Bankruptcy Trustees succeed in Cummins' Appeal
On 7 March 2006, the High Court overturned the Full Federal Court’s decision in the long running saga over the estate of the senior counsel who had not lodged tax returns (The Trustees of the Property of John Daniel Cummins, A Bankrupt v Cummins  HCA 6). In so doing, it has had to deal with some of the evidential difficulties that can occur when trustees seek to overturn transactions between related parties.
Briefly the facts of the case were as follows. Mr and Mrs Cummins bought vacant land in Hunters Hill in Sydney in 1970. At that time, Mrs Cummins paid about three-quarters of the purchase price and Mr Cummins paid about a quarter. They then built a house on the land in which they lived for many years. In 1987, Mr Cummins, a barrister in Sydney who had become a QC in 1980, transferred his interest in the house to his wife and also transferred the shares he held in the company that owned his barrister’s chambers to a family trust. The transfer of the house was recorded as having been in consideration of a payment of half of the then value of the property but 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. When in 2000 he eventually saw his way clear to lodge returns for the 1992 to 1999 tax years, his eventual tax liability was nearly a million dollars. Not surprisingly, he went bankrupt in December 2000.
Issues in the case
The trustees of Mr Cummins’ estate challenged the transfer of the interest in the family home under section 121 of the Bankruptcy Act. To succeed, the trustees had 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 some impending indebtedness.
At the trial of the matter, Mrs Cummins did not adduce any evidence. The trustees were forced to rely principally on the documentary evidence that they had gathered and seek to convince the Federal Court to draw inferences from those documents. The paucity of the evidence was the reason that the litigation has had a long history through appeals right up to the High Court.
Trustees win Round One
At first instance, Sackville J drew the inference that Mr Cummins would have had income sufficient to warrant a tax liability at the time of the transaction in 1987. The failure to lodge returns for over thirty years would have justified a serious concern for significant tax liability such that the inference to be drawn was that the transactions in 1987 were done with the main purpose of defeating any claim that was later made by the tax office.
Mrs Cummins wins Round Two
Mrs Cummins appealed to the Full Federal Court. The Court accepted her submission that it could not be presumed that there would be any tax liability because there was, at least in the view of the Full Court, no evidence before it of any level of income that may have been earned by Mr Cummins. This is an often encountered difficulty which trustees find in pursuing cases. It is often not enough to make presumptions that may be quite sensible to the lay person; the test remains that there must be something before the Court which would justify an inference being drawn, even in situations where the inference may seem obvious. The Full Court considered that the lack of evidence as to any income earned by the bankrupt was fatal to the trustees’ case in that, without anything to infer income having been earned above the non-tax threshold, it could not be said that there was any impending tax liability.
High Court delivers unanimous points decision
The matter went on further appeal to the High Court. In a unanimous judgment, the High Court has saved the trustees from the consequences of being unable to adduce more evidence to back up every element of their case.
The High Court considered that an inference of impending tax liability could be drawn because it would have been unlikely that a barrister with an insubstantial practice could have gained the recommendation to become a QC and maintained two sets of barristers’ chambers, one in the Sydney CBD and the other in Parramatta. Further, the level of income shown in the tax returns for the 1992 to 1999 tax years was relevant for indicating the likelihood that some substantial income would have been earned in the earlier years leading up to the transaction in 1987.
As to the main purpose of the transaction, the High Court rejected the submission by the respondent that the purpose was a concern held by Mr Cummins that a case which was then pending in the courts in 1987 might dispel the notion of immunity from negligence for barristers running matters in court. The evidence and surrounding circumstances at the time of the transaction were such that it was implausible for Mr Cummins to legitimately hold such a concern.
The High Court, having ruled that the transfer of the interest in the house was void, then went on to consider the submission as to the extent of the interest held by Mr and Mrs Cummins in the house. It had been submitted that the proportion available to the trustees was less than half because equity should presume that Mr and Mrs Cummins held their interests in the proportions in which they had contributed to the acquisition of the property. In the absence of a relationship between the parties giving rise to a presumption of advancement, if two people contribute to the purchase of a property in different proportions then there should be a presumption that they hold the property on trust as tenants in common in the proportion to their contributions.
In this case, Mrs Cummins had apparently contributed three-quarters of the purchase price and so the submission was that she should only be liable to trustees for a quarter of the value of the property. The High Court rejected that submission by referring to a number of points. Firstly, the proportions cannot be based only by the initial purchase price. Mr and Mrs Cummins jointly borrowed funds from the Commonwealth Bank to build the house. Further, it appeared that they had jointly received funds from the sale of another jointly owned asset which were then used to pay for the house. Secondly, there was nothing in the facts of the matter that supported a presumption that the property should be held in other than the proportions suggested by the title being held as joint tenants equally. Thirdly, the consideration recited in the transfer document was for one half of the then value of the property and Mrs Cummins paid the stamp duty and valuation fees incurred in relation to the transaction. Those facts were inconsistent with any belief on the part of Mrs Cummins that she was already entitled to three quarters of the value of the property.
Lessons for insolvency practitioners
The trustees succeeded in this case because the 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 that are usually required for such a case. It often occurs that the evidence available to trustees or liquidators, especially in cases where they seek to overturn transactions between related parties, is less than perfect and often both sides of the transaction are unwilling to voluntarily assist the insolvency practitioner. While the trustees in Cummins were fortunate that the Court was prepared to draw inferences from what evidence was available, this should not be seen as a green light to insolvency practitioners challenging transactions in cases where better evidence may be available without trying to gather that evidence and considering what evidence may be needed to satisfy the strict test of admissibility.
For further information please contact Derek Hilliard.
Derek Hilliard, Partner