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The line it is drawn, the curse it is cast - Bob DYLAN

Important developments in asset structuring – the “main purpose” test and the relevance of time

McMillan v Warner (Trustee) [2022] FCAFC 20 (22 February 2022)

Limitation periods apply to almost all civil causes of action. They apply to voidable transactions such as preference actions, uncommercial transactions and insolvent trading claims under the Corporations Act that are for the benefit of creditors of insolvent companies. Surprisingly no limitation period applies to voiding transactions entered into with the main purpose of preventing property being available to creditors under section 121 of the Bankruptcy Act.

The issue of whether a transfer of property for effectively no consideration can be open to attack by a trustee in bankruptcy 16 years later was recently considered by The Full Court of the Federal Court of Australia (McMillan v Warner (Trustee) 2022] FCAF 20).

In May 2002 Mr McMillan transferred to his wife his one half interest in their matrimonial home for a stated consideration of $1. His trustee (who was appointed in November 2018) alleged that the transfer was void under section 121 of the Bankruptcy Act on the basis that “the main purpose” of the transfer was to prevent the property becoming divisible among his creditors.

At the time of the transfer there was no suggestion that Mr McMillan was, or was about to become, insolvent. He was operating a successful and growing prestige car dealership and repair business. Various finance facilities had been entered into relating to the business and its anticipated growth prior to the transfer. The main car supplier and financier to the business were both aware of the transfer. Indeed the supplier had suggested to Mr McMillan in 2001 that there needed to be a financial separation between Mr McMillan’s personal situation and that of his business.

Mr McMillan’s explanation for the transfer at the initial hearing was that it had been done “out of love. It was done at her request” and asserted that the house was effectively hers anyway as the deposit had been financed by his wife’s parents. He denied the suggestion that the transfer was done to ensure that the family home was protected in case the expanding business did not succeed as planned.

The trustee was successful in the first instance. The primary judge did not accept Mr McMillan’s evidence and also drew adverse inferences from the fact that neither Mrs. McMillan nor his accountant who had advised Mr and Mrs McMillan gave evidence. He found that Mr McMillan’s main purpose in effecting the transfer was to prevent the house becoming available to his creditors.

Mrs McMillan successfully appealed. The Full Court helpfully summarised the principles relating to the operation section 121 of the Bankruptcy Act as follows:

If the trustee can’t establish that at the time of the transfer the bankrupt was insolvent or about to become insolvent enabling the trustee to rely on the statutory presumption that the main purpose of the transfer was to prevent the property being available to creditors, the trustee will need to establish that subjective purpose by other means.
“Main purpose” is established if it can be shown that the transferor’s principal or leading purpose was to prevent the transferred property being divisible amongst creditors notwithstanding that the transferor had other purposes in mind.
The trustee bears the onus of establishing the main purpose.
A Court can infer that in all the circumstances, independently of the solvency of the transferor, the transferor’s main purpose.
The required main purpose under section 121 can be established even if at the time of the transfer the transferor has no creditors or was able to satisfy is or her creditors.
If a person makes a voluntary settlement before entering into “a financially hazardous venture” it could establish an intention to defraud creditors notwithstanding there were no outstanding creditors at the time of the transfer.

In upholding the appeal the Full Court considered that:

There was an equally compelling inference that the main purpose in making the transfer was attributable to the supplier’s suggestion of a financial separation between Mr McMillan’s personal and business affairs. It noted that the trustee must prove the case on the balance of probabilities and that a mere rejection of Mr McMillan’s evidence did not prove the case.
An analysis of finance arrangements for the business did not establish that the planned expansion of the business (and the necessary financial arrangements required) was a hazardous or speculative business venture.
The trustee had not suggested that there was any doubt as to Mr McMillan’s solvency at the time of the transfer.
It is “ inherently problematic”, taking into account the above matters and the significant time that had elapsed between the transfer and the bankruptcy, that an inference could be drawn that Mr McMillan’s main purpose for the transfer was to prevent the matrimonial home becoming available to his creditors.

Mrs McMillan’s appeal was successful. The Court held it was reasonable to infer from the evidence an alternative main purpose to that of preventing the property being available to Mr McMillan’s creditors.

The time that had elapsed between the transfer and bankruptcy was taken into account by the Court having regard to the available facts. However without being able to rely on those facts it is arguable that time alone (even if there was no suggestion of insolvency when the transfer took place) may not by itself be sufficient to defeat an inference that a transferor’s main purpose of transferring property at an undervalue may be caught by section 121 of the Bankruptcy Act.