Birdseye v Sheahan

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FEDERAL COURT OF AUSTRALIA
Birdseye v Sheahan [2002] FCA 1319

BANKRUPTCY – order relating to property of an entity controlled by a bankrupt – appellant, an accountant (the bankrupt), was trustee of a family trust and, in that capacity, conducted an accountancy practice – paid himself a modest “salary” – the practice generated substantial fees – bankrupt’s wife owned property subject to mortgage – trust moneys were paid in discharge of wife’s obligations under that mortgage – bankrupt’s wife had possession of cheque book in respect of the bank account of the Trust – wife drew numerous cheques in payment of various outgoings of private or domestic nature – expenditure initially recorded in accounts of Trust as “Teresa’s Expenditure” – subsequently balances of those amounts were treated as loans made to the bankrupt husband – whether in truth that expenditure created a debt owing by the bankrupt’s wife to the entity – Trustee in bankruptcy applied for orders under Part VI Division 4A of the Bankruptcy Act – whether appellant’s remuneration was substantially less than a person might reasonably be expected to receive if the person had dealt with the Trust at arm’s length – whether the Trust had acquired an estate in “particular property”  (the chose in action against the bankrupt’s wife) as a direct or indirect result of, or of matters including, the supply by the appellant of those services – whether the appellant used or derived a benefit from the property – what was the relevant “examinable period” – whether Magistrate erred in making an order vesting in the bankruptcy Trustee the entity’s estate in the chose in action constituted by the debt owed by the bankrupt’s wife to the Trust.

Bankruptcy Act 1966 (Cth), ss 5, 139D

NICHOLAS GUY BIRDSEYE v JOHN SHEAHAN

S 106 of 2002

CARR J
25 OCTOBER 2002
PERTH (Heard in Adelaide)


IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY

S 106 OF 2002

ON APPEAL FROM A FEDERAL MAGISTRATE

BETWEEN:

NICHOLAS GUY BIRDSEYE
Appellant

AND:

JOHN SHEAHAN
Respondent

JUDGE:

CARR J

DATE OF ORDER:

25 OCTOBER 2002

WHERE MADE:

Perth (Heard in Adelaide) 

THE COURT ORDERS THAT:

1.        The appeal be allowed in part. 

2.Paragraph 1 of the orders made on 22 March 2002 in application No AZ 215 of 2001 be set aside.

3.Paragraph 2 of those orders be amended to read:

“The applicant has a charge or right of lien over the property of the Nicholas Birdseye Family Trust in respect of the debt due to the Deputy Commissioner of Taxation in the sum of $47,557.03”. 

4.Paragraph 3 of those orders be set aside and in lieu thereof there be an order that the respondent pay one half of the applicant’s costs of the application.

5.The respondent pay one half of the appellant’s costs of the 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 106 OF

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Details
Case
[2002] FCA 1319
Decision Date

CaseChat Overview and Summary

In the matter of Birdseye v Sheahan, the appeal was brought against the orders made by a Federal Magistrate on 22 March 2002, which vested certain causes of action in the respondent, who is the trustee in bankruptcy of the appellant, and declared that the appellant had a charge or right of lien over specific property of the Nicholas Birdseye Family Trust to secure a debt of $47,557.03. The appellant, Mr Birdseye, an accountant, had conducted his accounting practice as trustee of the Nicholas Birdseye Family Trust, which was settled by his father on 1 July 1986. A sequestration order was made concerning Mr Birdseye’s estate on 9 November 1998. The respondent sought to vest causes of action against Mrs Birdseye and a tax debt in him as the trustee of the bankrupt estate of Mr Birdseye.

The legal issues before the court included the determination of the examinable period under the Bankruptcy Act 1966, whether the bankrupt received adequate remuneration for services provided to the Trust, and the scope of the charge or right of lien over the Trust’s property. The court examined the statutory provisions under Division 4A of the Act and Section 139A, which allow for the vesting of causes of action under certain conditions. The court also considered the definition of the examinable period, the nature of the services provided by the appellant, and the adequacy of the remuneration received.

The court found that the examinable period began four years before the commencement of the bankruptcy, contrary to the appellant’s argument. It was determined that the appellant had not received adequate remuneration for the services he provided to the Trust. The court also concluded that the declaration concerning the charge or right of lien over the Trust’s property had been drawn too widely. The appeal was partially allowed, and the orders were amended to reflect a narrower charge over the Trust’s property. The court ordered that the respondent bear half of the appellant's costs for both the application and the appeal.

Orders

Orders of the court

1. The appeal be allowed in part.

2. Paragraph 1 of the orders made on 22 March 2002 in application No AZ 215 of 2001 be set aside.

3. Paragraph 2 of those orders be amended to read:

“The applicant has a charge or right of lien over the property of the Nicholas Birdseye Family Trust in respect of the debt due to the Deputy Commissioner of Taxation in the sum of $47,557.03”.

4. Paragraph 3 of those orders be set aside and in lieu thereof there be an order that the respondent pay one half of the applicant’s costs of the application.

5. The respondent pay one half of the appellant’s costs of the appeal.

Note:

Background

Background to the litigation

This is an appeal from declaratory and other orders made by a Federal Magistrate on 22 March 2002. The orders involved two discrete categories of relief. First, the learned Magistrate ordered that certain causes of action be vested in the respondent (who is the trustee in bankruptcy of the appellant). That order was made pursuant to Part VI Div 4A (“Division 4A”) of the Bankruptcy Act 1966 (Cth) (“the Act”). Secondly, his Honour declared that the appellant had a charge or right of lien over certain property of the Nicholas Birdseye Family Trust to secure the sum of $47,557.03. FACTUAL BACKGROUND The appellant (also referred to in these reasons as “Mr Birdseye”) is an accountant. At all material times both before and after the commencement of his bankruptcy the appellant conducted his accounting practice, known as Nicholas Birdseye & Associates (“the Practice”), as trustee of a discretionary family trust known as the Nicholas Birdseye Family Trust (“the Trust”). The Trust was settled on 1 July 1986 by Mr Birdseye’s father. There are two beneficiaries, Mr Birdseye and his wife. The specified powers of the Trust include carrying on the profession and activities of accountants, auditors and tax agents and the rendering of management, commercial, financial, secretarial and related services. On 9 November 1998, a sequestration order was made by this Court in respect of Mr Birdseye’s estate, upon the petition of the Deputy Commissioner of Taxation. Mr Birdseye continued to conduct the Practice and in doing so employed four persons. The income of the Practice thus continued to be received by Mr Birdseye in his capacity as trustee of the Trust. On 4 October 2001, the respondent filed an application under s 139A of the Act seeking an order that any and all causes of action against Mrs Birdseye in respect of moneys said to be owing by her to the Trust be vested in him as trustee of the bankrupt estate of Mr Birdseye. As a related, but separate claim, the respondent also sought an order for payment out of the assets of the Trust of the sum of $47,557.03, being the amount of an assessment of payroll tax levied against the appellant personally, but which arose out of his conduct of the Practice. THE STATUTORY FRAMEWORK Section 139A of the Act is in the following terms:“139A The trustee of a bankrupt’s estate may, at any time within 6 years after the date of the bankruptcy, apply to the Court for an order under this Division in relation to an entity (in this Division called the respondent entity)”. Section 5 defines “entity” as meaning a natural person, company, partnership or trust. It is common ground that the appellant is an entity. Section 139D of the Act is in the following terms: “139D (1) Where, on an application under section 139A, the Court is satisfied that:(a) the bankrupt supplied personal services to, or for or on behalf of, the respondent entity at a time or times, during the examinable period and before the end of the bankruptcy, when the bankrupt controlled the entity in relation to the supply of those services;(b) either:(i)the bankrupt received for those services no remuneration in money or other property; or(ii)the remuneration in money or other property that the bankrupt received for those services was substantially less in amount or value than a person supplying those services in similar circumstances might reasonably be expected to have received if the person had dealt with the entity at arm’s length in relation to the supply of those services;(c)during the examinable period, the entity acquired an estate in particular property as a direct or indirect result of, or of matters including, the supply by the bankrupt of those services;(d)the bankrupt used, or derived a benefit from, the property at a time or times during the examinable period when the bankrupt controlled the entity in relation to the property; and(e)the entity still has an estate in the property;subsections (2) and (3) have effect, whether or not the bankrupt has ever had an estate in the property.(2)The Court may, by order, vest in the applicant:(a)the entity’s estate in the whole, or in a specified part, of the property; or(b)a specified estate in the whole, or in a specified part, of the property, being an estate that could, by virtue of the entity’s estate in the property, be so vested by or on behalf of the entity.(3)The Court may make an order directing:(a)the execution of an instrument;(b)the production of documents of title; or(c)the doing of any other act or thing;in order to give effect to an order under this section made on the application.”

Evidence

Evidence Before The Court

The appellant conceded that: · the Trust was a relevant entity;· he had supplied personal services to the Trust; and · he controlled the Trust in relation to the supply of those services.THE EVIDENCE AND THE DECISION AT FIRST INSTANCE Only one witness was called at the hearing before the Magistrate. He was a Mr Ian Lock, a partner of the respondent. Mr Lock swore an affidavit to which was annexed a large bundle of documents including ledgers and transcripts of evidence of examinations of Mr and Mrs Birdseye which had been conducted before Deputy Registrars of this Court. Those transcripts were admitted into evidence without objection. It should be noted that neither the appellant nor Mrs Birdseye gave evidence before his Honour. The appellant did not dispute that he supplied personal services to the Trust and that he controlled the Trust during what he considered to be the appropriate examinable period, namely, the two years immediately preceding the commencement of his bankruptcy. The respondent contended that the examinable period extended back to two years earlier than that. The first question for the Magistrate to resolve was what was the examinable period. Examinable period is defined in s 5 of the Act as follows:“Examinable period”, in relation to an application under section 139A by the trustee of a bankrupt’s estate means the period beginning:(a)if, at a time or times during the period beginning 4 years before, and ending 2 years before, the commencement of the bankruptcy, the bankrupt became unable to pay his or her debts, as they became due, from his or her own money – at that time, or at the first of those times, as the case may be; or (b)in any other case - 2 years before the commencement of the bankruptcy; and ending on the day on which the application is made.” The respondent had submitted to the Magistrate that the examinable period commenced on 10 November 1994 (i.e. four years before the commencement of the bankruptcy) on the basis of certain responses given by the appellant in questions set out in his statement of affairs. These were as follows: “17.Details of bankruptcies or arrangements with creditors in last ten years” - In 1994 tried to do Part X – details attached, was in “adjourned” Part X status for two and a half years – the law changed 8 January 1997 whereby you could only be in “adjourned” status for four months and then when came out, Part X was not voted on.” The “details attached” were not attached to the statement of affairs, but in response to Question 21 in the statement of affairs “List what you believe to be the causes of your bankruptcy or insolvency”, the appellant responded: “Fraud done to me in 1990 by Mr Andreas Yohannsen”. In response to Question 22 “When did you begin having difficulties meeting your debts?”, the answer was: “1990”. The Magistrate took the view that the commission by the appellant of an act of bankruptcy, the signing of an authority under s 188, and what the Magistrate described as “the admissions” referred to above indicated the appellant’s inability to pay his debts as and when they fell due from his own money. The Magistrate then reasoned as follows: “On the basis of the debtor's admission that he went into Part X in 1994 I would find that at a period beginning four years before and ending two years before the commencement of the bankruptcy the bankrupt became unable to pay his debts. I do not accept the respondent’s argument that “during the period…became unable” excludes a situation in which the debtor was unable to pay his debts at the commencement of the period.I would therefore find that the examinable period for the purposes of this application commenced on 10 November 1994.”

Decision

Reasons for decision

CARR J
I agree with the proposed re-wording of the declaration. CONCLUSION For the reasons given above, the appeal in relation to the claim made under Division 4A must be allowed. The appellant has been successful in respect of that aspect of the appeal, but I have found against him in respect of three of the four issues which he chose to contest both at first instance and on appeal. The Division 4A claim involved by far the greater part of the proceedings at each stage. In relation to the tax debt, in my view, the appellant has not been successful. I have not accepted his main argument. The respondent readily conceded that the declaration had been drawn too widely. There was no argument about that point. In those circumstances the question arises as to how the costs of the application and of the appeal should be borne. I have considered whether they should be borne equally. In my opinion, such an order would not properly reflect the degree of success achieved by the appellant. In my view, the interests of justice would be served, and the respective degrees of success achieved by the parties would be reflected, by orders that the respondent bear one-half of the appellant’s costs both at first instance and on appeal.

Ratio Decidendi

Legal Principle Established

Established by: CARR J

Full text does not contain this section.