Re Permewan (No 2)

This case considered the validity of transactions designed to remove assets from a deceased’s estate prior to her death – through the making of a gift and loan back – entered into with the intention of preventing a family provision application pursuant to the Succession Act 1981. Justice Cooper found that the transactions were void as contrary to public policy, and void as a “sham”. It was appropriate that the parties who had argued for the validity of the transactions should pay indemnity costs.

Cooper J

10 June 2022

Background

The applicant is the administrator of the estate of Prudence Permewan (“the deceased”). [1]. It sought declarations as to the invalidity of certain transactions said to have been entered into on 18 April 2018 (“the transactions”). [1]. In the end, consent declarations were made that the transactions were invalid and unenforceable. [2].

The issue remaining between the parties was as to costs. [4]. The administrator and two of the deceased’s daughters (who had all contended that the transactions were invalid) sought indemnity costs against the deceased’s son and a corporate trustee (which had contended the transactions were valid, and had sought to enforce them, before conceding and agreeing to the consent declarations). [4].

By way of further background, the deceased had three children: Scott, Donna and Marla.[14]. At the time of her death she had assets with an estimated value of $3 million. [19]. Having been excluded from the estate, Donna and Marla had commenced proceedings pursuant to Part VI of the Succession Act 1981 for family provision. [20]. It was principally as a result of those family provision proceedings that the validity of the transactions was put in issue.

The transactions

The transactions in issue were reflected in a number of documents prepared by a law firm. [27].The purported effect of the transactions was as follows:

1. A gift from the deceased, in the form of a promissory note, of $3 million to the Lotus Trust;
2. A loan from the Lotus Trust of $3 million to the deceased; and
3. To secure the loan, a mortgage / charge over the assets of the deceased.

As Cooper J observed, if valid, the consequence of the transactions would be that the deceased’s financial position “changed from having had assets worth approximately $3 million before the Transactions to having a debt of $3 million to the Lotus Trust secured over her assets”. [38]. Notably, at no point did the deceased have $3 million in cash to pay to the Lotus Trust if the promissory note was called on (she would have had to liquidate her assets, and there would likely have been a shortfall); and nor did the Lotus Trust have $3 million in cash to loan to the deceased. [39]. 

A solicitor who helped prepare the transaction documents described this as an “asset protection model” referred to as “Secured Debt”, in which there was:

“a gift and loan back process, whereby an entity gifts an amount of money almost equal to their net equity to a trust which, in turn, loans the amount of the gift back to the originating entity, and takes security for the loan amount.” [57].

Justice Cooper noted that the deceased’s solicitor gave evidence that the purpose of the transactions was “to ensure that there was so little, if anything, left in the estate” that any family provision application by the deceased’s daughters would “have no prospects of success”. [60].

Why the transactions were invalid

As noted at the outset of this summary, the parties had eventually agreed that the transactions were invalid, but the concession was only made on the basis that the Court could not find that the promissory note had been delivered. Absent delivery, “the promissory note remained inchoate and incomplete” (per s 90 of the Bills of Exchange Act 1909 (Cth). [2], [64]. However, Cooper J considered that there were at least two other reasons why the transactions were invalid and unenforceable, and as a result the Administrator and the deceased’s daughters were “almost certain to have succeeded” on their applications for declarations to this effect, irrespective of the concessions. [66]. The two reasons were: (1) the transactions were void as contrary to public policy; and (2) the transactions were void as a sham.

In relation to public policy, Cooper J quoted authority to the effect that “a contract is not enforceable if its enforcement would be opposed to public policy” (per In re Jacob Morris (1943) 43 NR (NSW) 352) and that it is the “policy of the law that contractual arrangements will not be enforced where they operate to defeat or circumvent a statutory purpose or policy according to which statutory rights are conferred in the public interest” (per Westfield Management Limited v AMP Capital Property Nominees Ltd (2012) 247 CLR 129). [69].

As his Honour noted, the public policy upon which s 41 of the Succession Act is based is the making of provision for family members who are in need of maintenance following a death – a policy which is of “public, as well as private importance” (quoting from Barns v Barns (2003) 214 CLR 169). [70]. His Honour considered that the transactions here were not bona fide, including because the deceased had “no intention of disposing of her property during her lifetime”. [74]. The sole purpose was to attempt to prevent a family provision application, and that would be “defeat or circumvent” the public policy upon which s 41 of the Succession Act is based. [76].

In relation to the transactions being a “sham”, Cooper J quoted authority to the effect that a transaction will likely be characterised as a “sham” where “the parties do not intend to give effect to the ostensible transaction” (per Raftland Pty Ltd v Commissioner of Taxation (2006) 227 ALR 598). [79]. In this case, contrary to the terms of the promissory note, the deceased “never intended to pay the sum of $3 million to the Lotus Trust” and the Lotus Trust had “no intention of receiving (nor seeking to enforce the payment of) the $3 million”. [80].

Why costs should be assessed on an indemnity basis

Having found that the Administrator and the deceased’s daughters would have succeeded in their application (and cross-applications) for declarations that the transactions were invalid irrespective of the concessions made, this was a case where “the court is in a position to exercise the discretion to make an order for costs by reference to ‘the event’.” [83]. As McHugh J observed in Lai Qin (1997) 186 CLR 622, a court may make an order for costs even if there has not been a hearing on the merits, if “one party was almost certain to have succeeded”, as was the case here. [10]. The final issue was as to “the basis upon which those costs are to be assessed”. [88].

His Honour ultimately concluded that costs should be assessed on an indemnity basis, payable by the deceased’s son and the former corporate trustee of the Lotus Trust (which had initially contended that the transactions were valid, and had sought to enforce them). [92]. This was because the conduct of both of those parties involved “the making of allegations which ought never to have been made and the undue prolongation of the proceedings by groundless contentions” (namely, contending that the transactions were valid and enforceable). [92].

W Isdale