FEDERAL COURT OF AUSTRALIA

Macks (Trustee), in the matter of Weber (Bankrupt) [2006] FCA 636

BANKRUPTCY – application for directions pursuant to s 134(4) of Bankruptcy Act 1966 (Cth) – husband, wife and son in partnership – husband and wife joint tenants of non-partnership properties – son tenant in common of one such property – alleged intention for son to be joint tenant – all 3 made bankrupt simultaneously – multiple bankrupt estates.

BANKRUPTCY – proof of debt – whether a creditor can lodge proof in joint and separate estates when bankrupts jointly and separately liable to creditor – whether creditor required to elect estate – whether bankruptcy severed joint tenancies – whether trustee should ascertain intention of parties regarding son’s claim to joint tenancy.

Held:  Act provides for proof in respect of distinct contracts – no need for Court direction on issue of election – non-partnership co-owned property will only be capable of forming part of joint estate of joint debtors if co-ownership is as joint tenants – the joint tenancy of joint debtors made bankrupt at the same time will not sever upon bankruptcy – insufficient material to determine parties intention regarding son’s claim to joint tenancy – not possible to determine basis of any possible claims – direction not given. 

Bankruptcy Act 1966 (Cth) s 110, s 134(4), s 156A(3)

Bankruptcy Act 1861 (UK)s 152

Bankruptcy Act 1883 (UK) Sched II r 18

Bankruptcy Act 1914 (UK) Sched 2, r 19

Bankruptcy Act 1924 (Cth)

Partnership Act 1891 (SA) s 2(1)(a)

Property Law Act (SA)s 29

Re Driller (1972) 21 FLR 159 applied

Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 cited

Sutherland (in matter of Scutts) [1999] FCA 147 cited

Re Lofthouse (2001) 107 FCR 151 cited

Re Scott (1970) 16 FLR 416 followed

Ex p Adamson;  In re Collie (1878) 8 Ch D 807 cited

Ex p Honey (1871) LR 7 Ch App 178 cited

Western Australia v Bond Corporation Holdings Ltd (1992) 37 FCR 150 cited

Re Francis;  Ex parte Official Trustee in Bankruptcy (1988) 82 ALR 335 discussed

Re Boots;  Ex parte Official Receiver (1976) 26 FLR 320 discussed

Sistrom v Urh (1992) 40 FCR 550 cited

Re Holland;  Ex parte Official Trustee in Bankruptcy (1985) 5 FCR 165 cited

Re Prestia [2001] FCA 792 cited

Cummings v Claremont Petroleum NL (1996) 185 CLR 124 cited

Re Lemon Tree Passage & Districts RSL and Citizens Club Cooperative Ltd (1987) 11 ACLR 796 applied

Lindley and Banks on Partnership (18^th ed, 2002)

Eastman, Commonwealth Bankruptcy Act 1924-1933 (2^nd ed, 1940)

Gray and Gray, Elements of Land Law (4^th ed, 2005)

Jacobs’ Law of Trusts in Australia (7^th ed, 2006)

Meagher, Gummow and Lehane’s Equity:  Doctrines and Remedies, (4^th ed, 2002)

PETER IVAN MACKS AS TRUSTEE OF THE BANKRUPT ESTATE OF COLIN GEOFFREY WEBER, MARLENE RUTH WEBER AND CRAIG ANTHONY WEBER

No SAD 14 of 2006

FINN J

ADELAIDE

20 JULY 2006

IN THE MATTER OF:  COLIN GEOFFREY WEBER, MARLENE RUTH WEBER AND CRAIG ANTHONY WEBER A BANKRUPT

THE COURT DIRECTS THAT:

1.         The interests of Colin and Marlene Weber as joint tenants in both the Bordertown property (Volume 5248, Folios 947 and 948) and Hayborough property (Volume 5775, Folio 114) be allocated to the joint bankrupt estate of Colin and Marlene Weber. 

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

IN THE MATTER OF:  COLIN GEOFFREY WEBER, MARLENE RUTH WEBER AND CRAIG ANTHONY WEBER A BANKRUPT

REASONS FOR JUDGMENT

1                     Peter Ivan Macks, was appointed a trustee in bankruptcy of the joint and several estates of Colin, Marlene and Craig Weber under s 156A(3) of the Bankruptcy Act 1966 (Cth) (“the Act”).  Having determined that the affairs and assets both joint and several of the bankrupts were such that his administration may need to be divided into five separate bankrupt estates, the trustee now seeks directions of the Court under s 134(4) of the Act as to how the assets of the bankrupts of which he has taken control ought be allocated to the various estates.

2                     While s 134(4) of the Act empowers a trustee to seek directions “in respect of a matter arising in connexion with the administration of the estate”, it is well accepted that the Court is not for that reason obliged to give the directions sought:  Re Driller (1972) 21 FLR 159.  The proper subject of directions, in my view, is the manner in which a trustee should act in carrying out his or her functions as such:  cf Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 679.  Their proper effect, if full disclosure has been made to the Court of the material facts, is to protect the trustee from liability to a creditor or a bankrupt for a breach of duty of office for things done in accordance with the directions:  see generally the decision of Sackville J in Sutherland (in matter of Scutts) [1999] FCA 147 at [9] ff.  The s 134(4) procedure is not of itself an appropriate vehicle to determine the substantive rights of creditors as against a trustee in bankruptcy or a creditors amongst themselves:  Scutts, at [14];  see also Re Lofthouse (2001) 107 FCR 151 at [9].

BACKGROUND

3                     This can be stated shortly.  By 1990 Colin and Marlene Weber, who were husband and wife, conducted a partnership business as grain dealers under the name “Weber Agencies”.  In 1996 their son, Craig, was admitted to the partnership.  I am informed that the trustee has not located any partnership agreement.

4                     Colin and Marlene purchased real property in Bordertown, South Australia, approximately twenty years ago to be used as their matrimonial property (“the Bordertown property”).  They were registered as joint tenants of the property.  They later transferred one undivided third part of this property to Craig for which he was registered as a tenant in common.  Though the partnership business was operated from this property, the trustee has formed the view that the property itself was not an asset of the partnership for reasons he gives in his affidavit.  That is not a matter into which I need inquire.  The partnership overdraft with the Commonwealth Bank of Australia (“the CBA”) was secured by this property. 

5                     The three Webers resided at the Bordertown Property until 1997 when a house in McLaren Vale (“the McLaren Vale Property”) was purchased and Colin and Marlene commenced residing there.  That property was registered in the joint names of Colin, Marlene and Craig and partly funded by a loan to all three by the CBA.  Craig continued to reside in the Bordertown property.

6                     In late 2000 Craig transferred his interest in the McLaren Vale property to his parents.  He obtained a loan from the CBA which he used, in the main, to pay out the joint loan taken out by him and his parents when purchasing the McLaren Vale property.  The partnership’s overdraft was in turn then secured on the McLaren Vale property.  An annexure to bank documentation prepared at the time of the loan stated (inter alia):

“What is now happening is that Craig is to relinquish his interest in the McLaren Vale property and become a 3^rd interest holder of the Bordertown property.  The intention is that when the parents die, under joint tenancy he will then own the property outright.”

7                     Further investigation of this “intent” instigated by the trustee, resulted in one of his staff reaching the understanding that (Macks first affidavit):

“13.6   at about the time the McLaren Vale Property was purchased, Colin and Marlene wished to gift a one third interest in the Bordertown Property to Craig but to save stamp duty and other costs associated with effecting that transfer, Craig obtained a one third interest in the McLaren Vale Property; 

13.7     during 1997 they each intended that Craig would eventually obtain a one third interest in the Bordertown Property when funds sufficient to effect the transfer were available to them;

13.8     they each intended that upon the death of Colin and Marlene, their interest in the Bordertown Property would pass to Craig.”

The basis of this understanding is not explicitly revealed.  The file of the conveyancer who dealt with the transfer of Craig’s interest in the McLaren Vale property was put in evidence.  It revealed that in mid June 2000 it was envisaged that a composite of transactions was envisaged in which a one third interest in the Bordertown property was to be sold to Craig and Craig’s interest in the McLaren Vale property was to be transferred to his parents.  Stamped transfers were prepared to those ends.  It also indicated the significant costs by way of government charges that would be incurred particularly on the Bordertown property ($5,392) relative to the McLaren Vale property ($1,530) were both transfers to be effected.  In May 2001 Colin and Marlene sold the McLaren Vale property. 

8                     Several months earlier Colin and Marlene purchased as joint tenants a property at Hayborough (“the Hayborough property”).  They later built a residence on it.  The trustee has concluded that this property was not partnership property. 

9                     In realising the assets of the bankrupts the trustee (i) sold (a) the Bordertown property which produced a net balance of $115,377.00;  and (b) the Hayborough property for which the net balance was $146,653.93;  and (ii) has received partnership assets amounting approximately to $230,800.

Proof of debts

10                  Apart from the three separate estates of the three individual bankrupts, the trustee has created two further estates, the one being the joint partnership estate, the other, the joint estate of Colin and Marlene in respect of the properties of which they were joint tenants.  There are, it seems, creditors whose proofs have been admitted for all of the estates except for Marlene’s separate estate.

11                  Some number of the creditors, by virtue of their contracts with the partnership and its members which impose joint and several liability, are creditors of both the joint partnership estate and the partners’ separate estates.

The Directions Sought

12                  There are three substantial matters on which directions are sought.  These are:

(i)         is a creditor who is admitted as a creditor of the partnership estate and of the three separate estates entitled to lodge a proof of debt in respect of each of those estates or is that creditor required to elect whether to prove in the joint or a several estate; 

(ii)        did the bankruptcy of the partners sever the two joint tenancies of Colin and Marlene in the Bordertown and Hayborough properties, the answer to this question determining the estate (or estates) to which the proceeds of their interests in these properties should be allocated;  and

(iii)       ought the trustee take further steps to ascertain whether Colin has a claim on the Bordertown property by virtue of the circumstances surrounding his sale of his interest in the McLaren Vale property and the apparent intentions of himself and his parents at that time?

Direction 1:  Proving in the joint and separate estates

13                  There is no need for directions on this matter, it being governed by the provisions of s 95 of the Act.  It provides:

“Section 95    Proof in respect of distinct contracts

95        Where a person was, at the time when he or she became a bankrupt, liable in respect of distinct contracts as a member of 2 or more distinct firms, or as a sole contractor and also as a member of a firm, the fact that the firms are in whole or in part composed of the same individuals, or that the sole contractor is also a member of the firm, does not prevent proof in respect of the contracts against the estates respectively liable on the contracts.”

14                  As Street J held in Re Scott (1970) 16 FLR 416, where partners incur joint and several liability to pay make a payment they are for s 95 purposes liable in respect of distinct contracts (a) as members of the firm and (b) as sole contractors, even if those contracts were contained in the same instrument.  Section 95 has its provenance in English Bankruptcy legislation provisions originating in the Bankruptcy Act 1861 (UK) s 152 and achieving its presently relevant form in the Bankruptcy Act 1883 (UK) Sched II r 18 (see also Bankruptcy Act 1914 (UK) Sched 2 r 19).  The English legislation was copied in r 244 of the Rules made under the Bankruptcy Act 1924 (Cth). 

15                  Prior to the 1861 English Act, the common law rule was that a person to whom members of a firm were bound jointly and severally was not allowed to rank as a creditor in the joint and the separate estates but had to elect whether he would rank as a joint creditor or a separate creditor.  While the English and Australian legislation to which I have referred did not totally abolish that rule, it rendered the rule “[p]ractically of little consequence”:  see the short version of this history in Lindley and Banks on Partnership, 27-164 – 27-167 (18^th ed, 2002).  As there pointed out, the common law rule was in real terms confined to torts, frauds etc:  see e.g. Ex p Adamson;  In re Collie (1878) 8 Ch D 807.  The view expressed by Street J merely reflected long standing English authority to the same effect:  see Ex p Honey (1871) LR 7 Ch App 178;  and what was earlier understood to be orthodox Australian law:  see Eastman, Commonwealth Bankruptcy Act 1924-1933, 650-651 (2^nd ed, 1940). 

16                  There being nothing in this matter to suggest that it falls within those exceptional cases not covered by s 95, a creditor to whom the Webers are jointly and separately bound on distinct contracts has a statutory entitlement to prove in both the joint and several estates.

17                  I should add for the sake of completeness that the rule that only one proof may be lodged against a single estate in respect of each debt of that estate:  see generally Western Australia v Bond Corporation Holdings Ltd (1992) 37 FCR 150 at 161-164;  has no present relevance.

Question 2:  Severance of the two joint tenancies

18                  The distinguishing characteristics of joint tenancy are first “the right of survivorship” and second, the presence of “the four unities”, being unity of possession, of interest, of title and of time:  on joint tenancy see generally Gray and Gray, Elements of Land Law, 11.4 ff (4^th ed, 2005).

19                  It was held by the Full Court of this Court in Re Francis;  Ex parte Official Trustee in Bankruptcy (1988) 82 ALR 335 that the bankruptcy of one of two joint tenants severs the joint tenancy with the interest of the bankrupt vesting in the Official Trustee or a registered trustee under s 58 of the Act, and the remaining co-owner becoming a tenant in common with the Official Trustee or trustee.  The Court said (at 339):

“When the estate of the male bankrupt in the land in question became vested in the Official Trustee, the unity of title was immediately destroyed, in that the respective interests of the Official Trustee and the female co-owner in the land did not derive from the same act or document.  Nor is there any unity of time between the two estates.  The unity of interest also does not exist because the interest of the Official Trustee is impressed with his responsibilities under the Bankruptcy Act 1966 and may, and very likely will, be of less duration than that of his co-owner.

The fact that upon the later bankruptcy of the female bankrupt the Official Trustee succeeded to her interest in the land as well, cannot recreate a joint tenancy out of what has become on severance a tenancy-in-common, if for no other reason, because the unities of title and time are not present. 

Finally on the matter of principle, it could hardly be said that, if the female bankrupt had died after the male bankrupt’s bankruptcy but before she herself became bankrupt, the Official Trustee would have succeeded to her estate and interest in the land by survivorship.”

Later in its reasons, in commenting on Re Boots; Ex parte Official Receiver (1976) 26 FLR 320 (discussed below) where a husband and wife with jointly owned non-partnership assets became bankrupt at the same time, the Court observed (at 340) that “[i]n those circumstances no question of severance of joint tenancies arose”.

20                  Boots’ case raised for the consideration the operation of s 110 of the Act in circumstances in which a husband and wife (a) carried on a business in partnership;  (b) jointly owned real property which was not partnership property;  and (c) were bankrupted at the same time.  Section 110, which is also presently relevant provides:

“Section 110  Application of estates of joint debtors

110(1)             [Joint debts and separate debts]  In the case of joint debtors, whether partners or not, the joint estate shall be applied in the first instance in payment of their joint debts, and the separate estate of each joint debtor shall be applied in the first instance in payment of his or her separate debts.

110(2)             [Procedure where surplus]  If there is a surplus in the case of any of the separate estates, it shall be dealt with as part of the joint estate and if there is a surplus in the case of the joint estate, it shall be dealt with as part of the respective separate estates in proportion to the right and interest of each joint debtor in the joint estate.”

21                  The question in Boots’ case was whether, because the husband and wife were “joint debtors” (in consequence of their conduct of the partnership business), their jointly owned real property, though not partnership property, was to be included in their “joint estate” under s 110(1).  In holding that that property was part of the joint estate, Riley J clearly proceeded on the premise that no severance of the joint tenancy resulted from the contemporaneous bankruptcy of the joint tenants.  The dictum quoted above from Re Francis endorsed the correctness of that premise.  In this matter I am being asked to deal directly with whether the Full Court’s dictum and the premise of Boots’ are correct.

22                  I am satisfied that they are, while acknowledging that the concept of joint tenancy does not accommodate itself easily to the scheme of the Bankruptcy Act at least where the property held as joint tenants is not partnership property and the joint tenants are made bankrupt at the same time.  I exclude from this comment jointly owned partnership property for this reason.  Such property will necessarily constitute part of joint estate on the winding up of the firm irrespective of whether the property co-owned is held by the partners as joint tenants or as tenants in common:  cf Partnership Act 1891 (SA) s 2(1)(a), s 20.  In the case of non-partnership co-owned property, it will only be capable of forming part of the joint estate of joint debtors if that co-ownership is as joint tenants.  If the co-ownership is as tenants-in-common, the co-owner’s shares on their bankruptcy will form part of each’s separate estates. 

23                  There is now a significant body of Australian case law in addition to Re Francis to the effect that the bankruptcy of a joint tenant severs the joint tenancy at law (if the land in question is old system land) or in equity (if the land is held under a title registration system), the involuntary alienation worked by s 58 of the Bankruptcy Act effecting the severance in either case:  see generally Sistrom v Urh (1992) 40 FCR 550;  Re Holland;  Ex parte Official Trustee in Bankruptcy (1985) 5 FCR 165;  Re Prestia [2001] FCA 792 at [23]-[24].  As Re Francis indicates, that involuntary alienation severs at least two of the “unities” (i.e. of interest and of time). 

24                  When one turns to where joint tenants are made bankrupt at the same time as joint debtors, a somewhat more complex state of affairs exists.  Section 110(1) in express terms contemplates that, in such a case, a joint estate does come into existence.  I consider the section envisages that where jointly owned property is alienated to the Official Trustee or trustee by s 58 that property retains that character in the Official Trustee’s or trustee’s hands.  And it does so because as between the joint tenants no act was done by, or to, either or both of the bankrupts other than the bankruptcy itself and its s 58 consequence which could require that the property no longer be considered as joint property to be applied in the payment of their joint debts.  To say that the very act which makes the joint property of both available to be utilised under s 110 (i.e. the joint bankruptcy) has the effect of severing what was joint property until that moment is to negate what I consider to be the manifest purpose of s 110.  I do not consider that the section requires that construction, hence my agreement with the dictum in Re Francis.

25                  Having reached this conclusion I would have to say, though, that I have some difficulty in seeing a principled operation for the right of survivorship of a joint tenant were one of the bankrupts to die during the course of the administration either before or after the jointly owned property was sold.

26                  Accordingly, I would direct that the interests of Colin and Marlene as joint tenants in both the Bordertown and Hayborough properties be allocated to the joint estate of Colin and Marlene, this being the only joint estate of which they alone are joint debtors.  While they are also joint debtors for the purposes of the partnership estate, the joint debtors for that particular estate are not limited to them alone.  They include Colin as well.

Direction 3:  The bankrupts’ intention and the Bordertown property

27                  I have referred to the material before me, such as it is, relating to Craig’s transfer of his interest in the McLaren Vale property to his parents and to the apparent mutual intention at or around that time that he was to acquire some further interest in that property as a joint tenant with his parents.

28                  The trustee is not seeking a direction as to whether in the circumstances Craig could have maintained an action against Colin and Marlene “for specific performance to rectify the manner in which he held his interest in the Bordertown property [sic]”.  Rather, what is sought are directions as to whether he should take any further steps in relation to whether a claim exists and, if so, what steps should be taken in relation to dealing with that claim.  The trustee acknowledges that any claim Colin might have has vested in him and that Colin “has no right to bring or prosecute proceedings to protect, enhance or add to the property of which he has been divested on bankruptcy”:  Cummings v Claremont Petroleum NL (1996) 185 CLR 124 at 136.

29                  The directions sought are not ones I am prepared to give notwithstanding that they may be of a type that a trustee properly could seek (i.e. concerning the incurring of expense to ascertain whether legal proceedings may be in the interests of creditors and, if there is the prospect of a surplus, the bankrupt).  By way of analogy, trustees commonly approach courts under the provisions of the Trustee Acts that obtain in most Australian jurisdictions for directions as to whether to sue or to defend an action:  see Jacobs’ Law of Trusts in Australia [2134] (7^th ed, 2006).

30                  I would preface what I have to say with this comment.  A successful claim by Craig against his parents would not result in a nett accretion to the totality of the joint and separate estates being administered by the trustee.  However, depending upon whether the outcome of that action was to give Craig a joint tenancy with his parents in part of the Bordertown property or only an additional several interest, the result of his claim could affect both the partnership estate and the joint estate of his parents (in the event of a joint tenancy finding) or the joint estate of his parents and his own separate estate if his additional interest in the property was that of a tenant in common. 

31                  Turning to my reasons for declining to give any directions, the materials put before me are opaque and are quite inadequate insofar as they reveal the possible basis of any claim or claims that might be made.  Is it to specifically enforce a contract, in which case what contract and is it in writing:  cf Property Law Act (SA)s 29.  Is it a Holroyd v Marshall type constructive trust claim based on the consideration for the transfer of an interest having been executed in the steps taken by Craig in relation to the McLaren Vale property:  Meagher, Gummow and Lehane’s Equity:  Doctrines and Remedies, (4^th ed, 2002)?  Is the claim based on equitable estoppel?  Etc.  Equally, with any possible claim being likely to turn critically on the intentions and actions of the three bankrupts, there seems to be no material at all before me from them which might illuminate the matter.  I am simply asked to speculate.  While I do not have to determine whether or not any proposed proceedings will or will not be successful, I need to investigate the matter sufficiently to determine whether or not any such proceedings would be fruitless:  cf Re Lemon Tree Passage & Districts RSL and Citizens Club Cooperative Ltd (1987) 11 ACLR 796 at 799.  There is insufficient material before me to make this determination let alone a determination as to whether it would be worthwhile for the trustee to further investigate a possible claim by Craig:  Re Lemon Tree Passage, at 799.  Hence I decline to give the directions sought. 

Associate:

Dated:              20 July 2006