High Court clarifies the approach to setting aside transactions made with the intention of defrauding creditors under property law statutes

On 9 March 2011, the High Court handed down its decision in a case concerning the proper interpretation of s37A of the Conveyancing Act 1919 (NSW), in Marcolongo v Yu Po Chen & Anor [2011] HCA 3.

S37A (1) provides that except for certain specified exceptions, every alienation of property made with the intent to defraud creditors shall be voidable at the instance of any person thereby prejudiced.

S37A is in very similar terms to s89 of the Property Law Act 1969 (WA).  There are a few reported decisions on the Western Australian provision, and given the similar wording in s37A, the High Court’s approach will be followed in Western Australia and in other states with similar legislation.

Relevant facts

Mrs Marcolongo owned a property adjacent to land where a property development project was underway, in which Mr Lym was involved.  Mrs Marcolongo brought a claim against Mr Lym in the New South Wales District Court for damages, upon the removal by Mr Lym of support, during the building operations.  Mrs Marcolongo’s solicitors gave notice to Mr Lym of an application to obtain a property preservation order, over a separate property development project in which Mr Lym was also involved, to protect Mrs Marcolongo’s position in the District Court action against Mr Lym.  However, in 2006, Mr Lym transferred the second property to Mr Chen.  In November 2009, Mrs Marcolongo recovered a judgment against Mr Lym in the District Court proceedings, for some $388,000.

Mrs Marcolongo was not able to recover on the judgment, and brought proceedings against Mr Chen, in which she sought orders under s37A to have the contract for the sale of the property to Mr Chen declared voidable, and to require Mr Chen to transfer the property back to Mr Lym.

The trial judge found in favour of Mrs Marcolongo.  The Court of Appeal reversed the trial judge’s decision on the basis that Mr Lym had not been dishonest and the transfer was not ‘predominantly’ motivated by an intent to defeat Mrs Marcolongo’s claim, as a creditor.

The High Court considered that s37A should receive a liberal construction.  The Court held that ‘defraud’ includes the hindering or delaying of creditors in the exercise of legal remedies.  The majority judges also found that s37A requires a finding of intent to achieve the prescribed prejudice.  Their Honours held that s37A is not qualified by a notion of constructive fraud, does not require an element of dishonesty and does not require a predominant or sole intent to defraud.

Heydon J held that whatever the precise test called for by s37A, the intent underlying Mr Lym’s conduct was enough to satisfy it, given that the intent was as ‘actual’ and ‘dishonest’ as it is possible to have.

Mr Chen argued that his purchase of the property came within one of the exceptions to s37A, where a purchase is made in good faith and without notice of any intent to defraud creditors.  The High Court rejected this argument and found that Mr Chen clearly knew that the transfer was being made with a view to Mr Lym avoiding having to pay money to Mrs Marcolongo, under the District Court judgment.

The High Court’s decision has assisted in clarifying the law in relation to s89 of the Property Law Act.  The High Court’s reasoning makes it clear that an applicant for relief does not need to show that the transaction in question was initiated with a predominant or sole intent to defraud, and that it will be enough if the effect of the transaction is to hinder or delay creditors in exercising their legal remedies.

For more information please contact special counsel Tim Coyle on (08) 9288 6761 / tim.coyle@lavanlegal.com.au