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01 Dec 2008

Past Consideration is generally not Good Consideration


4 min

Most people will be familiar with a Bankruptcy Trustee’s rights to void transfers of property when that property was transferred for less than its value, or the transfer was intended to defeat creditors. These recoveries are made pursuant to sections 120 and 121 of the Bankruptcy Act respectively and are based on the debtor not receiving proper consideration. The question of what is consideration and whether consideration passed is usually a major determining factor in these cases.

Historically the Act used the term ‘valuable consideration’ to describe what was necessary to avoid a transfer falling under these provisions. But valuable consideration could be anything that was not merely nominal. The value of that valuable consideration did not necessarily have to be equal to the real value of the property transferred, it just had to have some value.

To make the situation clearer, the wording of the Act changed from valuable consideration to “the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.” (section 120(1)(b)) and is clarified as “the market value of property transferred is its market value at the time of the transfer.” (section 120(7)(c) and 121(9)(c)).

Section 121 also excluded transfers where market value consideration was given:

121(4) Despite subsection (1), a transfer of property is not void against the trustee if:
(a) the consideration that the transferee gave for the transfer was at least as valuable as the market value of the property;

Consideration had to be able to be valued (have a market value itself) and be at least the market value of the property transferred to be good consideration under the section. Certain other forms of ‘considerations’ were specifically excluded as being good consideration. (These are mirrored in section 121(6).)

120(5) For the purposes of subsections (1) and (4), the following have no value as consideration:
(a) the fact that the transferee is related to the transferor;
(b) if the transferee is the spouse or de facto spouse of the transferor - the transferee making a deed in favour of the transferor;
(c) the transferee's promise to marry, or to become the de facto spouse of, the transferor;
(d) the transferee's love or affection for the transferor;
(e) if the transferee is the spouse of the transferor - the transferee granting the transferor a right to live at the transferred property, unless the grant relates to a transfer or settlement of property, or an agreement, under the Family Law Act 1975.

So consideration must be real and must be able to be valued. It must also have a value equal to the market value of the property at the time of the transfer. But when does the consideration need to be ‘paid’? At the time of the transfer, or at some later time, or at some earlier time?

Payments of consideration made at the time of the transfer or paid later pursuant to an agreement entered into at the time of the transfer should pose no problems as long as the payment of consideration is part of the agreement to transfer. But is consideration paid in the past good consideration?

This is a question that is raised frequently as some bankrupts transfer assets to relatives or other people in satisfaction or part satisfaction of long outstanding debts. They believe that the granting of these past debts is good consideration for the current transfer, and that the transfer is simply repaying the debts.

Usually the Court's position is that past consideration is no consideration. Consideration must be part of the transfer agreement and must occur at the time.

We ran this argument successfully in 2005 [Peldan & Ors v DCT (2005) FMCA 547], with his Honor stating in that judgment: “I accept as accurate the principles of law contended by the Applicant that "Consideration" in the section is used in its ordinary common law legal sense (Official Trustee in Bankruptcy v Lopatinsky [2003] FCAFC 109; (2003) 129 FCR 234 at 249) and that past consideration is not consideration for this purpose (Official Trustee in Bankruptcy v Mateo [2003] FCAFC 26; (2003) 127 FCR 217 at 236 - 250).” We are about to run that argument again in two separate cases.

Debtors must be aware that attempts to repay old debts with current transfers will probably not stand up to scrutiny.

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