FEDERAL COURT OF AUSTRALIA

O’Brien v Sheahan [2002] FCA 1292

BANKRUPTCY – EQUITABLE ESTOPPEL – immediately before commencement of bankruptcy, bankrupts owned their matrimonial home subject to two registered mortgages – value of property close to total amount secured by the mortgages – trustee directed bankrupts to obtain appraisals of property with a view to deciding whether any realisable “equity” in it – appraisals confirmed sale proceeds unlikely to exceed amount owing under mortgages – second mortgage held by close relative of bankrupts – trustee suspicious about second mortgage – trustee did not pursue inquiries about whether it secured a genuine indebtedness – trustee told bankrupts that they could reside in the property while they discharged obligations under the first mortgage – at time of bankruptcies first mortgagee about to exercise power of sale – bankrupts paid arrears of moneys owing under first mortgage – bankrupts paid all instalments of principal and interest falling due under first mortgage – made further payments in reduction of principal – bankrupt husband carried out substantial refurbishments – bankrupt wife paid all rates and taxes – bankrupts heard nothing further from trustee about his intentions in relation to the property for over four years – property increased in value – trustee then decided to sell the property – applied to the Federal Magistrates Court for vacant possession – bankrupts applied for declaratory and other relief – Magistrate found that trustee had made no “specific representation” that he would allow bankrupts to keep the property if there was no equity in it – Magistrate found that trustee knew that appellants were making payments under the first mortgage – also found that appellants had made lump sum reductions in the principal owing under the first mortgage –Magistrate held that it would be unconscionable for the trustee to retain the benefit of the bankrupts’ expenditure on preserving the property – held that some restitutionary order by way of compensation should be made – refused to make any such order at all in relation to bankrupt husband on basis that his “equity” constituted after-acquired property – made small compensatory order in respect of bankrupt wife for similar reasons and confined her entitlement to payments made since her discharge from bankruptcy – whether Magistrate erred in law – whether trustee had induced appellants into an assumption that he had abandoned any interest in the property – whether facts gave rise to equitable estoppel – nature of appropriate relief.

Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 applied

Giumelli v Giumelli (1999) 196 CLR 101 applied

The Commonwealth v Verwayen (1990) 170 CLR 394 applied

CHRISTOPHER O'BRIEN and DEBORAH O’BRIEN v JOHN SHEAHAN

S103 of 2002

S109 of 2002

CARR J

21 OCTOBER 2002

PERTH (Heard in Adelaide)

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	S 103 OF 2002

BETWEEN:	CHRISTOPHER O'BRIEN and DEBORAH O’BRIEN Appellants
AND:	JOHN SHEAHAN Respondent
JUDGE:	CARR J
DATE OF ORDER:	21 OCTOBER 2002
WHERE MADE:	PERTH (Heard in Adelaide)

THE COURT ORDERS THAT:

1. The appeal be allowed.

2. The orders made by the Federal Magistrate in application No AZ 204 of 2001 (“the application”) on 20 March 2002 be set aside.

3. In lieu thereof the application be dismissed.

4. The respondent pay the appellants’ costs of the application and of this appeal.

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

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	S 109 OF 2002

BETWEEN:	CHRISTOPHER O'BRIEN and DEBORAH O’BRIEN Appellants
AND:	JOHN SHEAHAN Respondent
JUDGE:	CARR J
DATE OF ORDER:	21 OCTOBER 2002
WHERE MADE:	PERTH (Heard in Adelaide)

THE COURT ORDERS THAT:

1. The appeal be allowed.

2. The orders made by the Federal Magistrate in application No AZ 242 of 2001 (“the application”) on 20 March 2002 be set aside and in lieu thereof the following orders be substituted.

3. The respondent shall forthwith take such steps as may be necessary to convey and transfer one-half of his interest in the property known as 54 Dutton Terrace, Medindie, South Australia being the property referred to in Certificate of Title Registered Book Vol 5315 Folio 513 (“the property”) to Deborah Anne O’Brien, at his own expense.

4. Subject to Christopher John O’Brien (“Mr O’Brien”) complying with the conditions referred to in paragraph 5 below, the respondent shall transfer the balance of his interest in the property to Mr O’Brien forthwith upon his discharge from bankruptcy, at the respondent’s expense.

5. The conditions referred to above are that:

(a) there be an inquiry, to be conducted by the District Registrar, as to:

(i) the income derived by Mr O’Brien during the respective contribution periods commencing on 5 November 1996 and ending on 4 November 2002; and

(ii) the contribution assessments (if any) which would have been assessed in relation to Mr O’Brien during those periods;

to fix the total of such notional contribution assessments (if any). In the alternative, Mr O’Brien and the respondent may agree such an amount without the need for an inquiry by the District Registrar.

(b) Mr O’Brien is to pay the respondent any amount so fixed or agreed within three months of the fixing of such amount or the date of such agreement.

The expressions “income”, “contribution period” and “contribution assessment”, used in this paragraph, shall have the same meaning as in Part VI Division 4B of the Bankruptcy Act 1966 (Cth).

6. There be liberty to any party to apply on seven days written notice to the other parties in relation to any matters arising out of the implementation of these orders.

7. The respondent pay the appellants’ costs of the application and of this appeal.

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

IN THE FEDERAL COURT OF AUSTRALIA	S 103 OF 2002
SOUTH AUSTRALIA DISTRICT REGISTRY	S 109 OF 2002

BETWEEN:

CHRISTOPHER O'BRIEN and DEBORAH O’BRIEN

Appellants

AND:

JOHN SHEAHAN

Respondent

JUDGE:	CARR J
DATE:	21 OCTOBER 2002
PLACE:	PERTH (Heard in Adelaide)

REASONS FOR JUDGMENT

introduction

1 These are two appeals from orders made by a Federal Magistrate on 20 March 2002. On the respondent’s application, the learned Magistrate ordered that the appellants vacate their matrimonial home some five years after the commencement of their respective bankruptcies, during which period they had paid just under $70,000 by way of principal and interest to the first mortgagee of that property, had paid all other outgoings and had carried out substantial refurbishment of the property. In relation to the appellants’ application, the Magistrate made a declaration that the second-named appellant (Mrs O’Brien) had established an equitable interest in the property, and made provision for a small amount to be paid to her upon its sale.

factual and procedural background

2 On 5 November 1996, upon the application of the Deputy Commissioner of Taxation, orders were made in this Court for the sequestration of the respective estates of the appellants, Mr Christopher John O’Brien and Mrs Deborah Anne O’Brien. The Official Receiver was appointed as their trustee in bankruptcy. The appellants had previously filed debtors’ petitions which were referred to the Court pursuant to s 55(3B) of the Bankruptcy Act 1966 (Cth) (“the Act”).

3 At the time of the bankruptcies Mr and Mrs O’Brien were the registered proprietors of their matrimonial home in Medindie, a suburb of Adelaide (“the property”). There is evidence which suggests that at that time the property was worth between $220,000 and $250,000. The value of the property assessed by the appellants in their statement of affairs attached to their debtors’ petitions was $260,000. The debtors owed about $250,000 pursuant to two mortgages registered on the certificate of title to the property. There was a first mortgage to the Bank of South Australia. At that time the bank was owed just under $200,000, the appellants were in default (the arrears were about $2,000) and the bank had taken the requisite preliminary steps to the exercise of its power of sale. There was also a second registered mortgage under which $50,000 was then owing. The mortgagee was Mr O’Brien’s mother.

4 On 6 December 1996 Mr O’Brien attended at the office of the Insolvency Trustee Service of Australia (“ITSA”) and had an interview with a Mr Jeremy Gordon Peel. This was in response to a telephone call from Mr Peel. Mr Peel was the “case officer” for the bankrupt estates of the appellants and remained so for a period of approximately six months. He continued in employment with ITSA and at one stage conducted a review of the files, but did not have any other contact with Mr or Mrs O’Brien after he ceased to be the case officer. Mr O’Brien gave Mr Peel a statement of affairs. Mr Peel queried a number of items in that statement. Mr O’Brien agreed to return that afternoon with his wife for a further interview.

5 Mr and Mrs O’Brien attended a meeting with Mr Peel on the afternoon of the 6^th December 1996, as Mr O’Brien had promised. They discussed with Mr Peel a number of matters directly relevant to their bankruptcy and their financial position. This included the matter of the Medindie property. Mr and Mrs O’Brien’s evidence was that Mr Peel told them words to the effect “if there is no equity in the house you can keep it”. Mr Peel denied having said this and (as will be seen below) the Magistrate did not accept that he had.

6 Mr O’Brien’s evidence was that in early 1997 Mr Peel asked him to provide three valuations or appraisals of the property. Over a period of about three weeks during February and March 1997, Mr O’Brien obtained three such valuations or appraisals. One of the valuers had valued the property for the first mortgagee when the appellants purchased it. The valuations were in the sum of $220,000, between $230,000 and $250,000, and $245,000 respectively.

7 Mrs O’Brien was discharged from bankruptcy by the operation of s 149 of the Act on 7 December 1999 upon the expiry of three years from the date upon which Mr and Mrs O’Brien filed their statements of affairs. On 6 December 1999 (four days after his appointment, by a resolution of the creditors, as substitute trustee) the respondent signed a notice of objection to the discharge of Mr O’Brien from bankruptcy. That was the very last day for the filing of such an objection under s 149B of the Act. As it appears to be common ground that Mr O’Brien is still an undischarged bankrupt, I assume that the respondent filed that notice with the Official Receiver on the same date. If so, the result is that Mr O’Brien will not be discharged from bankruptcy until 7 December 2004, unless the respondent ceases to object on all grounds relied upon or withdraws the objection – see ss 149H and 149J.

8 It would appear the appellants heard nothing further from the Official Receiver or from the respondent about what, if anything, was to be done about the property until 14 February 2001 when the respondent wrote to the appellants (there were two letters) stating that he intended to have the property valued, following which he would determine whether to realise “any equity” in it.

9 On 26 February 2001, nearly four years and four months since the sequestration orders were made, the respondent obtained a valuation of the property in the amount of $370,000. By this time the appellants had made payments to the bank which reduced the principal sum owing to a figure of between $183,000 and $185,000 (not all the relevant statements of account are in evidence).

10 On 2 March 2001, there was a meeting between Mr O’Brien and a Mr Anthony Lehmann of the respondent’s office. Mr Lehmann’s file note of what took place at that meeting was in evidence at first instance. The file note shows that a range of matters was discussed before the question of the property arose. Mr Lehmann’s notes on that point were as follows:

“Mr O’Brien then asked me what would be happening with his bankruptcy. I advised him that once all other matters had been dealt with we would consider the valuation on his property and if there were some equity in the property we will be forced to take a course of action suitable to creditors.

I told Mr O’Brien that if for example a property was valued at $400,000 then the Trustee would have to consider how to deal with the $75,000 equity that will vest in him as the Trustee in bankruptcy for Mr O’Brien. I told Mr O’Brien that if this were to be the case we would probably propose that a composition be put to creditors whereby they would receive a small dividend, the trustee’s fees would be paid and Mr O’Brien would contribute an amount of money to the composition equivalent to the value of the equity in the property.

I undertook to Mr O’Brien that we would keep him fully up to speed with the administration and what was happening with his property.”

11 In the meantime the appellants made what the Magistrate described as “sporadic payments in reduction of the mortgage debt and interest”. The Magistrate referred to, and appeared to have accepted as being accurate, a document in the form of a table which referred to the following payments:

5/12/96-5/12/97	$14,000
5/12/97-5/12/98	$23,240
5/12/98-5/12/99	$15,000
5/12/99-5/12/00	$13,000
5/12/00-5/11/01	$ 4,000
Total	$69,240

12 The appellants also paid all rates and taxes assessed in respect of the property throughout this period.

13 It was common ground that for some eighteen months from the date of bankruptcy the Bank of South Australia “commence(d) steps to sell the property but did not press this course of action in the face of payments”.

14 Mr O’Brien is a metalwork tradesman. His unchallenged evidence was that during the period October 1997 to October 2001 he carried out improvements to the property. These included:

· rewiring the home;

· replacing all outside plumbing;

· replacing all brick garden edging;

· repairing boundary fencing and a brick wall at the back of the garden;

· installing slate paving;

· repairing parquetry floors inside the house;

· sanding and polishing new parquetry;

· painting the interiors; and

· repainting the pool.

15 He swore that he carried out these works because of his belief that the Official Receiver was not interested in the family home. The Magistrate did not make any findings in relation to this evidence, save to note a valuer’s opinion that the house was of no value at all.

16 On 18 April 2001, the respondent registered his interest in the property at the Land Titles Office.

17 On 31 July 2001, the respondent served on the appellants a notice to vacate the property.

18 On 20 September 2001, the respondent filed an application in the Federal Magistrates Court at Adelaide claiming an order under s 30 of the Act that the appellants vacate the property.

19 On 31 October 2001, the appellants filed an application in the Federal Magistrates Court seeking, first, that no order be made against them for vacant possession of the property and also seeking equitable and declaratory relief. The appellants filed an amended application on 25 February 2002. The orders sought by the appellants were, in summary, as follows:

1. That the respondent transfer title of the property to them.

2. In the alternative that the Court make no order against them for vacant possession.

3. A declaration that “any equity” arising in the property after the date upon which they became bankrupt was not property that vested in the respondent as trustee of their estates.

4. A declaration that the respondent account to the appellants or either of them for their equitable interest in the property.

5. In the alternative to 1 above, a declaration that the appellants be given a period of 28 days to purchase the property from the respondent and that the respondent be restrained from disposing or otherwise dealing with the property during that period.

6. In further alternative to paragraphs 1 and 5 a declaration that the appellants be granted an equitable lien or charge over the property as security for their equitable interest.

7. In further alternative to paragraphs 1, 5 and 6, a declaration that the respondent holds the property on constructive trust for the appellants or either of them.

20 Both the respondent’s application and the appellants’ application (which was treated as a cross-application) came on for hearing before the Magistrate. The hearing occupied three and a half days. Judgment was reserved.

the judgment at first instance

21 The Magistrate found that at the second meeting on 6 December 1996 Mr Peel told Mr and Mrs O’Brien that their family home had vested in the Official Receiver by operation of the Act and that as they were alleging that there was no, or very little, equity in the property, it would be necessary for them to obtain two market assessments to enable him to determine the current equity. He also found that Mr Peel told Mr and Mrs O’Brien that he would be investigating the circumstances surrounding the granting of the second mortgage over the property. Mr Peel’s evidence was, and the Magistrate appears to have accepted all of his evidence on this point, that he told Mr and Mrs O’Brien that so long as they were living in the property it was their responsibility to deal with any mortgage commitments. The Magistrate did not accept the appellants’ evidence that Mr Peel had said “… if there is no equity in the property you can keep it”.

22 At this point of his reasons the Magistrate said this:

“On Mr O’Brien’s own evidence he was at a fork in the road. It was difficult for him to make the mortgage payments and it is hard to believe that he was looking at any long term situation. It is much more likely that any discussion revolved around remaining in the property until a decision to sell was made. That decision being one to be taken either by the Bank SA or (and very unlikely because of the negative value) by the Trustee. There is no dispute that the O’Briens were led to believe that they could remain whilst they continued to pay the mortgage. I do not believe the conversation went any further than this.”

23 The Magistrate further found that both trustees were at all times aware that the appellants were making sufficient payments to the first mortgagee to ensure that the property was not sold and that this situation continued until the respondent applied for possession of the property in 2001.

24 The Magistrate also found that:

“… there was no discussion at any time about the effect of the payment of sufficient moneys to the first mortgagee to prevent the sale and to allow the O’Briens to continue to reside in the premises. By the same token there was no representation made that by doing this the O’Briens would earn themselves an equity in the property.

I do not consider that the lengthy period that elapsed in relative silence supports a submission that the O’Briens were told that they could keep the property if there was no equity in it.”

25 The Magistrate then proceeded to make what he described as “findings of law”. He appears to have considered that, having found there was no estoppel arising out of any specific representation that the Official Receiver would allow the appellants to keep the property if there was no equity in it, there was no need to consider any other further possible basis for an estoppel. Rather, the Magistrate said that he was obliged to consider whether any other equities arose out of the payments made by the appellants.

26 The Magistrate saw, as a factual matrix which would support an argument for the creation of a restitutional right in favour of the appellants, the fact that the respondent (and his predecessor) knew full well that the appellants were making payments to the first mortgagee which had the effect of preserving the property which now belongs to the respondent. Such payments had been made not just of interest but also of capital. The respective trustees had been:

“… content to sit back and allow this to occur so that, by virtue of the almost immutable law of increase in property value and the repayment of capital sums, value was restored to the Medindie property for the benefit of the creditors.”

27 The Magistrate then compared that factual situation to cases such as Morris v Morris (1982) 1 NSWLR 61, Luke v Chamberlain (2000) NSWSC 626, Musgrave v Musgrave (2001) ACL Rep 430 NSW 5 and Cadorange Pty Limited v Tanga Holdings Pty Limited (1990) 20 NSWLR 26. He found that if the appellants had not made the payments the property would have been sold by the bank within a short space of time and the creditors would have received nothing. He concluded:

“I am satisfied that in this case it would be unconscionable for the Trustee to retain the benefit of the expenditure by the O’Briens on preserving the property.”

28 The Magistrate then said that, having decided that the appellants were entitled to some form of restitutionary order, the question was, how was that to be calculated?

29 The Magistrate felt constrained by the above authorities to base the amount of restitution upon the amount paid by the appellants, saying:

“In other words, the claimant does not participate in any increase in the value of the property but only receives back what he put into it. What the O’Briens put into the Medindie property were two things. They were, interest on the loan moneys and capital repayments of the loan moneys. There can be no dispute, subject to what is said below concerning after acquired property and s 58(6) of the Bankruptcy Act, that the O’Briens are entitled to any amount which constituted a reduction in the principal debt.

76. I would also be inclined to the view that interest payments, being necessary for the preservation of the property, were also claimable. However, against both this and the capital payments must be put the benefit received by the O’Briens in actually living in the house.”

30 The Magistrate had regard to evidence given by the appellants that they could have lived rent-free with relatives or possibly have rented a flat for approximately $85 per week. Counsel for the appellants had submitted that the sum of $85 per week was the maximum possible rental deduction. The Magistrate’s response to this was as follows:

“I am not sure of that. Moving to your relative’s home may only be a short-term option although the evidence indicated that so far as Mr O’Brien’s sister was concerned he could have used the property on their station for some years. Living in a small flat in a different part of Adelaide would also be less advantageous than remaining living in your own home in the most prestigious suburb of that city. I am of the view that if one does live in a property which is not one’s own then the owner is entitled to a reasonable rental, and the fact that you might have decided not to live there if you had not misunderstood something which the owner said to you, does not allow you to reduce the value of that rental.”

31 The Magistrate said that he was not prepared to accept the only evidence as to the proper rental value of the Medindie property, which had been given most reluctantly by a real estate agent called for another purpose. I agree, respectfully, with his assessment and rejection of that evidence. The Magistrate decided that the assessment of the rent would be referred to the District Registrar.

32 He also decided that the respondent should pay interest on any net amount owing, such calculation to be referred to the District Registrar as well.

33 The Magistrate then said this:

“79. Having decided that an equity has been created by the preservation of the property, I must now consider whether or not in the hands of the O’Briens that equity is defeated. The equity would be defeated in either of the following situations:

i) if the equity itself was acquired from after-acquired property of the bankrupt, which would normally vest in the trustee pursuant to s 58(1)(b) of the Bankruptcy Act;

ii) if the equity becomes after acquired property even if it has been acquired from exempt income.”

34 The Magistrate noted that it was common ground that the payments made by the O’Briens were made from income. The Magistrate referred to the view expressed by French J in Re Gilles; Ex parte Official Trustee in Bankruptcy (1993) 115 ALR 631 that Part VI Division 4B of the Act (“Division 4B”) was a code dealing with after-acquired income of the bankrupt and that income did not vest in the trustee as after-acquired property pursuant to s 58(1)(b).

35 The Magistrate then examined what had taken place in relation to assessments of income contributions from the appellants under Division 4B. He distinguished between Mrs O’Brien and Mr O’Brien. The Magistrate held:

“In the case of Mrs O’Brien, all the required procedures were complied with and a nil assessment was made. Therefore, to the extent that she can establish she had income left over which was applied to maintain and reduce the mortgage, then that income is not after-acquired property pursuant to s 58(1)(b) of the Bankruptcy Act.”

36 The Magistrate held that but for the matter of the application of s 116(2) of the Bankruptcy Act, he would have referred to the Registrar the assessment of the amount paid by Mrs O’Brien from what he described as “exempt income” in discharge of obligations to the mortgagee and in payment of rates and taxes. However, the Magistrate held that:

“… the translation of this exempt income into an equity in the Medindie property constitutes an after-acquired property which vests in the trustee pursuant to s 58(1)(b) of the Bankruptcy Act and is divisible among the creditors of the bankrupt under s 116(1)(a).

88. The effect of this finding is therefore that Mrs O’Brien can only set up her equity out of moneys paid by her after she ceased to be bankrupt. And it is only one half of these moneys which represent her equity. This is because one half of the money was paid on behalf of her joint debtor, the bankrupt Mr O’Brien, and the equity that it was used to acquire forms part of his after acquired property: Muschinski v Dodds (1986) 160 CLR 583 at 596-97.”

37 The Magistrate thought that Mr O’Brien’s case was different. He found that no assessment of his income was made (I note that this is, at least in part, contrary to the evidence – a notice of “nil assessment” in respect of Mr O’Brien for the period 5 November 1996 to 4 November 1997 is in evidence). The Magistrate then referred to efforts made by the Official Receiver to ascertain Mr O’Brien’s income and held that Mr O’Brien had simply failed to prove that the payments made by him were from “exempt income”.

38 Accordingly it appears, implicitly though not expressly, that the Magistrate considered that Mr O’Brien’s claim had to fail not only because all of his income became after-acquired property pursuant to s 58(1)(b), but also because any equity which he might otherwise have acquired would also have become after-acquired property.

39 In summary, the Magistrate held that the appellants were obliged to vacate the property, that Mrs O’Brien was entitled to an equitable interest in the property in respect of payments of interest or capital on the mortgage to the bank (but only from the date of her discharge from bankruptcy) in an amount to be assessed by the Registrar and that Mr O’Brien was not entitled to any relief.

the appealS

40 The principal argument advanced by the appellants was that the factual circumstances found by the Magistrate gave rise to an equitable estoppel which would prevent the respondent from relying on his legal rights to the property. This was the primary basis upon which the appeal was fought.

41 In the alternative, the appellants challenged the Magistrate’s conclusions and orders in respect of such matters as vesting of income or after-acquired property and the like.

my reasoning

42 I agree, respectfully, with the Magistrate’s conclusion (see paragraph 26 above) that it would be unconscionable for the respondent, as trustee in bankruptcy, to retain the benefit of the expenditure by the appellants on preserving the property. However, in my opinion, the Magistrate fell into error when, having found that there was no estoppel arising out of any specific representation that the Official Receiver would allow the appellants to keep the property if there was no equity in it, he decided apparently that there was no need to consider any other further possible basis for an estoppel. In my view, there was such a need.

43 I think it is sufficiently clear that when the Magistrate referred to “any specific representation” he meant any express representation. Was there any other representation to similar effect by way of conduct, including inaction and silence? I think there was.

44 When the Official Receiver, through Mr Peel, called upon the appellants to provide him with valuations of the property it was in the context of having told them (at the second meeting on 6 December 1996) that he needed those assessments to enable him to determine any current equity held by them in the property. He needed that information, as all three of the persons concerned were aware, in order to decide whether to sell the interest which, as trustee, he had acquired in the property. Mr Peel recorded the following in his contemporaneous diary note:

“I told the bankrupts that we would be looking into the sale of the house property if there was equity we would also be looking into the validity into (sic) the mortgage to the mother …”.

45 The appellants provided the Official Receiver with the last of those valuations by March 1997. In all these circumstances, I consider that it was incumbent upon the Official Receiver, within a reasonable time thereafter, to make a decision (and inform the appellants) whether he was (at that time) going to take any steps to realise the property for the benefit of the creditors and, if not, to inform the appellants what other course he proposed to take.

46 By not doing so during a period of over four years, I consider (and so find) that the Official Receiver and, subsequently, the respondent, represented and maintained such representation to the appellants that they did not propose to assert any entitlement to any net proceeds from the realisation of the property. Important factors in that assessment are:

· the request and then the direction (the Official Receiver told the appellants, by letter dated 5 March 1997, that they would be in contempt of Court if they failed to comply) to the appellants to obtain the valuations;

· the finding by the Magistrate that Mr Peel led the O’Briens to believe that they could remain in the property whilst they continued to “pay the mortgage”;

· Mr Peel’s statement to the appellants that so long as they lived in the property it was their responsibility to deal with any mortgage commitments;

· the Magistrate’s finding that the respondent and the Official Receiver knew full well that the appellants were making payments to the first mortgagee which had the effect of preserving the property; and

· the very long period which expired before the respondent eventually decided to sell the property.

47 The respondent sought to justify the delay by referring to the fact that it was necessary to investigate the validity of the second mortgage. He asserted that Mr O’Brien had been uncooperative in that regard.

48 The evidence is that the Official Receiver was provided (by the second mortgagee’s solicitors) with a copy of the second mortgage on or about 26 November 1996, together with a written response to some eleven questions. Those responses gave particulars of the date upon which $50,000 was advanced, the fact that the debtors had made no payments of moneys payable under that mortgage and that the total of principal and arrears of interest was some $57,000. At the meeting on 6 December 1996 Mr O’Brien told Mr Peel that the money advanced upon the security of the second mortgage had been used by one of his companies, Poynman Pty Ltd, which was in liquidation. If the Official Receiver was unable to obtain further confirmation from the appellants that the moneys had in fact been advanced by the second mortgagee to them or at their direction, then he could have exercised his powers under the Act to obtain the necessary financial records from the liquidator of Poynman Pty Ltd. He would then have been in a position to decide whether to challenge the assertion that the property was properly the subject of security for a debt of some $57,000. It would appear that the Official Receiver simply did not take the necessary steps to obtain the relevant information.

49 In my opinion, as the years passed without any action on the part of the Official Receiver, a combination of the original conduct (demanding valuations) and statements made by Mr Peel on the Official Receiver’s behalf, his failure to take any action to realise the property, and his silence (despite knowing that substantial payments of capital and interest were being made by the appellants) gave rise to the representation that the Official Receiver was no longer interested in realising the property and had, in effect, abandoned it to the appellants. It is not necessary for me to find the exact point at which such a representation came into existence. If it were necessary for me to do so, I would have thought that it would arise, at the latest, at the expiration of about two years from the time when the appellants provided the Official Receiver with the valuations in March 1997. As from the time when the representation came into existence the appellants assumed, quite reasonably in my view, that the legal relationship existing between them and the Official Receiver in relation to the property was that the Trustee had abandoned any interest in the property in favour of them. The property was thereafter at their risk. It may be worth noting that if the value of the property had fallen to the extent that despite the appellants having paid interest and repaid capital, there was no equity in the property, then that would have been their loss.

50 It is quite clear, in my opinion, that the Official Receiver (and later, to a lesser extent, the respondent) by the conduct to which I have referred above induced the appellants to adopt the assumption or expectation that neither of them was interested in selling the property and they had abandoned it to the appellants.

51 It is also quite clear that the appellants acted in reliance on that assumption or expectation by making the payments of principal, interest, rates and taxes, and that the Official Receiver and the respondent knew that they were doing so.

52 The appellants’ unchallenged evidence was that at the time when they became bankrupt they had two offers of free accommodation, one from each side of their family and the opportunity to lease a nearby flat for $85.00 per week ($368.33 per month). By contrast, the monthly interest payable under the first mortgage to the bank was, almost always, in excess of $1,000 per month. The appellants also reduced the principal amount substantially and, as I have mentioned, paid all the rates and taxes.

53 Furthermore, Mr O’Brien’s evidence that he, being a tradesman, personally carried out improvements to the property, which I have summarised at paragraph 14 above, was not challenged.

54 The Magistrate declined to make any restitutionary allowance in respect of such work, on the basis that there was evidence from a valuer that the house had no value i.e. that the only value was land value. Be that as it may, I find that, in addition to making payments of principal and interest, rates and taxes, the appellants acted to their substantial detriment in effecting the refurbishments described above.

55 The respondent now seeks to frustrate the assumption or expectation which he, and the Official Receiver before him, have raised in the appellants by a combination of the factors to which I have referred above, and which caused them to act to their very substantial detriment.

56 In my opinion, it would be unconscionable, on well-accepted equitable principles, to allow the respondent to do this. He should not be allowed, after so many years, to step in and unconditionally assert his legal rights: Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 406-408, 428-429; The Commonwealth v Verwayen (1990) 170 CLR 394 at 410-414, 440-446, 453-455.

57 There was no submission from the respondent that the appellants were precluded from raising the matter of equitable estoppel on this basis. I think that the respondent was correct in not making such a submission. It seems to me that the case was fought at first instance upon the appellants’ claim that the respondent was estopped from asserting his legal rights. The main basis of that claim was an express representation. Nonetheless, all of the evidence upon which the appellants relied was before the Magistrate and, in my view, he should have considered the alternative basis for an equitable estoppel which emerged from that evidence. At paragraph [5] of his reasons, the first issue which the Magistrate stated had been raised for his decision was:

“Was an estoppel by conduct, representation/silence or otherwise raised against the Trustee in bankruptcy of the O’Briens which would require the Trustee to reconvey to them the Medindie property?”

58 There is a further point. It concerns that part of Mr Peel’s evidence which was as follows:

“Part of the standard process of advising people [he was referring to bankrupts] about real estate is to say words to the effect that if there is currently no equityin the property that if they continue to make payments to the secured creditor, and the secured creditor does not exercise any sale rights and the Trustee will not sell it, because obviously there is no equity, then as long as they continue to make those mortgage payments they can remain in the property. [Mr Peel confirmed that he would have said those words to Mr and Mrs O’Brien at the interview on 6 December 1996 and then continued as follows] I would advise them if there was no equity in the property and the trustee was not in a position to sell it and they continued to make mortgage payments, they could remain in the property. However, if they did so and the property acquired an equity at a future time, as a result of those payments, the trustee’s interest could still be realised. I also would have explained to them that they could, if they wanted to, in the situation where there was no equity, perhaps find somebody who could make an offer to purchase the trustee’s interest for a nominal figure.”

59 The Magistrate found that Mr Peel told the appellants, on this occasion, that the Medindie property vested in the Trustee. Although he expressed confidence that when Mr Peel described his “usual practice” as being to say or do something, that that practice was followed in this case, the Magistrate did not make a clear finding as to whether Mr Peel told the appellants that if the property acquired an equity in future, the Trustee’s interest could still be realised. In fact, later in his reasons, at paragraph 67 the Magistrate held that there was no discussion at any time about the effect of the payment of sufficient moneys to the first mortgagee to prevent the sale and to allow the appellants to continue to reside in the premises.

60 In my view, in the absence of any clear finding about what Mr Peel may have said in relation to future realisation, the facts as found by the Magistrate gave rise to the equitable estoppel which I have described above.

61 In my view, once the Magistrate had found unconscionability, he moved too quickly to considering the matter as being one in which the appellants were confined to some form of restitutionary order.

62 I have found that the appellants have “an equity to some relief” – the words used in the principal judgment in Giumelli v Giumelli (1999) 196 CLR 101 at [11]. The next question is – what relief? Included in the orders sought by the appellants in their Notice of Appeal are orders which would require the respondent to surrender the property to them. Such an order would amount to the creation of a “constructive trust” of the type identified by their Honours in Giumelli at [2] to [6]. As their Honours observed, at [10], before a Court imposes such a constructive trust, it should decide whether, having regard to the issues in the litigation, there is an appropriate equitable remedy which falls short of the imposition of a trust. Later in those reasons, at [34] to [47], their Honours reviewed the relevant authorities, and in particular the various views expressed in Verwayen. It is, in my opinion, clear from the authorities that, as a matter of doctrine, an order could be made requiring the respondent to make good the assumption which the Official Receiver and he induced to be made by the appellants. But before making such an order I must consider all the circumstances of the case.

63 As was the case in Giumelli there are third party interests in the present matter. I refer to the interests of the unsecured creditors. However, the evidence strongly suggests, and the Magistrate so found at [73] of his reasons, that if the appellants had not made the payments to the bank, the bank would have sold the property within a short period of time and the creditors would have got nothing. This must have been on the basis that the amount owing under the second mortgage was to be taken into account. Taking the average valuation of the property in February/March 1997 as being $230,000, there would have been a shortfall of about $21,000. I consider that it is appropriate to take the moneys owing under the second mortgage into account. It was (and still is) a valid security registered on the Certificate of Title. The respondent and his predecessor have had more than ample time to investigate whether, in terms of creating a debt, the transaction with the second mortgagee did not in reality do so, and to challenge the validity of that security. They have not done so. So there was nothing in the property for the creditors, there being no suggestion that they would have kept up the payments under the mortgage or mortgages in the hope of an increase in value of the property. But there was some evidence, albeit of a hearsay nature, that a substantial portion of the increase in property values in the Medindie area occurred in the period of a “year or so” preceding the bringing by the respondent of this application.

64 I take into account also, but to a somewhat lesser extent, that any conduct engaged in by the Official Receiver and the respondent should be viewed as having been engaged in as representative of the interests of creditors.

65 As I have mentioned earlier in these reasons, vis à vis the creditors, it is the appellants who have borne all of the risk that the property might have fallen in value. In those circumstances (and all the other circumstances to which I have referred throughout these reasons) there seems to be what might perhaps be described as an equitable symmetry in the proposition that their expenditure and efforts should result in their receiving the whole of any increase in value.

66 I have considered whether it would be appropriate to confine the appellants’ remedies to equitable compensation in a money sum equivalent to their expenditure of money and effort on the property, plus perhaps some proportion of the increase in value of the property over the years (with the balance being payable to the respondent as trustee of their estates). I do not consider that, in all the circumstances it would be appropriate to do so. I have reached this conclusion not simply on the basis that relief by way of reconveyance of the property would not be inequitably harsh (see Deane J in Verwayen at 443), but after taking into account all the circumstances.

67 In view of the conclusions which I have reached in respect of the appellants’ principal argument, it is not necessary for me to consider whether any part of the income derived by the appellants since their bankruptcies formed after-acquired property or otherwise vested in their sequential trustees. Nor is it necessary to consider whether, by applying their income in satisfaction of the moneys payable under the first mortgage and in further reduction of the principal owing under that mortgage, in reliance upon the assumption induced in them by the Official Receiver and the respondent, thereby acquiring what I have found to be an entitlement to equitable relief, the appellants have somehow caused “after-acquired property” to come into existence which must vest in the respondent. Mrs O’Brien has long been discharged from bankruptcy. In my view, the proper adjustment of the equitable rights and obligations as between her and the respondent requires that the respondent be ordered to transfer one-half of his interest in the property to Mrs O’Brien forthwith. To give effect to such a similar remedy in relation to Mr O’Brien, and to avoid any possibility that the respondent might seek to “claw back” Mr O’Brien’s equitable entitlements, I shall frame the orders in his favour so that any conveyance to him will take effect forthwith upon his discharge from bankruptcy. But there is one further matter which needs to be considered, which also militates against an immediate reconveyance of a half interest in the property to Mr O’Brien. That is whether Mr O’Brien should be required “to do equity”.

68 The respondent argued that Mr O’Brien did not come to the Court with “clean hands”. This was a reference to Mr O’Brien’s failure to comply with demands made by the Official Receiver that he supply particulars of his income so that an assessment might issue under Division 4B. Mr Stevens, counsel for the respondent, submitted that:

“If he wants equity to be done, he must clearly have disclosed to his trustee what his income was so that a contribution could have been made. It does not make any difference as to the way he expends his income but it would be a complete farce to permit somebody to avoid an assessment and thereby accrue property in whatever form and then be able to claim that, “You can’t touch this because I’ve used it from the income which was acquired after the bankruptcy and is therefore exempt …”.”

69 I think that there is some merit in parts of that submission. Mr O’Brien was under a statutory duty to provide evidence of his income within no later than 21 days after the end of each contribution period – see s 139U of the Act. The evidence is that he did not do so. It is probably too late now for assessments to be made under the Act, but equity can mould an appropriate remedy, for example, by granting relief upon conditions. The point is relevant only to Mr O’Brien, since no complaints are made against Mrs O’Brien.

Conclusion

70 For the foregoing reasons I propose to make orders along the following lines:

· allowing both appeals;

· requiring the respondent to take such steps as may be necessary to transfer one-half of his interest in the property to Mrs O’Brien forthwith;

· subject to Mr O’Brien having complied with the condition referred to below, requiring the respondent to transfer the balance of his interest in the property to Mr O’Brien forthwith upon his discharge from bankruptcy;

· the conditions referred to above are that there be an inquiry, to be conducted by the District Registrar as to the income derived by Mr O’Brien during each of the respective contribution periods commencing on 5 November 1996 and ending on 4 November 2002 and the contribution assessment (if any) which would have been assessed in relation to Mr O’Brien during those periods and to fix the total of such notional contribution assessments (if any). In the alternative, the parties may agree such an amount without the need for an inquiry by the District Registrar. Mr O’Brien is to pay to the respondent any amount so fixed or agreed within three months of the fixing of such amount or the date of such agreement;

· the respondent is to pay the appellants’ costs in respect of both applications and both appeals (to be taxed if not agreed).

I certify that the preceding seventy (70) numbered paragraphs are a true copy of the Reasons for Judgment herein of Justice Carr.

Associate:

Dated: 21 October 2002

Counsel for the Appellants:	Mr C J Kourakis QC

Solicitor for the Appellants:	Townsends

Counsel for the Respondent:	Mr G Stevens

Solicitor for the Respondent:	William Christie

Date of Hearing:	26 & 27 August 2002

Date of Judgment:	21 October 2002

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