Assignments Between Family Members: An Issue For Insolvency Practitioners

By Krisha Reddy, Law Clerk, and Alicia Hill, Principal, MST Lawyers

The Supreme Court of Victoria’s decision in AAD Services Pty Ltd (in liq) v ALD Wholesale Pty Ltd and Ors (No 3) [2019] VSC 546 highlights the issues that insolvency practitioners can face in regards to recouping funds. On these facts, an assignment created between family members had legal operation and meant that the trustee in bankruptcy was unable to access proceeds of judgment.

Background

In the principal matter, it was found that funds of $59,000 held in Court were payable to Mr Tahiri Snr. After the principal matter was decided but before orders were made for payment, Mr Tahiri Snr was declared bankrupt, and a trustee was appointed (Trustee). On 19 October 2018, a sequestration order was made against him and his wife. On 25 March 2019, orders were made to give effect to the judges decision in the principal matter. 

However, Mr Tahiri Snr contended that he had assigned $40,000 of his interest in the proceeds of judgment to Cardboard Collection Service Pty Ltd (CCS) through a deed of assignment dated 4 May 2018 (Assignment). The sole company officer of CCS was Mr Adem Tahiri (Mr Tahiri Jnr), the son of Mr Tahiri Snr. The deed of assignment was drafted by Mr Tahiri Jnr, a non-lawyer, from documents he had found on the internet. Mr Tahiri Jnr gave evidence that his father asked him if CCS could lend him money to pay legal fees in the principal matter. He deposed that he was told it was best not to structure the agreement as a loan and instead tried to buy the cause of action as a litigation funder. The deed of assignment provided that payment of legal fees would be capped at $40,000.

Mr Tahiri Snr conceded that $19,000 should be paid out to the Trustee. However, an issue arose regarding the remaining $40,000. The Trustee challenged the assertion that the interest had been assigned to CCS.

Issues

There were three issues to be decided by Associate Justice Lansdowne:

• whether the Trustee should be allowed to argue intent to defraud;
• whether the Assignment was supported by consideration; and
• whether the Assignment conferred a security interest.

Allegation Of Intent To Defraud

The Trustee argued that the assignment was ineffective under s 172(1) of the Property Law Act 1958 (Vic) which provides that alienation of property, with the intent to defraud creditors, shall be voidable at the instance of any person prejudiced.

Mr Tahiri Snr and CCS argued that the Trustee should not be able to make this argument because the issue was only raised after the close of evidence and notice was essential given the seriousness of the allegation.

Her Honour accepted Mr Tahiri Snr’s argument as the Trustee had the obligation to ensure that the matter was dealt with appropriately.

Assignment Supported By Consideration

The Trustee also argued that the Assignment would only be valid if there was consideration, and Mr Tahiri Snr and CCS had the onus of proving consideration was provided. The absence of evidence adduced meant that per the principle in Jones v Dunkel an inference could be drawn that no consideration was paid.

Mr Tahiri Snr and CCS did not dispute that consideration was required for the Assignment to be effective. However, they submitted that the Assignment recorded consideration and prima facie this was sufficient. There is a difference between the establishment of consideration and proof of failure to provide consideration. The Trustee has the onus to establish the latter.

Her Honour clarified the Jones v Dunkel statement and found that any inference, if available and at its highest, would be that the evidence not given would not assist the case of Mr Tahiri Snr and CCS. There is a difference between evidence not assisting a case and evidence being unfavourable. The assignment deed itself was sufficient to establish consideration, and if the Trustee wanted to prove otherwise then it had the evidentiary onus.

Assignment Confers A Security Interest

The Trustee also argued that the Assignment created a security interest in the judgment proceeds meaning that it fell within s 12 of the Personal Property Securities Act 2009 (Cth). The security interest was not perfected by registration which meant that immediately before bankruptcy it was vested in Mr Tahiri Snr and therefore now the Trustee.

Her Honour found that the Assignment provided for the purchase by CCS of up to $40,000 of the interest of Mr Tahiri Snr in the proceeds of judgment. The Assignment was a transfer of interest in the proceeds of the judgment under certain conditions rather than the conferral of a security interest in the proceeds which meant that PPSR provisions were not enlivened.

Lansdowne AsJ ordered that the $40,000 be paid out to CCS in accordance with the terms of the Assignment.

Lessons To Learn

This decision highlights issues that insolvency practitioners can face in regards to funds paid into court. Assignments can operate to prevent trustees in bankruptcy from recouping funds paid into court which they might otherwise believe they are entitled to recover.

If you have any questions regarding this decision or any matters raised by it, please feel free to get in contact with Alicia Hill on 61 3 8540 0200 or by email on alicia.hill@mst.com.au.