FEDERAL COURT OF AUSTRALIA

Challen v Bendeich [1999] FCA 845

BANKRUPTCY – where trustee in bankruptcy made retrospective assessments of bankrupt’s income – review by AAT applied incorrect legislation – whether s 139W(1) Bankruptcy Act 1966 allows retrospective assessments of income – relevance of legislative amendments to interpretation of legislative provisions prior to amendments – whether costs certificate should be granted pursuant to s 6(1) of the Federal Proceedings (Costs) Act 1981

WORDS AND PHRASES – “likely to be derived” – “was derived” – “as soon as practicable”

Bankruptcy Act 1966 (Cth) ss 139M, 139P, 139Q, 139S, 139W, 139Y, 139ZG and 149D(1)(f)

Federal Proceedings (Costs) Act 1981 (Cth) s 6(1)

Allina Pty Ltd v Commissioner of Taxation (1991) 28 FCR 203 cited

Kalwy v Secretary, Department of Social Security (1992) 38 FCR 295 cited

Minister for Human Services & Health v Haddad (1996) 39 ALD 557 cited

Comcare Australia v Hill [1999] FCA 488 cited

PETER LESLIE CHALLEN v GRAHAM ROSS BENDEICH

QG 179 OF 1998

SPENDER, BURCHETT & HELY JJ

25 JUNE 1999

BRISBANE

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL

THE COURT ORDERS THAT:

1.         The appeal is allowed:

Ÿ                     The decision of AAT given on 7 December 1998 is set aside;

Ÿ                     The compulsory contributions assessments purportedly made by the respondent against the applicant on 9 August 1996 are quashed;

Ÿ                     The respondent is to pay the applicant’s costs of the appeal.

2.                  Pursuant to the provisions of s 6(1) of the Federal Proceedings (Costs) Act 1981 the respondent be granted a costs certificate in respect of the appeal to the effect that, in the opinion of the Court, it would be appropriate for the Attorney-General to authorise a payment under the Act to the respondent in respect of:

Ÿ                     The costs incurred by the respondent in relation to the appeal; and

Ÿ                     Any costs incurred by the applicant in respect of the appeal that are required to be paid by the respondent to the applicant in pursuance of Order 1.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL

REASONS FOR JUDGMENT

THE COURT:

1                     The applicant became bankrupt on his own petition on 12 August 1993.  Robert Thomas Adcock (“Adcock”) became his trustee on that date.  The applicant had signed an authority pursuant to s 188 of the Bankruptcy Act 1966 (“the Act”) on 21 July 1993, hence his bankruptcy is deemed to have commenced on that date: s 115(2), s 40(1)(i).

2                     On 29 October 1995 Adcock was replaced by the respondent as trustee.

3                     On 9 August 1996 the respondent purported to assess the income of the applicant pursuant to s 139W and s 139Y of the Act.  The contributions which the applicant was liable to pay in consequence of those assessments were as follows:

            Period                                                 Amount

21.7.93 to 20.7.94                                           $  8,386.15

21.7.94 to 20.7.95                                           $  8,885.50

21.7.95 to 20.7.96                                           $  8,920.10

                                                                        $26,191.75

4                     On 13 August 1996 the applicant was discharged from bankruptcy.

5                     During the period of the applicant’s bankruptcy he was employed as a solicitor earning a salary of $24,112.65 per annum.  In the opinion of the trustee that was less than the “reasonable remuneration” referred to in s 139Y.  Accordingly, for the purpose of making his assessments, the trustee deemed the bankrupt’s income for the contribution periods referred to above, to have been $60,000, $62,000 and $65,000 respectively.

6                     On 15 January 1997 the applicant applied to the Inspector-General in Bankruptcy for a review of the trustee’s assessments pursuant to s 139ZA of the Act.  On 21 March 1997 the delegate of the Inspector-General set aside the trustee’s assessments, and pursuant to s 139ZD(b) of the Act, purported to make fresh assessments for each of the contribution periods referred to above.

7                     In making his assessments, the trustee had overestimated the tax contributions payable by the applicant.  In that respect the assessments were too favourable to the applicant.  The delegate, in making his assessments, corrected that error.  The delegate also adopted a deemed income of $50,000 per annum in substitution for the higher figures adopted by the trustee.  In the result fresh assessments were made for each contribution period in an amount of $9,294.12 - totalling $27,882.36 for the three contribution periods in question.

8                     The applicant appealed against that decision to the Administrative Appeals Tribunal (“AAT”).  AAT found that the Inspector-General had no power to set the decision of the trustee aside, and make a fresh assessment, after the applicant was discharged from bankruptcy.  AAT set aside the decision of the Inspector-General, and restored the decision of the trustee of 9 August 1996.  Time within which an application for review of the trustee’s decision might be made was extended, and an amended application for review was lodged, which sought a review of the trustee’s decision of 9 August 1996.

9                     That application was determined by a differently constituted AAT on 7 December 1998.  AAT rejected all of the arguments put to it on behalf of the applicant.  Its decision is recorded as being as follows:

“(i)      The Notice of Assessment issued to the applicant on 8 August 1996 [sic] by the trustee as to income during the contribution period is valid;

(ii)               the Tribunal has the power to issue a fresh assessment of income under s 139W(2) of the Bankruptcy Act 1966;

(iii)             the amount of $50,000 is the appropriate amount of income.”

10                  With all due respect, the import of this decision is not pellucidly clear.  But it was common ground between the parties to this appeal that its intended effect was to impose a liability on the applicant to make contributions for each of the contribution periods referred to above of $9,294.12 – a total of $27,882.36.

A fundamental mistake by AAT

11                  The Bankruptcy Legislation Amendment Act 1996 (No 44, 1996) came into effect on 16 December 1996, after the applicant had been discharged from bankruptcy.  This Act made certain amendments to Division 4B of Part VI of the Act to which we shall presently refer.  However, the amended application for review fell to be determined by reference to the Act as it stood prior to the amendments.  It would only be legitimate to have regard to the amendments if and insofar as they might assist in the construction of the Act in its unamended form: see Allina Pty Ltd v Commissioner of Taxation (1991) 28 FCR 203 at 212; Kalwy v Secretary, Department of Social Security (1992) 38 FCR 295 at 299.

12                  AAT’s attention was drawn to the fact that it was the Act in the form which it took prior to the December 1996 amendments that was relevant for the purposes of the amended application before it.  However, AAT appears to have overlooked this, because the legislation which it quotes as being applicable to the matter before it is either the legislation in its amended form, or in the case of s 139W, some mixture of the legislation as it was both before and after the amendments.

13                  Accordingly, AAT’s decision is fatally flawed, because it addresses and purports to apply legislation which is different in form from that which was in force at the relevant time.  But it would be unsatisfactory for the matter simply to be referred back to the AAT to be reconsidered upon the basis of the legislation as it stood prior to the amendments, when the application of the legislation to the undisputed facts has been the subject of submission in this Court.

Retrospective Assessments?

14                  The applicant submits that s 139W(1) did not permit an assessment to be made for a contribution period after its expiry.  For that reason, none of the assessments was authorised by the Act, and each ought to be set aside.

15                  In Division 4B of the Act, a distinction is drawn between an “original assessment”, in relation to a contribution assessment period, and a “subsequent assessment” in relation to that period.  An original assessment is one which is made by the trustee under s 139W(1); a subsequent assessment is one which is made by the trustee under s 139W(2).

16                  Section 139W(1), prior to its amendment, relevantly provided:

“As soon as practicable after the start of each contribution assessment period in relation to a bankrupt and before the bankrupt is discharged, the trustee is to make an assessment of the income that is likely to be derived by the bankrupt ... and of the contribution (if any) that the bankrupt is liable to pay in respect of that period under section 139S."

Section 139W(2), prior to its amendment, relevantly provided:

“If at any time, whether during or after a contribution assessment period but before the bankrupt is discharged ...

(a)               the trustee is satisfied that the income that is likely to be derived, or was derived, by the bankrupt during that period is or was greater or less than the amount of that income as assessed by the last preceding assessment in respect of that period;

(b)               ...

(c)               ...

the trustee is to make a fresh assessment of the income that is likely to be derived, or was derived, by the bankrupt during that period ... and of the contribution (if any) that the bankrupt is liable to pay in respect of that period.”

17                  A consideration of the provisions of s 139W provokes the following observations:

Ÿ                     The assessment under s 139W(1) is to be made “as soon as practicable” after the start of the period to which it relates – no doubt so that the bankrupt can organise his financial affairs knowing the extent of his commitment to make contributions to his estate, and so that he can make arrangements with the trustee, if appropriate, to make payment by instalments: cf s 139ZG.

Ÿ                     The subject matter of the assessment under s 139W(1) is the income that is likely to be derived by the bankrupt during the period – as the assessment is one which is necessarily made after the commencement of the period, it may take account of income derived from the commencement of the period up to the point of assessment in calculating the income that is likely to be derived for the whole period.  But that does not detract from the proposition that the subject matter of the assessment is the income likely to be derived by the bankrupt during the period.  The phrase, "likely to be derived" nonetheless indicates that there must be at least an element of futurity associated with the assessment process.  It is not an expression which is apt to encompass income, all of which has been already derived in the period.

Ÿ                     If it subsequently emerges that the income which was derived by the bankrupt in the period is different from the estimate in the original assessment, then a subsequent assessment may be made by the trustee under s 139W(2).  Section 139W(2) makes it plain that a subsequent assessment may be made after the expiry of the contribution assessment period to which it relates, and upon the basis of the income actually derived in that period.  Section 139W(1) does not follow that form.

18                  It is s 139P of the Act which directly imposes the liability upon the bankrupt to pay a contribution to the trustee.  Section 139P(1) relevantly provides:

“Subject to section 139Q, if the income that a bankrupt is likely to derive during a contribution assessment period as assessed by the trustee under an original assessment exceeds the actual income threshold amount applicable in relation to the bankrupt when that assessment is made, the bankrupt is liable to pay to the trustee a contribution in respect of that period.”

19                  Section 139Q applies to a subsequent assessment.  For that reason it provides that “[i]f the income that a bankrupt is likely to derive, or derived, during a contribution assessment period as assessed by the trustee under a subsequent assessment” exceeds the threshold amount, then the bankrupt is liable to pay to the trustee a contribution in respect of that period.

20                  Section 139S provides a formula for working out the contribution amount payable by the bankrupt.  It applies both to an original assessment and to a subsequent assessment.  For that reason it is appropriate that the integer, “Assessed Income” should be defined in terms so as to include the income that the bankrupt is likely to derive, or derived, during the contribution assessment period.

21                  Section 139M is concerned with the concept of derivation of income.  Section 139M(2) provides:

“A reference in this Division to the income that a bankrupt is likely to derive during a contribution assessment period includes a reference to income that the bankrupt has derived during that period.”

This provision does not detract from the proposition that s 139P, and s 139W(1) require a prospective assessment of income likely to be derived during the contribution assessment period.  It simply makes explicit what is, in any event implicit in s 139W(1), namely that income already derived up to the point of assessment may be included as part of the assessment process.

22                  Finally, s 139Y enables a trustee, in specified circumstances, to adopt a reasonable remuneration for the purposes of making an assessment under s 139W(1) if the bankrupt receives either no remuneration, or less than a reasonable remuneration, in respect of his services:

“... for the purpose of making an assessment, the trustee may determine that the bankrupt receives or received the reasonable remuneration in respect of the employment ...”

Again, the inclusion of “or received” is explicable on the basis that an assessment made partway through a period, of income likely to be derived in the whole period, necessarily encompasses income that may have already been received, as well as income which is in prospect.

23                  Contributions that are not paid by the bankrupt are recoverable by the trustee as a debt due to the estate of the bankrupt: s 139ZG(3).  Failure to pay contributions is also a ground on which objection can be taken to the discharge of a bankrupt from bankruptcy: s 149D(1)(f).

24                  A consideration of the terms of s 139W(1), and the general scheme of the Act to which we have referred, leads us to the conclusion that, prior to the December 1996 amendments, the Act did not authorise the making of an original assessment with respect to a contribution period after the expiry of the period, on the basis of income actually derived, or deemed to have been derived in the period.  Section 139W(1) authorises a prospective assessment of income likely to be derived in the period; it does not authorise a retrospective assessment of income derived, or deemed to have been derived, in the period.  That conclusion is reinforced by the fact that a different construction would produce a result which could be unfairly prejudicial to a bankrupt.  The present case is an illustration of a potentially unfair situation, as assessments for a period of three years in the past were made only days before the applicant’s discharge from bankruptcy.

The Bankruptcy Act is amended

25                  The amendments to the Act which came into effect in December 1996 changed the definition of contribution assessment period in s 139K.  The commencing point of the period was changed from the commencement of the bankruptcy, to the day on which the person became bankrupt.  Section 139W(1) was amended by omitting “and before the bankrupt is discharged” and by inserting after “derived”, “or was derived”.  Section 139W(2) was amended by omitting “but before the bankrupt is discharged”: [items 256-258].

26                  Section 139W(1) thereafter provided:

“As soon as practicable after the start of each contribution assessment period in relation to a bankrupt, the trustee is to make an assessment of the income that is likely to be derived, or was derived, by the bankrupt during that period ... and of the contribution (if any) that the bankrupt is liable to pay in respect of that period under section 139S”.

27                  The Explanatory Memorandum issued in relation to the 1996 amending Act contains the following statement:

“98.2   The income that the bankrupt actually derived during a contribution assessment period can only be ascertained precisely after the period has concluded.  In the case of contribution assessment periods at the end of a bankruptcy, the trustee is precluded from making a revised assessment of the bankrupt’s income to reflect the exact income of the bankrupt, because an assessment must be made before the bankrupt is discharged.  The amendments proposed to section 139W by items 256-259 of the Bill will enable a trustee to make an assessment of the bankrupt’s income for a contribution assessment period which has come to an end because of the discharge of the bankrupt after the discharge, so ensuring the bankrupt is liable to make contributions to the estate commensurate with his or her total income during the period concerned.  These amendments will apply in relation to bankruptcies where the date of the bankruptcy occurs after the commencement of the Bill.”

28                  There may be room for debate as to whether s 139W(1), if in force in its amended form at the relevant time, would have authorised the assessments which the trustee made.  A possible view of the matter is the insertion of “or was derived” into s 139W(1) did no more than bring that subsection into line with provisions such as s 139M(2), without changing the basic notion that what the subsection requires, and all that it authorises, is a timely assessment of prospective income.  The fact that no change was made to s 139P, which imposes the liability, and which is expressed in terms of “income that a bankrupt is likely to derive”, may be thought to support that view.

29                  It is unnecessary for us to decide the effect of the amendment, or whether what we have described as a possible view of its operation is the correct view, and we expressly refrain from doing so.  In the particular circumstances of the present case we do not gain any assistance from the amendment in construing the legislation as it stood in its unamended form.  Certainly, on no view of the matter, could the amendments assist in coming to a conclusion contrary to the conclusion which we have reached.

Alternative arguments

30                  In view of the conclusion which we have reached, it is unnecessary to consider the alternative basis on which the applicant put his case, namely that in determining whether the assessments were issued as soon as practicable after the start of each contribution assessment period, regard must be had to the period during which Adcock was trustee.  In the view which we take of the operation of the subsection, this question simply does not arise.

31                  Nor is it necessary, for the same reason, to consider whether AAT made an error of law in rejecting as irrelevant, evidence which the applicant intended to adduce from Adcock, which was apparently designed to show the level of knowledge of the respondent as to the affairs of the bankrupt at the point when he assumed office.  However, we should say that we are far from satisfied that the supposed relevance of this evidence was exposed for AAT’s consideration with sufficient clarity.  In any event, the trustee was called as a witness and cross-examined as to his knowledge, hence the complaint really leads nowhere.

32                  Finally, AAT purported to invoke s 139W(2) as the basis for a supposed entitlement in AAT to issue a fresh assessment.  AAT, in its reasons for decision, recognised, correctly, that the trustee was not empowered to make an original assessment under s 139W(2).  That being so, we are unable to understand how the AAT, standing in the shoes of the decision-maker, could do so.  Again it is not necessary to pursue this matter, or alternative steps which might have been taken by AAT to bring about the intended result, in view of the conclusion which we have reached on the principal matter argued on the appeal.

Conclusion

Ÿ                     The appeal is allowed:

Ÿ                     The decision of AAT given on 7 December 1998 is set aside;

Ÿ                     The compulsory contributions assessments purportedly made by the respondent against the applicant on 9 August 1996 are quashed;

Ÿ                     The respondent is to pay the applicant’s costs of the appeal.

33                  The respondent has sought an order under s 6(1) of the Federal Proceedings (Costs) Act 1981.  That section gives the Court a discretion to grant to the respondent a costs certificate in respect of an appeal from (inter alia) AAT, where the appeal succeeds on a question of law.  This appeal has succeeded on a question of law.  However, the authorities establish that there is no automatic entitlement to a certificate.  The unsuccessful respondent must establish some ground for the exercise by the Court of its discretionary power to grant a certificate.  Amongst the matters which it is legitimate to take into account is the part played by the respondent in the error made by AAT: Minister for Human Services & Health v Haddad (1996) 39 ALD 557; Comcare Australia v Hill [1999] FCA 488.

34                  It was not the fault of either party that AAT addressed legislation in a form other than that which was applicable.  Although the respondent urged upon the AAT a construction of the applicable legislation which we have found to be erroneous, and was seeking to uphold the validity of assessments which we have found to be invalid, he was doing so on behalf of the creditors generally and in bona fide pursuance of his duty as trustee.  In those circumstances, we think it appropriate to exercise our discretion in favour of granting the certificate which the respondent seeks.

Associate:

Dated:              25 June 1999