FEDERAL COURT OF AUSTRALIA

Combis, the Trustee of the Property of Landers, a Bankrupt v Harding, Billington and Regan as Executors of the Deceased Estate of Billington [2014] FCA 1391

THE COURT ORDERS THAT:

1.    The appeal is dismissed.

2.    The costs of the appellant and the first respondents are to be paid out of the bankrupt’s entitlement in the deceased estate of Mrs Patricia Anne Billington.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    The issue in this appeal is whether the quarterly payments to which a bankrupt is entitled under a testamentary trust, is money which is to be paid to the trustee of the bankrupt’s estate, or to the bankrupt for his own benefit.

2    On 29 May 2012, a sequestration order was made in respect of the bankrupt estate of Mr Stefan James Landers.

3    On 1 August 2012, Mr Landers’ mother, Mrs Patricia Anne Billington, died. A house was part of her deceased estate. By her will, Mrs Billington provided that the house was to be sold and that the proceeds invested. The will went on to provide that, during his lifetime, Mr Landers was to be paid the interest on 25% of the realised amount of the sale of the house. This amount was to be paid to Mr Landers quarterly. The capital sum, comprising the proceeds of the sale of the house was ultimately to be paid to Mrs Billington’s granddaughter, the daughter of Mr Landers.

4    The first respondents are the executors of the deceased estate. In 2014, they sought directions from the Federal Circuit Court of Australia as to whether the quarterly interest payments under the testamentary trust were to be paid to Mr Landers directly for his benefit or to be paid to the trustee of his bankrupt estate. The trustee in bankruptcy contended that the monies were payable to him because Mr Landers’ right to receive those monies was after-acquired property of the bankrupt pursuant to s 58 and s 116(1)(a) of the Bankruptcy Act 1966 (Cth). The total amount of the quarterly payments is about $6,000 per annum.

5    The primary judge directed that the quarterly payments were to be paid to the bankrupt directly, because the monies were income within the meaning of s 139L(1)(a)(iv) and not after-acquired property. Section 139L(1)(a)(iv) of the Bankruptcy Act provides as follows:

In this Division:

income, in relation to a bankrupt, has its ordinary meaning, subject to the following qualifications:

(a)    the following are income in relation to a bankrupt (whether or not they come within the ordinary meaning of “income”):

…

(iv)    an amount received by the bankrupt as a beneficiary under a trust to the extent that the amount was paid out of income of the trust;

…

6    The appellant, the trustee in bankruptcy, appeals against the primary judge’s decision.

7    How income derived by a bankrupt during his or her bankruptcy is to be treated is dealt with in Div 4B of the Bankruptcy Act. In essence the statutory scheme provides that the bankrupt is entitled to the benefit of income derived up to a specified amount (referred to as the “actual income threshold amount”), but that a contribution to his or her creditors is to be made from income derived in excess of that amount by reference to a formula which is set out in s 139S of the Bankruptcy Act. The actual income threshold is defined in s 139K of the Bankruptcy Act and varies depending upon the number, if any, of the bankrupt’s dependants.

8    The Court was advised that the base rate for a bankrupt with no dependants is $53,280.50 after tax.

9    On appeal the trustee in bankruptcy contended that as a beneficiary of his deceased mother’s estate, Mr Landers, on the death of his mother, acquired a right to the due administration of his deceased mother’s estate. The appellant said that the right included a right to the fruits of the administration of the estate, which in this case, included the quarterly payments which would, in due course, be paid to the bankrupt under the testamentary trust. The appellant went on to contend that immediately the right to the due administration of the estate vested in Mr Landers, it vested in the trustee in bankruptcy as after-acquired property pursuant to s 58(1)(b) of the Bankruptcy Act.

10    Section 58(1) of the Bankruptcy Act provides:

Subject to this Act, where a debtor becomes a bankrupt:

(a)    the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and

(b)    after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.

11    The appellant said that there was only “one vesting” of the right of due administration and that was in the trustee in bankruptcy as after-acquired property. This vesting, said the appellant, had the effect of immutably defining the nature and character of the right and its incidents, namely, as property of the trustee in bankruptcy, on the date of the vesting. Thus, argued the appellant, when the fruits inherent in the vested right materialised, the fruits, namely, the quarterly payments, belonged to the trustee in bankruptcy as an incident of Mr Landers’ right which the trustee in bankruptcy had acquired as after-acquired property under s 58(1) of the Bankruptcy Act.

12    The appellant argued that s 139L(1)(a)(iv) of the Bankruptcy Act had no application to the quarterly payments due to the bankrupt under the testamentary trust. This is because, said the appellant, no income was actually being generated in favour of the bankrupt at the date of the bankruptcy, nor at the date of the vesting of Mr Landers’ right to due administration. The consequence, said the appellant, was that s 139L(1)(a)(iv) was permanently precluded from applying to the income which subsequently flowed as an incident of the fruits of the crystallised right to the administration of the testamentary trust.

13    The appellant went on to argue that the position would be different if the testamentary trust was already being administered at the date that Mr Landers became bankrupt. This is because, contended the appellant, on that date Mr Landers would already have been in receipt of the quarterly payments made by the executors of his deceased mother’s estate, and s 139L(1)(a)(iv) of the Bankruptcy Act would apply to those monies.

14    The appellant’s contentions are not accepted.

15    A similar question to the question raised by this appeal was considered by French J (as he then was) in the case of Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies (1993) 42 FCR 571 (Gillies). In that case, French J considered the case of monies which the bankrupt, Mr Gillies, who was a professional diver, had earned carrying out diving activities during the period of his bankruptcy. The question for the Court was whether that income derived by Mr Gillies was to be treated as after-acquired property so belonging to the trustee in bankruptcy, or whether the monies were owned beneficially by the bankrupt.

16    French J undertook a detailed analysis of the legislative history of the bankrupt’s right to retain income derived during bankruptcy and its relationship to the trustee in bankruptcy’s right to the bankrupt’s after-acquired property.

17    French J observed that s 131 of the Bankruptcy Act 1966 had been enacted to reflect the construction given to s 101 of the Bankruptcy Act 1924 (Cth) in the case of Federal Commissioner of Taxation v Official Receiver (1956) 95 CLR 300, namely, that personal earnings of a bankrupt did not vest in the Official Receiver. Section 131 of the Bankruptcy Act was itself repealed on 1 July 1992. As it stood prior to its repeal, s 131 provided that the bankrupt had a right to retain for his or her own benefit, income received during bankruptcy, but that the Court could, on the application of the trustee in bankruptcy, order part of the income to be paid to the trustee in bankruptcy for the benefit of the bankrupt’s creditors. French J also observed that “income” was not defined for the purposes of s 131.

18    French J went on to observe at 574-575:

Section 131 was repealed by s 24 of the Bankruptcy Amendment Act 1991 (Cth), the material parts of which came into force on 1 July 1992. By virtue of s 51(1) of that Act the relevant amendments of the Principal Act applied to persons who were bankrupt at the commencement of those amendments. The amending Act inserted into the Bankruptcy Act 1966 a new Div 4B entitled “Contribution by bankrupt and recovery of property”. A statement of its objects is set out in s 139J. They are:

“(a)    to require a bankrupt who derives income during the bankruptcy to pay contributions towards the bankrupt's estate; and

(b)    to enable the recovery of certain money and property for the benefit of the bankrupt’s estate.”

The Division establishes a liability on the part of a person who is bankrupt to make a contribution out of the excess of his income over a threshold amount which is a function of the maximum basic rate of pension payable under the Social Security Act 1991 (Cth). The Division does not impose a liability to contribute in respect of the entire excess. In the Explanatory Memorandum relating to the Bill it was said that s 131 had not been a particularly useful instrument for trustees because of the cost of court processes which it was necessary to invoke and the self-defeating nature of the custodial sanction for non-compliance with an order once made. Reference was made in the Memorandum to the class of bankrupts who earned large incomes after bankruptcy and for all practical purposes were not required to make any repayment to creditors from that income. The Memorandum went on to outline the statutory mechanism established by the amendments for imposing upon bankrupts a liability to contribute. There was no suggestion in the Memorandum that the amendments would effect a vesting of after-acquired income in the trustee.

Before turning to the contribution provisions it should be noted that the vesting provisions of the Act remain unchanged in their application to after-acquired property. When a debtor becomes a bankrupt, all after-acquired property vests as soon as it is acquired by or devolves on the bankrupt on or after the date of the bankruptcy being property that is divisible among the creditors of the bankrupt (s 58). The property divisible among creditors is defined by s 116 and includes “all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him, or has devolved or devolves on him, after the commencement of the bankruptcy and before his discharge”. The word “property” is defined in s 4 as:

“real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.”

The central provision of Div 4B is s 139P(1) which provides that:

“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    Later at 576-577, French J observed:

The Bankruptcy Act 1966 no longer contains the equivalent of s 101 of the 1924 Act or the former s 131. Section 101 of the 1924 Act was the foundation of the views expressed by members of the High Court in the Official Receiver case which ultimately led to the enactment of s 131. Despite the absence of an equivalent of s 101 of the 1924 Act or s 131, the scheme of Div 4B rests upon the continuing assumption that the income of the bankrupt does not vest in the trustee. The liability to contribute is limited to half the excess of assessed income over the actual income threshold amount. Before it arises, a process of assessment is required to be undertaken by the trustee. It is true that the after-acquired property to which ss 58 and 116 apply is defined widely enough to encompass income. However, in my opinion, the legislative scheme now in place is quite inconsistent with the application of those provisions to after-acquired income. This follows from the comprehensive scheme embodied in Div 4B which approaches a code for dealing with after-acquired income of the bankrupt. There is nothing in the extrinsic material to support a change in the approach to after-acquired income which would bring it within after-acquired property vesting in the trustee. In my opinion such income does not vest in the trustee. (Emphasis added.)

20    In my view, the observations of French J in Gillies at [19] above, have direct application to, and are decisive of the issue in this case.

21    First, as was the case with the income earned by Mr Gillies, Mr Landers’ right to the fruits of the administration of his deceased mother’s estate is capable of falling within the definition of “after-acquired property” for the purposes of s 58(1)(b) and s 116(1)(a) of the Bankruptcy Act.

22    Secondly, the definition of “income” in s 139L of the Bankruptcy Act has been expanded beyond its ordinary meaning, and, specifically, includes an amount received by a bankrupt as a beneficiary under a trust to the extent that the amount was paid out of income of the trust. This definition is wide enough to include the income payable to Mr Landers under the testamentary trust established by his mother’s will. There is nothing which precludes the definition from applying to income received by a beneficiary of a trust in circumstances where there has been a delay between the vesting of the right to income and the actual receipt of that income. Nor is there anything in the definition which limits the income to income which is payable pursuant to an income stream which commenced flowing before the date of the bankruptcy. Accordingly, in my view, there is no substance in the distinction which the appellant sought to draw during oral argument, to this effect.

23    There is, therefore, in my view, no meaningful distinction between this case and Gillies. Thus, although Mr Landers’ right to the quarterly payments is capable of falling within the definition of “after-acquired property” for the purposes of s 58(1) and s 116 of the Bankruptcy Act, as French J observed, the legislative scheme as enacted with effect from 1 July 1992, is “quite inconsistent” with the application of s 58 and s 116 to after-acquired income which falls within the ambit of s 139L(1)(a)(iv). In this regard, I would also observe, that s 58(1) of the Bankruptcy Act is prefaced by the phrase: “Subject to this Act”.

24    It follows, therefore, that, in my view, the primary judge did not err in holding that the quarterly payments due to Mr Landers under the testamentary trust established by his deceased mother’s will, is income for the purpose of s 139L(1)(a)(iv) of the Bankruptcy Act and not after-acquired property belonging to his trustee in bankruptcy.

25    It, also, follows that the appeal is dismissed.

Associate:

Dated:    18 December 2014