FEDERAL COURT OF AUSTRALIA

Reaper v Vrsecky (Trustee) [2016] FCA 509

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The cross-appeal be allowed.

3.    Paragraph 2 of the orders of Burchardt J made on 18 September 2015 and amended on 9 October 2015 be set aside and in its place, order that within 90 days of the making of these orders, the Second Appellant has the option to purchase the Respondent’s interest in the property described in Certificate of Title Volume 10609 Folio 987 and known as 12 The Esplanade, Narre Warren South in the State of Victoria, for $221,635.

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

REASONS FOR JUDGMENT

DAVIES J:

introduction

1    The first appellant (“Mr Reaper”) became a bankrupt on 7 March 2013 and the respondent (“the Trustee”) was appointed as trustee of his estate. At the time, Mr Reaper and the second appellant (“Ms Fisher”) owned their home situated at 12 The Esplanade, Narre Warren South (“the property”) as joint tenants. In November 2014, the Trustee applied for the partition and sale of the property. Mr Reaper and Ms Fisher opposed the Trustee’s application on the basis, amongst other things, that the whole or substantially the whole of the property had been purchased with “protected money” within the meaning of s 116(2D) of the Bankruptcy Act 1966 (Cth) (“the Act”). The case was conducted on the basis that in the event that s 116(3) of the Act did not apply but s 116(4) of the Act did apply, it was appropriate for the Court to quantify the amount that Ms Fisher would need to pay the Trustee to purchase the Trustee’s interest in the property, rather than proceeding forthwith to sale. Mr Reaper and Ms Fisher also filed an interlocutory application seeking various declarations and orders and cross-claimed for damages against the Trustee in respect of an alleged failure on the part of the Trustee to arrange appropriate insurance cover over the property and make an insurance claim in respect of storm damage to the property and a bug and bird infestation.

2    In a judgment delivered on 10 February 2015 (“the first decision”), the Federal Circuit Court (“the FCC”) did not accept that the property was purchased wholly or substantially with protected money and held that s 116(3) did not apply. The FCC did, however, accept that all the payments made since 2007 on a loan taken out by Mr Reaper and Ms Fisher in 2004 were from “protected moneys” and held that half of any accrual in the overall value of the property since 2007 was “plainly directly attributable to Mr Reaper’s protected payments” within the terms of s 116(4): Vrsecky v Reaper & Anor [2015] FCCA 32, [62]. At [72]–[74], the FCC held that the methodology to apply to determine the amount which the Trustee must pay Mr Reaper pursuant to s 116(4) in respect of the “protected money” was as follows:

72.    The methodology that it seems to me is eminently fair in the particular circumstances of this case is to ascertain the value of the property and the extent of the mortgage in 2007 thus isolating the then net equity. That net equity is plainly not referrable to any protected payments to Mr Reaper. It may however be the case that the actual increase in value is very small. That might then resuscitate the s.116(3) case upon which the respondents advance. It is eminently in their interests that these figures be ascertained.

73.    The next step in the methodology is to ascertain the value of the property now and the value of the mortgage. Half of the increase from 2007 until 2014 (or early 2015 as I suspect will be the case) is plainly directly attributable to Mr Reaper’s protected payments. The other half, adopting the reasoning of Emmett J in Stankovic v Van Der Velde is clearly attributable to Ms Fisher.

74.    Once these figures are ascertained it will be possible to determine whether the respondents are able to purchase out the trustee’s interest in the property.

The FCC ordered the parties to obtain a valuation of the property and produce an agreed estimate of the mortgage on the property as at May 2007 and currently. The matter was listed for further hearing, including the cross-claims and interlocutory application which the FCC had not determined because of the late filing of documents by Mr Reaper and Ms Fisher.

3    The hearing resumed in June 2015 and the valuation and mortgage evidence was presented. Applying the methodology referred to in [72]–[74] of the first decision, the FCC valued the Trustee’s interest in the property at $96,000: Vrsecky v Reaper & Anor (No. 2) [2015] FCCA 2230, [101]. The FCC held that the claims made by the appellants in their interlocutory application were misconceived, stating at [102]–[104]:

102.    A number of the matters set out in the Interlocutory Application, which are said to be sought as Interlocutory Orders, are plainly inappropriate. They are so misconceived that it is not appropriate to dignify them with any detailed consideration. By way of illustration only, order (8) seeks “a declaration that the First Respondent does not owe a debt to the Australian Taxation Office on the integrated client account of Urban Habitat Landscaping and Paving Pty Ltd”. This matter is not properly before this Court at all.

103.    The orders sought also seem to me, on their face, to seek to re-litigate matters previously disposed of in the various court proceedings to which Mr Reaper has been a party. Insofar as the Interlocutory Application seeks an inquiry, pursuant to s.179 of the Bankruptcy Act, not only are the matters asserted not made out, but I am quite satisfied on the materials as a whole that the conduct of the trustee does not make it appropriate to contemplate an inquiry pursuant to s.179. Insofar as the Interlocutory Application seeks, at paragraph 13(h), an inquiry pursuant to s.179 because "the applicant engaged in litigation on a substantially misconceived basis, and in a manner which was unnecessary", I would only observe that the trustee's conduct seems to me to have been, at all times, entirely proper.

104.    Regrettably, it is Mr Reaper and Ms Fisher who have engaged in unnecessarily prolix and often irrelevant initiatives, and have protracted and expanded these proceedings. Insofar as the Interlocutory Application seeks compensation pursuant to s.178 of the Act (paragraph 14) for "injury harm loss and damage suffered by the respondents as a consequence of circumstances relating to the orders sought herein", that matter is not in any sense particularised. In any event, as I would find, there is nothing to suggest that the trustee's actions have been such as to give rise to any compensable claim, whether under s.178 or otherwise.

The FCC also dismissed the cross-claims, essentially for the reason that Mr Reaper and Ms Fisher had not established that any damage had been done to the property, as claimed.

4    In orders made on 18 September 2015 and amended on 9 October 2015, the FCC declared that 50% of the property vested in the Trustee pursuant to ss 58, 115(1) and 116(1) of the Act as and from the date of commencement of Mr Reaper’s bankruptcy and ordered that within 90 days of the making of the orders, Ms Fisher have the option to purchase the Trustee’s interest in the property for $96,000. Ancillary orders were made in relation to the process to be followed if Ms Fisher did not exercise her option right. These ancillary orders were subsequently stayed on the application of Mr Reaper and Ms Fisher pending an appeal from the FCC decision.

5    Mr Reaper and Ms Fisher have appealed those orders on several grounds. Mr Reaper and Ms Fisher represent themselves and the grounds, to some extent, overlap and, in part, are unintelligible. As best can be understood, in summary it is alleged that the FCC erred in declaring that 50% of the property vested in the Trustee, erred in calculating the amount of money that the Trustee must pay Mr Reaper pursuant to s 116(4) of the Act, erred in failing to dismiss the Trustee’s partition and sale application as an abuse of process and erred in dismissing the cross-claims. Additionally, it is claimed that the FCC failed to accord the appellants procedural fairness. The Trustee, by notice of cross-appeal (amended from a notice of contention), has challenged the amount found by the FCC to be payable by the Trustee to Mr Reaper pursuant to s 116(4) of the Act.

The protected money claim

6    Section 116(1) relevantly provides that all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy is property divisible amongst the creditors of the bankrupt. Section 116(2)(g) relevantly provides that subs (1) does not apply to any damages or compensation recovered by the bankrupt (whether before or after he or she became a bankrupt) for personal injury. Section 116(2)(n) provides that subs (1) does not extend to “property to which, by virtue of subsection (3), this paragraph applies”.

7    Section 116(3) provides that:

Where, at any time, the whole, or substantially the whole, of the money paid for the purchase, or used in the acquisition, of particular property is protected money, paragraph (2)(n) applies to the property.

8    Section 116(4) provides that:

Where, as at the time when the trustee realises particular property to which paragraph (2)(n) does not apply, the outlay in relation to the property is in part protected money and in part other money, the trustee shall pay to the bankrupt so much of the proceeds of realising the property as can fairly be attributed to that protected money.

9    Section 116(2D) provides:

In subsections (3) and (4):

exempt loan money, in relation to a particular time, means so much of the principal sum of a loan to the bankrupt, or to the bankrupt and another person or other persons, as was repaid, before that time, out of exempt money.

exempt money means money of any of the following kinds:

(a)    ….

(b)    damages or compensation of a kind referred to in paragraph (2)(g);

(c)    …

outlay, in relation to property, in relation to a particular time, means all of the following:

(a)    the money paid for the purchase, or used in the acquisition, of the property;

(b)    the money paid before that time in respect of the extensions, alterations and improvements, if any, of the property constructed or made since that purchase or acquisition.

protected money, in relation to a particular time, means:

(a)    exempt money; or

(b)    exempt loan money in relation to that time.

10    It was uncontroversial that in 2007 Mr Reaper suffered a severe workplace injury for which he was in receipt of compensation payments until sometime in 2013 at which time Mr Reaper was placed on a disability pension. It was also not in controversy that Mr Reaper used the compensation payments to reduce a loan from the Victorian Mortgage Management Group Pty Ltd which was taken out in November 2004 to fund the construction of a house on the property. The original loan was for $285,000, secured by a mortgage over the property. Between 2007 and February 2013, all the loan repayments were made from Mr Reaper’s compensation payments totalling $188,462. The principal outstanding on the loan was reduced by $45,033.63 and, overall, the amount outstanding on the loan, including interest, reduced from $317,649 to $275,000. None of these figures were disputed by Mr Reaper or Ms Fisher.

11    The FCC at [96] held that the moneys paid towards the repayment of the mortgage between 2007 and 2013 were “plainly exempt money, as they represented damages or compensation of a kind referred to in s.116(2)(g) of the Bankruptcy Act”. The FCC also accepted that the payments were an “outlay” within the meaning of the definition of that term in s 116(2D), being moneys “used in the acquisition” of the property and “might also be said to be moneys paid for the purchase of it”. The FCC stated at [97]:

97.    The definition of "outlay" is limited to "in relation to property, in relation to a particular time". There is no more precise temporal definition than that. The particular time with which the Court is here concerned seems to me to be the period between 2007 and 2015. All parties have proceeded on this footing. In my view, given the expanded appreciation of the phrase "used in the acquisition" given by Nicholson J in Jemeilita, a beneficent reading of the wording of the relevant sections leads to the conclusion that the mortgage repayments should be taken to be included in the relevant definition of "outlay". While the net gain to the value of the realised figure is, of course, only that it reduced half of the total reduction in the principal sum of the mortgage, the significance of the matter lies, however, in the significantly increased value of the property, which accrued simply because it continued to be the subject of the mortgage payments.

12    The FCC also held for the purposes of s 116(4) that the sum that can be fairly attributed to the reduction of the loan principal outstanding (which the FCC had rounded to $43,000) was the overall increase in the value of the property derived from its continued occupation. The FCC reasoned at [99]–[101]:

99.    Even if the protected money involved is only, as the trustee said, approximately some $43,000, the fact is that the sum that can be fairly attributed to that reduction is, in fact, the overall increase in the property derived from its continued occupation. In the particular circumstances of this case, looking as Neaves J, Davies J and Nicholson J suggest, at the totality of the relevant circumstances, it is immediately apparent, that albeit that the mortgage itself decreased by only a relatively small amount, the fact that the mortgage was paid has enabled the property to accrue very significantly in value.

100.    Thus, in my view, the submission by the trustee that the only relevant circumstance is the actual reduction in the principal owing on the loan is too narrow a construction of a provision that should, as the authorities to which I have referred make clear, be interpreted beneficently. It, therefore, follows that consistent with the figures I have set out earlier in this judgment, the amount attributable to Mr Reaper's contributions should be assessed at $308,000. Of this, consistently with what I said in my earlier reasons for judgment, half should be assumed to be for the benefit of Ms Fisher (see my earlier judgment at [59]–[60]).

101.    This means that the amount attributable to Mr Reaper is the sum of $154,000. The trustee's share of the half share of the net equity is $250,000. Subtracting $154,000 from that figure will reduce it to $96,000. That is the figure which, in all the circumstances, seems to me to be the just and equitable figure that Ms Fisher will need to find to pay out the trustee's interest.

13    The amount of $308,000 (rounded by the FCC) represented the overall increase in the net equity of the property between 2007 and 2015. On the figures presented to the FCC, the net equity increased between 2007 and 2015 by $307,649 calculated as follows:

(a)    as at 2007, the value of the property was $510,000, and the loan balance secured by mortgage was $317,649, leaving a net equity in the property of $192,351;

(b)    as at 2015, the value of the property was $775,000, and the loan balance secured by mortgage was $275,000, leaving a net equity of $500,000.

14    Relying on Re Manivilovski; Ex parte Official Trustee in Bankruptcy (1993) 45 FCR 358, 365 and Stankovic v Van der Velde [2012] FCA 1436, [10]–[11], the FCC reasoned that half of the overall increase in net equity of the property (ie $308,000) “would prima facie be attributed to Mr Reaper, being $154,000”: ie, “could fairly be attributed to” the protected money for the purposes of s 116(4). The FCC then took the current net equity of the property ($775,000 less the outstanding loan amount of $275,000 = $500,000) of which the Trustee’s 50% share was $250,000, and subtracted $154,000, leaving $96,000 as the amount that represents the Trustee’s interest in the property.

SECTIONS 116(2)(n) AND 116(3) OF THE BANKRUPTCY ACT

15    Sections 116(2)(n) and 116(3) apply if “the whole, or substantially the whole, of the money paid for the purchase, or used in the acquisition, of particular property is protected money”.

16    The phrase “used in the acquisition” has been construed to encompass moneys applied in repayment of a loan taken out to acquire the property: Re Iskenderian; Ex parte Iskenderian Bros Pty Ltd (1989) 21 FCR 363, 372; [1989] FCA 184, [31]; Turner v Official Trustee in Bankruptcy (1996) 71 FCR 418; [1996] FCA 1074; Re Manivilovski; Ex parte Official Trustee in Bankruptcy (1993) 45 FCR 358, 362. In Re Iskenderian; Ex parte Iskenderian Bros Pty Ltd (1989) 21 FCR 363; [1989] FCA 184, Neaves J stated at 372 (FCR):

Notwithstanding the difficulties to which the language of the provision gives rise, I am of opinion that 116(2)(g) and (n) and subs (3) sufficiently reflect a legislative intention that a bankrupt, notwithstanding his bankruptcy, is to continue to have the benefit not only of any damages or compensation of the kind referred to in s 116(2)(g) recovered by him, but also of any property which can, as at the time when he becomes a bankrupt, properly be described as representing such damages or compensation. Those provisions are, therefore, to be construed accordingly.

In Turner v Official Trustee in Bankruptcy (1996) 71 FCR 418; [1996] FCA 1074 at 422 (FCR), the Full Federal Court stated:

In Re Iskenderian; Ex parte Iskenderian Bros Pty Ltd (1989) 21 FCR 363 at 372 Neaves J, whilst dealing with other difficulties created by s 116(3) in its then form, considered that the question posed by the section was "whether the property, in truth, represents such damages or compensation". This decision was followed in Re Manivilovski; Ex parte Official Trustee in Bankruptcy (1993) 45 FCR 358. Such an approach gives effect, correctly in our view, to the word "whole" and the phrase following "or substantially the whole". The section requires, in the first instance, a consideration of the question whether the property is entirely accounted for by the application of protected moneys. If that is not the case, but nevertheless those moneys account for nearly all of what has been used in payment for or in the acquisition of the property, then this too will suffice to keep the property from being divided amongst creditors. But the subsection does not contemplate that property will be withheld from creditors wherever the protected moneys can account for a significant part of the purchase price, or of the means by which it is acquired. Even if, as here, the contribution of protected moneys could be described, in general terms, as "substantial" this would not satisfy the requirement that those moneys represent "substantially the whole" of that price or of the means of acquisition. Whilst "substantial", when it appears alone, might refer to a contribution of significance, here it derives its meaning from "the whole", the expression which it qualifies. The importance of the context supplied for the word "substantially", was emphasised by Hill J in Secretary, Department of Social Security v Wetter (1993) 40 FCR 22 at 29-30; [1993] FCA 17, in relation to other statutory provisions. In our view, s 116(3) provides that a bankrupt may retain property that can be seen to represent the protected moneys, subject to only a minor qualification of input from other sources.

In the present case, the FCC accepted that the compensation moneys applied by Mr Reaper towards repayment of the loan were moneys “used in the acquisition of property” within the terms of s 116(3) but rejected the appellants’ claim that s 116(3) applied, finding that repayments had been made on the loan since 2005 and “it is not possible, at least at present, to sustain the [appellants’] assertion that the entirety of the property can be attributed to the protected payments”: see the first decision at [70].

17    Grounds 7 and 8 of Mr Reaper’s and Ms Fisher’s notice of appeal raise that the FCC erred in the application of s 116(2) and s 116(3).

section 116(4) OF THE BANKRUPTCY ACT

18    Where the outlay in relation to the property is in part protected money and in part other money, s 116(4) requires the trustee to pay the bankrupt so much of the proceeds of realising the property “as can fairly be attributed to that protected money”. In Re Manivilovski 45 FCR 358, Davies J stated at 364:

The whole of the circumstances of the case must be taken into account. To ascertain what sum can fairly be attributed to the outlay of the protected money requires that a fair assessment be made of the part which the payment of the protected money played in the achievement of the final receipt. In this task, it may be necessary, in a particular case, to apportion or dissect expenditure or to make allowances or adjustments so as to achieve a sum which fairly reflects the significance of the protected expenditure in relation to the overall expenditure in the purchase or acquisition or improvement of the property.

…

[Counsel for the Trustee] … submitted, that when protected money is used in the repayment of a loan, the bankrupt should get back only that sum of money and not a proportion of the value of the property or that money plus interest. [Counsel] submitted that that was so because, by paying off the mortgage early, the bankrupt gained the benefit of not having to pay future interest on the principal and the interest that he saved could be equated to the interest that he would have received had the funds been invested. However, the subsections treat protected money that is used to pay off a mortgage as money that was paid for the purchase or acquisition of the property and s 116(4) requires the trustee to pay to the bankrupt such of the proceeds of realising the property as can fairly be attributed to that protected money. Accordingly, the protected money, whether it is used directly in the purchase of the property or in the repayment of a loan secured on the property or in the making of extensions, alterations and improvements to the property must be compared with any other moneys so expended and the net proceeds of realisation must be fairly apportioned as between them. That is the task and it must be undertaken, however complex it may be, to arrive at a sum which represents a fair attribution of the protected money to the net proceeds of realisation.

A further issue in Re Manivilovski 45 FCR 358 was whether, where the bankrupt is one of two joint tenants, that protected money must be treated as having been paid for the joint benefit of the bankrupt and the other joint tenant. It was held at 365 that “the proper course must be to treat the protected money as having been paid for the benefit of both the bankrupt and his wife and therefore to take into account only the bankrupt’s share thereof, that is to say one half of the expenditure”. This approach was also followed in Stankovic v Van der Velde [2012] FCA 1436, [10]–[11].

the appeal

19    Mr Reaper’s amended notice of appeal raised ten grounds of appeal.

Ground 1

The primary judge erred in the application of section 58 of the Bankruptcy Act 1966; his Honour failed to take into account the proportional relationship between the amount actually established at [2] [of the orders, ie $96,000] and the amount vested in the [Trustee] at [1] [of the orders, ie 50%]. His Honour should have held at [1] that $96,000 (12%) of the property vests in the [Trustee].

20    Mr Reaper argued that as the FCC quantified the Trustee’s interest in the property in the amount of $96,000 (being 12% of the market value of the property), therefore “pursuant to s 116(2), 38% of [his] 50% share in the property does not extend to creditors” and the FCC therefore erred in holding that 50% of the property vested in the Trustee pursuant to s 58 of the Bankruptcy Act. This ground is misconceived.

21    The bankruptcy of Mr Reaper had the effect of severing the joint tenancy of the property in equity and by operation of s 58 of the Act, Mr Reaper’s one-half interest in the property as tenant in common in equity vested in the Trustee: Sistrom v Urh (1992) 40 FCR 550, 556; Rameo v Trust Co (PTAL) Ltd [2012] NSWSC 62, [19]–[20]. Section 58(1)(a) relevantly provides:

58 Vesting of property upon bankruptcy – general rule

(1)    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…

22    Section 116, in contrast, prescribes the property of a bankrupt that is divisible amongst the bankrupt’s creditors. Where s 116(4) applies, notwithstanding that the property has vested in the trustee, the moneys’ worth of that property that can fairly be attributed to the bankrupt’s protected money is required to be paid to the bankrupt (here Mr Reaper), and it is only the balance of the moneys’ worth of the property that is available for distribution to creditors. The calculation under s 116(4) does not, however, gainsay the operation of s 58.

Grounds 6 and 28

23    These grounds should be considered together as they essentially raise the same point.

6.    The primary judge erred in the application of section 116(1) of the Act, his Honour:

(a)    failed to address the elements of the legislation by ascertaining whether in truth and reality a debt was due and owing by the first [appellant] to a creditor;

(b)    failed to give any or adequate reasons for applying the legislation when there was clear overwhelming evidence before the Court that it was not proper;

(c)    failed to adequately address the elements of the legislation by ascertaining whether other property of the first [appellant] would satisfy the debt(s), if any, due and owing to a creditor(s).

28.    The primary judge erred in holding that the trustee’s application was not an abuse of process when there was clear overwhelming evidence before the Court that the trustee’s actions did not match the application for a proper purpose:

(a)    the application did not disclose a valid cause of action;

(b)    the trustee has not held a valid meeting of creditors;

(c)    s 30 of the Act is used as a source of power to override express provisions;

(d)    the trustee proceeded to secure an interest in the Property knowing that one or several of the vehicles registered to the bankrupt in the report to creditors may or would satisfy any or all debts due and owing to a creditor(s).

24    These grounds were founded on the misconception that the FCC was required to determine whether Mr Reaper has any creditors and, if so, whether he has other property available out of which to pay his debts before determining the property divisible amongst his creditors pursuant to s 116. The effect of bankruptcy however was that upon the making of the sequestration order, all the property of Mr Reaper vested in the Trustee by operation of law pursuant to s 58(1) of the Act. Further, subject to the exceptions in s 116, all the property that belonged to, or was vested in, Mr Reaper at the commencement of his bankruptcy is, by operation of law, property divisible amongst his creditors pursuant to s 116(1) of the Act. The only questions arising for determination by the FCC on the Trustee’s application for an order for partition and sale concerned the application of ss 116(3) and 116(4). I note moreover that Mr Reaper’s claim that he did not owe the debt upon which he was made bankrupt was rejected by Pagone J in Reaper v Baycorp Collections PDL (Australia) Pty Ltd [2014] FCA 13 at [8] in an unsuccessful annulment application made by him. Mr Reaper is bound by that decision and the attempt by him in this appeal to re-agitate the correctness of that decision is an abuse of process.

Grounds 7, 8, 9 and 11

25    These grounds should be considered together as they essentially raise the same point.

7.    The primary judge erred in the application of section 116(2) of the Act, his Honour:

(a)    failed to correctly apply the bankrupt’s protected money used in the acquisition of the property ($188,462);

(b)    incorrectly attributed to the bankrupt’s protected money the amount of the drawdown of the mortgage ($43,000);

(c)    failed to correctly apply the equity attributable to the protected money;

(d)    failed to take into account and make allowance for money and protected money used to repair and improve the property;

(e)    incorrectly attributed the protected money to the house and land and not exclusively to the house to which the mortgage relates.

8.    The primary judge erred in the application of section 116(3) of the Act; his Honour failed to correctly ascertain the protected money used in the acquisition of the property.

9.    The primary judge erred in the application of section 116(4) of the Act; his Honour wrongly attributed the outlay using exempt money as the drawdown of the mortgage and not the actual amount outlaid to purchase the property using exempt money.

11.    The primary judge erred in failing to give adequate reasons in finding contrary to the evidence before the Court that the house and land are not different property when they are disconnected by mortgage, contract, protected money, ownership, time, his Honour:

(a)    failed to take into account that his earlier reasons found it apparent that the mortgage was for the house only;

(b)    failed to take into account that the [appellants] on 18 March 2015 effectively argued that the house and land are different property;

(c)    failed to take into account Order 18 March 2015 which was made to ascertain separately the value of the land.

26    Mr Reaper argued that the house and land are not the same property for the purposes of s 116. Mr Reaper further argued that s 116(3) and s 116(2)(n) apply because the land had been purchased in 2002 and paid for at the time and in late 2004 the loan was taken out to fund the construction of a house on the property and applied wholly for that purpose. It was argued therefore that the FCC should have held that the whole of the compensation moneys that Mr Reaper applied towards the loan repayments was protected money within the terms of s 116(3) of the Act and therefore s 116(2)(n) applies to the house.

27    These grounds are also misconceived. The premise on which they were founded is that the land and house are separate items of property. This premise is wrong in law as the house is a fixture and treated as part of the real property: Reid v Smith (1905) 3 CLR 656; [1905] HCA 54, 667–8 (Griffith CJ), 675 (Barton J), 679–680 (O’Connor J). Accordingly, for the purposes of s 116 the land and the house are not separate items of “property”.

28    Ground 7(d) is separately addressed below at [32].

Grounds 17 and 18

29    These grounds should be considered together as they essentially raise the same point.

17.    The primary judge erred in dismissing the cross-claims.

18.    The primary judge should have held that the [appellants] were entitled to compensation for injury harm and loss suffered by the [appellants].    

30    By this ground Mr Reaper and Ms Fisher have sought to contest the FCC’s findings of fact on their cross-claims and the conclusion that they did not establish that the alleged damage did occur or that the Trustee failed to arrange appropriate insurance or take appropriate steps to make an insurance claim. The difficulty for Mr Reaper and Ms Fisher is that the FCC found that Mr Reaper was not a witness of truth in relation to his claim that the property had suffered storm damage and held that his claim that the house was invaded by birds and pests between March 2013 and May 2013 was “improbable and farfetched”. The FCC concluded that the claim would fail in any event as the conduct of Mr Reaper and Ms Fisher prevented the Trustee from obtaining sufficient information to ensure that the claims were not fraudulent and to make an insurance claim. The FCC was also satisfied that the Trustee had arranged for appropriate insurance cover and stated that if damage had occurred as asserted by Mr Reaper and Ms Fisher, the property is still insured and there is nothing to prevent them from pursuing a claim properly formulated.

31    On appeal, this Court does not determine issues of fact as if the findings of the FCC had not been made. The Court’s function is to correct errors in the decision below: SLMB v Minister for Immigration and Multicultural and Indigenous Affairs [2004] FCAFC 129, [11]. The submissions advanced by Mr Reaper do not show that the FCC acted on evidence which was inconsistent with the objective facts or which was glaringly improbable: Fox v Percy (2003) 214 CLR 118; [2003] HCA 22, [29] (Gleeson CJ, Gummow and Kirby JJ). To the contrary, the contemporary emails and logic of events as set out in the FCC decision at [57]–[76] provide cogent support for the FCC’s findings. Moreover, the submissions do not articulate a basis upon which to conclude that the adverse credit findings should not have been reached by the FCC. Accordingly, I do not consider that there is any substance in these grounds.

Ground 27

The primary judge failed to accord procedural fairness to the [appellants].

32    A number of matters were raised by Mr Reaper in support of this ground. First, Mr Reaper alleged that the FCC permitted the Trustee to raise the submission that the “protected money” meant only “exempt loan money” when he was not on notice because this argument was not the subject of affidavit material whereas, in contradistinction, the FCC refused to entertain a submission by Mr Reaper for the reason that he made an assertion that was not supported by affidavit (see also ground 7(d)). There was however a clear difference between the submissions of the Trustee and of Mr Reaper. The Trustee’s submission was a submission based on the law and did not require evidentiary proof, whereas the assertion made by Mr Reaper did. Further as stated by the FCC at [88]:

…I note that at paragraph 24 of his submissions, Mr Reaper asserts that he had invested a further $90,000 in the house during the protected money period using payments of compensation and superannuation. This assertion, made in submissions in reply following the closure of both sides’ cases and not supported by affidavit, cannot be taken further.

In the circumstances there was no denial of procedural fairness.

33    In addition, Mr Reaper submitted that the FCC allowed counsel for the Trustee to raise in submissions, when it was not raised by affidavit, that “protected money” means “exempt loan money” “thus surprising the [appellants]”. There was no procedural unfairness however. The Trustee had accepted that the loan, since 2007, had been repaid wholly out of Mr Reaper’s compensation payments and the FCC accepted that the payments made came within the definition of “exempt loan money”.

34    Mr Reaper also submitted that the FCC failed to give reasons for paragraph 1 of the orders made (ie that 50% of the property vested in the Trustee pursuant to s 58 of the Bankruptcy Act). It was not however in dispute that Mr Reaper owned the property as joint tenant with Ms Fisher. As stated, the bankruptcy of Mr Reaper had the effect of severing the joint tenancy of the property in equity and by operation of s 58 of the Act, Mr Reaper’s one-half interest in the property as tenant in common in equity vested in the Trustee. The substantive controversy for determination concerned the application of ss 116(3) and (4).

35    Mr Reaper also submitted that the FCC failed to accord natural justice by questioning whether in truth and reality a debt was due and owing by Mr Reaper to a creditor. As already stated, the FCC was not required to do so as the issue did not arise in the proceeding.

36    The rest of the arguments were not intelligible.

cross-appeal

37    The Trustee has cross-appealed the order that Ms Fisher has the option to purchase the Trustee’s interest in the property for $96,000. The grounds of cross-appeal are:

1.    The Court ordered that the property be sold and that the trustee shall pay the bankrupt so much of the proceeds of realising the property as can fairly be attributed to that protected money pursuant to section 116(4) of the Bankruptcy Act 1966.

2.    The [Trustee] contends that (at paragraph [97] and [99] of the reasons) the Court should not have considered that the entirety of the bankrupt’s share of the increase of the value of the property since May 2007 constituted protected money under section 116(4) of the Bankruptcy Act 1966.

3.    The [Trustee] contends that in calculating the amount that can fairly be attributed to that protected money under section 116(4) of the Bankruptcy Act 1966, the bankrupt’s share of the increase in value of the property since May 2007 should be apportioned pro-rata between the bankrupt’s protected money and the balance of the bankrupt estate that has vested in the [Trustee].

38    The Trustee argued that the FCC fell into error in holding that the whole of the $188,000 that Mr Reaper applied towards repayment of the loan, using his compensation moneys, was “protected money”. Reliance was placed on the definition of “protected money” which is defined to mean “in relation to a particular time”, “exempt money” or “exempt loan money in relation to that time”. “Exempt money” relevantly means damages or compensation of a kind referred to in s 116(2)(g). “Exempt loan money” is defined in relation to a particular time to mean “so much of the principal sum of a loan to the bankrupt, or to the bankrupt and another person or other persons, as was repaid, before that time, out of exempt money”. It was submitted that as the compensation moneys were used for the purpose of repayment of a loan, only that part of the compensation moneys that repaid the loan principal constitutes “protected money”, being “exempt loan money”, for the purposes of s 116(4). As in this case, all payments on the loan from 2007 to 2013 were made from Mr Reaper’s compensation payments, I agree with that submission. Over the period of eight years, the loan repayments using the compensation moneys had the effect of reducing the loan principal by $45,033.63. Therefore, the exempt loan money and thus the “protected money” for the purposes of s 116(4) is that amount.

39    It remains to determine the amount as can “fairly be attributed to” Mr Reaper’s protected money. On this point, the Trustee argued that the FCC incorrectly attributed the whole of the increase in the value of the property from 2007 to date to the protected money. The Trustee argued that the s 116(4) figure should be pro rata to the reduction in principal outstanding on the loan, rather than including the whole increase in the net equity in the property. Thus, it was submitted, as over the period of eight years the mortgage on the property has been reduced by $45,033.63, which is Mr Reaper’s “protected money”, in applying s 116(4), it is appropriate to work out the proportion of Mr Reaper’s “protected money” to the increase in his net equity in the property over that time to determine the amount that should be paid to him under s 116(4). The Trustee submitted that because Mr Reaper made payments incrementally, his percentage interest in the property should be averaged over the period of payments as follows:

(a)    If Mr Reaper had paid the exempt loan money of $45,033.63 in a lump sum in May 2007, he would have acquired an interest of 8.83% in the property: ie, $45,033.63 is 8.83% of $510,000, which was the value of the property in May 2007 according to the point-in-time valuation.

(b)    If Mr Reaper had paid the exempt loan money of $45,033.63 in a lump sum in April 2015, he would have acquired an interest of 5.81% in the property: ie, $45,033.63 is 5.81% of $775,000, which is the value of the property according to the valuation dated 20 April 2015.

(c)    The mid-point of 5.81% and 8.83% is 7.32%. Therefore, 7.32% is a fair percentage interest in the property to attribute to the payment of exempt loan money.

(d)    Taking 7.32% of $775,000 is $56,730. Half of this interest should be attributed to Ms Fisher: Re Manivilovski 45 FCR 358, 365. Therefore, the amount fairly attributable to Mr Reaper’s protected money for the purposes of s 116(4) is $28,365.

(e)    Therefore, to pay out the Trustee’s interest, Ms Fisher needs to pay $221,635 to the Trustee. This represents half of the net equity of the property ($500,000), less the amount attributable to Mr Reaper’s protected money: $250,000 - $28,365.

40    Further, it was submitted by the Trustee that the proper time to conduct the calculation under s 116(4) is at the time of sale as the issue is the extent to which s 116(4) applies to the proceeds of the realisation of the property, which requires a fair assessment to be made of the amount of the proceeds that can be fairly attributed to the compensation moneys. As mentioned, the case was not conducted on that basis below. The reasons of the FCC record that “the trustee expressly conceded that it would be appropriate to seek to quantify the amount that [Mr Reaper and Ms Fisher] might need to pay to the trustee to purchase out the trustee’s interest in the property rather than proceeding forthwith to sale even if the [trustee] is successful”: see the first decision at [3]. The Trustee is bound by his concession and the way he conducted the case below and the new basis upon which he seeks to argue that the decision below was not correct should not be permitted: Metwally v University of Wollongong (1985) 60 ALR 68; [1985] HCA 28, [7]. Whilst the property has not been sold, the matter determined by the FCC was the amount in dollar terms that would be distributable to the unsecured creditors of Mr Reaper’s bankrupt estate if the property was sold for its market value valuation as at June 2015, net of the secured liability, Ms Fisher’s entitlement to one half of the proceeds and the amount which the Trustee is required to pay to Mr Reaper under s 116(4) of the Act.

“Fairly be attributed to”

41    Before considering the Trustee’s methodology, the meaning of the phrase “fairly be attributed to [the] protected money” should be considered. The meaning of the phrase in the context of s 116(4) does not appear to have been the subject of judicial consideration other than to identify that a pro rata apportionment is appropriate: Re Manivilovski 45 FCR 358, 364–5; Re Iskenderian 21 FCR 363, 372; Stankovic v Van der Velde [2012] FCA 1436, [10]–[12]. Nevertheless, the meaning of the words “attributable to” has been judicially considered in a number of contexts.

42    In the context of veterans’ entitlements to a pension, initially under the Repatriation Act 1920 (Cth) and later under the Veterans’ Entitlements Act 1986 (Cth), the phrase “attributable to” has been considered in the inquiry as to whether an injury, disease or death “arose out of, or was attributable to” the veteran’s service. This line of cases has emphasised that the phrase requires a causal relationship, but not a strong causal relationship such as sole or dominant cause. In Repatriation Commission v Law (1980) 47 FLR 57 at 68, the Full Federal Court held that the phrase “attributable to” “involves an element of causation” but that “the cause need not be the sole or the dominant cause: it is sufficient to show ‘attributability’ if the cause is one of a number of causes provided it is a contributing cause”. Further, the Court considered that “a ‘but for’ cause will suffice”: at 69. This discussion was referred to with approval in Gilkinson v Repatriation Commission (2011) 197 FCR 102; [2011] FCAFC 133 at 104–5 (Perram J), 110–111 (Nicholas and Robertson JJ) and held to apply equally to the use of the phrase “attributable to” in the Veterans’ Entitlements Act 1986 (Cth). Similarly, in Roncevich v Repatriation Commission (2005) 222 CLR 115; [2005] HCA 40 at 126 (CLR), the plurality in the High Court considered that:

A causal link alone or a causal connection is capable of satisfying a test of attributability without any qualifications conveyed by such terms as sole, dominant, direct or proximate.

43    The words “attributable to” were also considered by the High Court in the context of s 160ZK(5) of the Income Tax Assessment Act 1936 (Cth). In Commissioner of Taxation v Sun Alliance Investments Pty Ltd (2005) 225 CLR 488; [2005] HCA 70, the Court stated at [77] that “as with all questions of causality, the starting point is the identification of the purpose (here the legislative purpose) to which the question is directed”. At [80], the Court quoted with approval the determination of Donaldson J in Walsh v Rother District Council [1978] 1 All ER 510, 514 as to the meaning of “attributable to” in the Local Government Act 1972 (UK), as follows:

[T]hese are plain English words involving some causal connection between the loss of employment and that to which the loss is said to be attributable. However, this connection need not be that of a sole, dominant, direct or proximate cause and effect. A contributory causal connection is quite sufficient.

This statement of Donaldson J had previously been quoted with approval by the majority of the High Court in Roncevich at 222 CLR 115, 126.

44    These authorities consistently emphasise that “attributable to” is not a stringent causal test, but rather requires an inquiry into the relationship to determine whether there is a contributory causal connection. Applying this understanding of the phrase “attributable to” leads to the conclusion that there must be a contributory causal relationship between the protected money and the amount to be paid out by the Trustee on sale of the property.

45    There is clearly a causal relationship between the payment of the protected money and the reduction in the principal of the loan with concomitant increase in net equity. However, I am, with respect, unable to agree with the FCC that on an assumed realisation of the property, the sum that can fairly be attributed to the “protected money” is the overall increase in the value of the property “derived from its continued occupation”. Nor am I able to agree with the FCC’s conclusion that the fact that the mortgage was paid has enabled the property to accrue very significantly in value. The escalation in value between 2007 and the present is not causally related to the payments on the mortgage but to the increase in market value of the property. Indeed as a matter of common sense and general experience it is highly unlikely that the fact of holding a property subject to mortgage and making payments towards that mortgage would have any effect on the value of the underlying property. Nevertheless, by making payments towards the principal of the mortgage, Mr Reaper increased the proportion of the value of the property which he would be entitled to retain in the event of sale of the property, compared with his position had those payments out of protected money not been made. For these reasons, I accept the Trustee’s methodology set out at [39] above and find that the amount that can fairly be attributed to Mr Reaper’s protected money for the purposes of s 116(4) is $28,365.

conclusion

46    Accordingly the appeal should be dismissed and the cross-appeal allowed. Paragraph 2 of the orders below should be set aside and in lieu there should be an order giving Ms Fisher the option to purchase the Trustee’s interest in the property for $221,635. Ms Fisher should be allowed a further 90 days in which to exercise that option.

Associate:

Dated:    12 May 2016