Bankruptcy and the presumption of advancement

25 July 2014

In this issue:

Nature and operation of the presumption of advancement
Consequences of the presumption of advancement where bankruptcy intervenes
The presumption of advancement in the context of ageing parents transferring assets to adult children
Discussion of the decision in Aravanis (Trustee), in the matter of Gillespie (Bankrupt) v Gillespie (2014) FCA 630, 17/6/2014

Introduction

In a recent case before the Federal Court, Aravanis (Trustee), in the matter of Gillespie (Bankrupt) v Gillespie (2014) FCA 630, 17/6/2014, (“the Gillespie case”) the Court was required to determine whether a mother, in purchasing a house property which was conveyed into the name of her adult son only, had gifted the property to her son under the “presumption of advancement.” The issue arose for consideration when subsequently the son became bankrupt, with the trustee in bankruptcy seeking orders to the effect that at the time of transfer the son had acquired full beneficial ownership of the property.

The case provides a useful example of the presumption of advancement as it operates in Australia and its potential consequences where bankruptcy intervenes. Equally the case is significant in the context of an ageing population where ageing parents will increasingly transfer their assets into the names of their adult children to have the children assist them in managing their financial affairs. In such circumstances where the bankruptcy of either the ageing parent or the adult child intervenes the advancement issue will have a significant bearing on the administration of the bankrupt’s estate.

What is the “presumption of advancement”

Usually when one person purchases property in the name of another the transferee is taken in equity to hold the property on trust for the transferor, unless there is evidence that it was intended as a gift. The presumption of a trust means the transferee was never intended to hold the property beneficially.

Similarly in cases where two persons contribute towards the purchase price of property which is conveyed into the name of one of them alone, the latter is presumed to hold the property on trust for both parties in shares proportionate to the purchase price: see Tinsley v Milligan (1994) 1 AC 340 at 371. Again this presumption can be overridden by evidence to the effect that the money contributed to the purchase price was intended as a gift to the party in whose name the property was conveyed.

Importantly, where the parties stand in a particular relationship (“advancement relationship”) the presumption of a trust outlined above may be overridden by a “presumption of advancement”. Here equity presumes that a gift was intended and that the transferor did not intend to retain any interest in the property. In such cases the recipient is assumed to be the full legal owner. If the transferor seeks to recover property from a recipient standing in an advancement relationship with the transferor, the transferor carries the burden of proving that a gift was not intended.

The presumption of advancement applies in a narrow range of relationships. In Australia the presumption most commonly applies to transfers from husbands to wives, and, as occurred in the Gillespie case, from parents to their children, including independent adult children: see Nelson v Nelson (1995) 184 CLR 538.

The Gillespie case

For present purposes the primary facts of the case may be summarized as follows:

Facts

Mrs Gillespie was about 75 years old when her husband died in 2000. She had five adult children, namely, Ian and Peter, and three daughters. Mrs Gillespie decided to sell her family home. After the sale she was left with $256,000. She wanted to move into a smaller place. A suitable property was found with a purchase price of $371,000. It was agreed that Mrs Gillespie would contribute $161,000 to the purchase price. Moreover, because it was believed that Mrs Gillespie would not be in a position to borrow funds to meet the balance of the purchase price, Peter would take out a loan secured over the property to cover the balance of the purchase price. It was further agreed that the property would be put in Peter’s name, and that with respect to his payment of the mortgage instalments, he would be repaid when the property was sold at a future time. On this basis the property was purchased in Peter’s name on 3/9/2001.

After June 2004 Peter’s mortgage payments became sporadic. Eventually in 2007 Peter said he would not continue to pay the mortgage and Ian would have to take the mortgage over. It was then agreed that Peter would transfer the property to Ian. The market value of the property was $430,000. On 1/8/2008 Peter sold the property to Ian under a contract with a specified sale price of $430,000. Under the arrangement Ian took out a new loan secured by mortgage over the property. Using the loan funds Ian paid out the existing mortgage ($269,200) and paid $35,000 to Peter i.e. a total of $304,000. Nothing further was payable under the transfer even though the contract sale price was specified to be $430,000. Ian began to reside with his mother.

In 2011 Mrs Gillespie moved into a nursing home while Ian continued to reside at the property. In the following year, on 15/11/2012, Peter became bankrupt and Mr. Aravenis was appointed his trustee in bankruptcy. In July 2013 Ian sold the property to a third party for $588,146. After paying out the existing mortgage, selling expenses, and repayment to Ian on account of his mortgage payments, the sum of $130,000 was left over.

The trustee in bankruptcy claimed an entitlement to the $130,000 on behalf of Peter’s bankrupt estate.

The competing arguments

The trustee’s primary case was that when the property was first purchased in Peter’s name in 2001 the presumption of advancement from Mrs Gillespie to Peter her son applied. Accordingly, Peter owned the property both legally and beneficially. Then, invoking section 120 of the Bankruptcy Act 1966 (undervalued transactions), the trustee sought to argue that the sale from Peter to Ian in 2008, being at an under-value, was void. As a consequence the trustee asserted that the current surplus of $130,000 arising from Ian’s sale of the property vested in the trustee for the benefit of the creditors of Peter’s bankrupt estate.

Ian’s case was that the presumption of advancement was weak and easily rebutted. As a consequence the trustee’s reliance on section 120, Bankruptcy Act 1966 was misplaced.

Decision of the Court

Contrary to the trustee’s arguments the Court found that a common intention clearly existed between Mrs Gillespie, Peter and Ian that Peter held the property on trust for his mother rebutting any presumption that the transaction was intended to be for Peter’s advancement.

The Court recognized:

“It must have been in [Mrs Gillespie’s] contemplation and that of Peter that she might have to move into a different form of accommodation in time. This fact alone is inconsistent with the notion that Mrs Gillespie, uncaring of her future capacity to provide for herself, gifted Peter the unit, thereby depriving herself of any capacity to use the capital from the sale of the unit to ensure she always had appropriate accommodation.” (para. 42).

In view of the Court’s finding that the presumption of advancement had been rebutted it was unnecessary for the Court to consider the relevance of section 120, Bankruptcy Act 1966. Notwithstanding, the Court made a number of observations about the section as it related to the facts before it. In particular the Court recognized that under section 120 a transaction at an under-value is not void against the trustee “if the transfer took place more than 4 years before the commencement of the bankruptcy” and “the transferee proves that, at the time of the transfer, the transferor was solvent.”

The transfer from Peter to Ian on 1/8/2008 occurred more than 4 years before the commencement of Peter’s bankruptcy on 15/11/2012. At the time of transfer the Court considered that “Peter could pay his debts as and when they fell due……He was working and solvent at the time. It follows that the transfer of the property to Ian is not void pursuant to section 120(1) Bankruptcy Act.” (para. 55).

Summing up

The Gillespie case provides a useful example of:

A family arrangement involving the transfer of property between parties standing in an advancement relationship (mother and adult child).
In a recognized advancement relationship where bankruptcy of either the transferor or transferee subsequently arises issues relating to the equitable presumption of advancement will need to be resolved.
Findings on the existence or otherwise of advancement will have significant consequences for the bankrupt’s estate.
In the Gillespie case the presumption of advancement was rebutted with the result that the estate of the bankrupt could not benefit from the conveyance in the bankrupt’s name.

Finally, with the prospect of an ageing population family arrangements between ageing parents and their children of the kind encountered in the Gillespie case are likely to become more prevalent. This in turn will give rise to issues involving the presumption of advancement, and in the event that bankruptcy intervenes, further consideration of the consequences of the presumption in bankruptcy proceedings.