrister, transferred his interest in the house to his wife and transferred the shares he held in the company that owned his barrister’s chambers to a family trust. The beneficiaries of the trust included Mrs Cummins and the four Cummins children. The transfer of the house was recorded as having been in consideration of a payment of half of the then value of the property. However, no funds were actually paid to Mr Cummins. Mrs Cummins only paid the valuation fee and the stamp duty on the transaction.
Mr Cummins had not lodged tax returns since 1955, and consequently had not paid any income tax for 45 years. In 2000 he lodged returns for the 1992 to 1999 tax years. Mr Cummins’ total tax liability was nearly a million dollars. Mr Cummins went bankrupt in December 2000.
The trustees of Cummins’ bankrupt estate applied to the Court for orders that the assets transferred by Mr Cummins to Mrs Cummins and the family trust were void. The trustees relied on section 121 of the Bankruptcy Act 1966 (Cth). That section required the trustees to show that the main purpose of the transaction was to defeat or delay creditors. It was accepted that “creditors” did not necessarily have to be determined at the time of the transaction but rather it was sufficient that there was an awareness of impending indebtedness.
At trial, Mrs Cummins did not offer any evidence. The trustees were forced to rely on the documentary evidence gathered and convince the Federal Court to draw inferences from those documents.
Section 121 (2) of the Bankruptcy Act provides that the trustee may demonstrate the Transferor’s main purpose by leading evidence from which a court could reasonably infer that the bankrupt was about to become insolvent. Although no reasons were given by the trustees explaining their lack of sufficient evidence, it is likely that the absence of tax returns from 1987 meant that it was difficult for the trustees to demonstrate the insolvency of Mr Cummins at the time.
The trustees succeeded on appeal because the High Court was prepared to draw inferences based on surrounding facts even though there was no direct and conclusive evidence to prove all of the elements usually required for such a case.
The High Court unanimously found that evidence of the bankrupt’s main purpose was sufficient for the Trial Judge to be satisfied of Mr Cummins’ intention to defeat creditors.
The Court took notice of the appointment of Mr Cummins as Senior Counsel, the acquisition and maintenance of separate chambers, and the use of post transaction evidence of income to demonstrate that the bankrupt was in receipt of income which would give rise to a tax liability and had a motive to transfer assets to protect them from his creditors.
Often the evidence available to trustees or liquidators, especially in cases where they seek to overturn transactions between related parties, is inadequate: both sides of the transaction are usually unwilling to assist.
This case demonstrates that a trustee can construct a case with little direct evidence, if the court is prepared to draw the relevant inferences from that evidence.
However, not withstanding this case, trustees must be in a position to present to court all relevant evidence available as to the solvency of the defendant at the time of the transaction.
For further information, please contact John Hutchings on (03) 9608 2245 or j.hutchings@cornwalls.com.au
