BANKRUPTCY l Issue No. 1 l The hurdles of co-owned property
September 2014
Background Facts
The Full Court of the Federal Court in Coshott v Prentice
[2014] FCAFC 88 recently dealt with the issues of
whether the purchase of co-owned property by a
bankrupt was acquired beneficially or on trust for a family
superannuation fund and, therefore, not divisible among
creditors and, otherwise, whether the Court had power
under the Bankruptcy Act to order the sale of co-owned
property.
Background facts
Schlotzsky Nominee Company Pty Ltd (Schlotzsky) was
the nominated trustee for the Superannuation Fund.
Robert Coshott (who was to become bankrupt) and his
wife, Ljiljana, were the directors of Schlotzsky.
The contract for the purchase of the property identified
the purchasers as Robert and Ljiljana Coshott but did not
state whether they would take their interests as joint
tenants or tenants in common. The appellants relied on
a document entitled “Acknowledgment” which was signed
by Robert and Ljiljana and provided that a one-half
interest in the Property was purchased by Ljiljana and the
other half interest was purchased in the name of Robert
as trustee for the Coshott Family Superannuation Fund.
The deposit to be paid on the exchange of the contracts
was deposited in Schlotzsky’s business cheque account
and a cheque corresponding to that amount of the
deposit was drawn on the account a couple of days later.
However, the solicitor for Robert and Ljiljana provided
evidence that it was never suggested to him that the
property was being purchased in trust for a
Superannuation Fund. The solicitor stated that acting on
instructions from Robert, he was directed that the words
“joint tenants” should be typed on the transfer forms.
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At first instance
The central question run at trial by the Coshott parties
was whether Robert held his 50% interest in the property
as trustee of the Superannuation Fund or, in the
alternative, pursuant to a resulting trust in favour of
Schlotzsky as trustee of the Superannuation Fund. In
either case, under section 116(2)(a) of the Bankruptcy
Act, Robert’s interest would not be property divisible
amongst the creditors of the bankrupt estate.
Conversely, if the Court found that Robert’s interest was
held by him beneficially, then the property vested in the
trustee in bankruptcy and was divisible amongst
creditors.
The Court at first instance held that any suggestion or
arrangement tending to suggest that Robert purchased a
50% interest in the Property otherwise than beneficially
“was and is a sham as that term has come to be used in
the jurisprudence of this Court and the High Court”.
Declarations were made to the effect that Robert
acquired his interest beneficially, that the joint tenancy
was severed by operation of section 58(1) of the
Bankruptcy Act and that Robert’s interest vested in the
trustee in bankruptcy.
On appeal
The appellants (Ljiljana and Schlotzsky) sought an
alternative declaration that Robert’s interest in the
Property was held on trust for the Superannuation Fund
on the basis that it was purchased with fund monies. The
appellants also challenged the primary Judge’s findings
of a sham. The Full Court found that the sham doctorate
was irrelevant in these circumstances. It held that the
question was not whether the Acknowledgement formed
part of a sham but rather what weight should be given to
it as evidence of the existence of the resulting trust in
respect of Robert’s interest in the property, as against all
of the other evidence.
The Full Court found that irrespective of the conclusion
that the primary Judge mischaracterised the matters as a
sham, the monies applied in the purchase of the property
were not trust monies; hence, the primary Judge did not
err in “reaching that conclusion and, therefore, in
rejecting the basis on which the Coshott parties
contended that the Property was held on a resulting trust
for superannuation funds. The evidence as a whole
against that conclusion was overwhelming”.
Such evidence included the fact that the contract for the
purchase of the Property was signed by Robert and
Ljiljana without reference to any trust and that the
solicitor acting for Robert and Ljiljana was instructed to
arrange for the transfer of the Property to them as joint
tenants. Secondly, there was no record that Schlotzsky
as trustee of the Superannuation Fund held any interest
in the property. Thirdly, there was no evidence of any
activities by Schlotzsky as trustee of the Superannuation
Fund. Fourthly, while it was true that the evidence
established that funds for the deposit and purchase of
the property were withdrawn from the account which was
held by Schlotzsky as trustee for the Superannuation
Fund, the primary Judge’s finding that the account in
Schlotzsky’s name was in fact operated for Robert’s
personal benefit was unchallenged. Accordingly, the Full
Court found at [79]: “Robert’s conduct, therefore, both
before and after the acknowledgment was purportedly
made, was consistent only with him having taken his
interest beneficially”.
The Full Court found that the primary Judge correctly
held that Robert’s interest was acquired by him
beneficially and therefore vested in the trustee in
bankruptcy. The appeal was subsequently dismissed
save in so far as the primary Judge failed to appoint two
trustees as required by s66G of the Conveyancing Act
(NSW).
The appellants also challenged the primary Judge’s
orders for sale, alleging that the Court lacked power to
order the sale of the property because neither s 30 of the
Bankruptcy Act nor s 66G of the Conveyancing Act
(NSW) conferred that power. The Full Court found (at
[100]) that it must be the “case that the general power in
s30(1) of the Bankruptcy Act does not extend to the
making of orders for the sale of property which is coowned by a person who is not the bankrupt, thereby
destroying their rights in that property”. The Full Court
considered that the relief sought by the appellants would
permanently extinguish Ljiljana’s rights in real property in
order to facilitate the recovery of monies owed by the
bankrupt, solely on the ground that she was a co-owner
and that the sale would realise Robert’s interest.
Section 66G is similar in effect to s38 of the Property Law
Act (Qld). In relation to the s66G argument, the Full Court
found that s79 of the Judiciary Act operates to capture
and apply both procedural and substantive State law as a
surrogate to federal law, thereby enabling courts
exercising federal jurisdiction to provide remedies
afforded otherwise only under State law. The Full Court
remitted the matter back to the trial Judge to decide who
should be appointed as trustees for sale.
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Mark Madsen
Partner
Mullins Lawyers
t +61 7 3224 0241
mmadsen@mullinslaw.com.au
Ruth Sainsbury
Solicitor
Mullins Lawyers
t +61 7 3224 0382
rsainsbury@mullinslaw.com.au