Davies and Davies and Anor

[2012] FMCAfam 866

FEDERAL MAGISTRATES COURT OF AUSTRALIA

DAVIES & DAVIES & ANOR [2012] FMCAfam 866

FAMILY LAW – Family Law and Bankruptcy – where claim under Family Law Act later withdrawn and case proceeded under Bankruptcy Act – family home – express trust – resulting trust – whether it is property divisible amongst creditors – where bankrupt made payments relating to the home before and after bankruptcy – where wife in occupation also made payments – where bankrupt and wife mixed finances even though separated, had entered into orders under s.79 Family Law Act, and where husband had been previously bankrupt – where husband trustee for wife but unilaterally borrows further money on security of property – where bankrupt assessed for income contribution but does not pay – competing equities arising from the facts – imposition of charge or lien for expenditure incurred – equitable estoppel.

Bankruptcy Act 1966, ss.58(1)(b), 116(1), 116(2)(a), 120, 121, 139P
Bankruptcy Act 1966, Division 4B, Part VI
Family Law Act 1975, s.79
Federal Magistrates Act 1999, s.14

Barwick v Goodridge (2011) 255 FLR 245
Currie v Hamilton [1984] NSWLR 687
Juratowitch v Iannotti [2009] FMCA 1133
O’Brien v Sheahan [2002] FCA 1292
Octavo Investments Pty Ltd V Knight (1979) 144 CLR 360
Parsons v McBain (2001) 109 FCR 120
Re Gillies;Ex parte Official Trustee in Bankruptcy (1993) 115 ALR 631
Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies (1993) 42 FCR 571
Re Sharpe; Ex parte Donnelly (1998) 80 FCR 536
Rodway v White [2009] WASC 201
Ryan v Dries [2003] ANZConvR45
Sharment v Official Trustee in Bankruptcy (1988) 22ALR530

Applicant: MS DAVIES

First Respondent: MR DAVIES

Second Respondent: MR ADDIS

File Number: SYC 5992 of 2010

Judgment of: Altobelli FM

Hearing dates: 14 – 16 May 2012

Date of Last Submission: 16 May 2012

Delivered at: Sydney

Delivered on: 22 August 2012

REPRESENTATION

Counsel for the Applicant: Mr Ash

Solicitors for the Applicant: Horowitz & Bilinksy

Counsel for the second Respondent: Mr Combe

Solicitors for the second Respondent: Sally Nash & Co

ORDERS

1. A declaration that the whole of the property at Property T being folio identifier [omitted] (“the property”) is vested in the Second Respondent as Trustee in Bankruptcy of the First Respondent.

2. A declaration that the Applicant Ms Davies has a charge over the property to the extent of 32% of the equity of the same.

3. Order that the Second Respondent be appointed Trustee for the sale of the property (“the Trustee”).

4. An Order that the Trustee be empowered to offer the property for sale and to sell the property by public auction with power to fix a reserve price, or alternatively, to sell the property by private treaty at the best available price.

5. An Order that any sale by the Trustee may be made to the Applicant either as a result of sale at auction or by private treaty, without the requirement for the payment of a deposit and upon such terms as to the payment of the balance of the purchase price as the Trustee considers appropriate.

6. An Order that the Trustee be empowered and authorised to obtain a valuation of the property by employing a registered valuer, if he thinks it necessary.

7. An Order that after sale of the property at auction or by private treaty, the said Trustee be empowered to deduct from the proceeds of sale:-

   (a)The commission and other expenses of any real estate agent employed by the Trustee;

   (b)The reasonable remuneration and expenses of the Trustee in respect of the sale;

   (c)The reasonable legal expenses of transferring the land to the purchaser;

   (d)Any taxes including but not limited to Capital Gains Tax, Land Tax and Goods and Services Tax (GST);

   (e)To make all necessary adjustments of rates and taxes on settlement of the sale; and

   (f)Insurance and any other reasonable expenses for protection and maintenance of the property.

8. An Order that the Trustee hold the proceeds of sale (after deduction of the expenses in Order 7 on trust for the First Respondent as Trustee of the bankrupt estate of the First Respondent and the Applicant in accordance with these Orders.

9. There be liberty to any party to apply on 7 days written notice to the other parties in relation to any matters arising out of the implementation of these Orders.

IT IS NOTED that publication of this judgment under the pseudonym Davies & Davies & Anor is approved pursuant to s.121(9)(g) of the Family Law Act 1975 (Cth).

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYC 5992 of 2010

MS DAVIES

Applicant

And

MR DAVIES

First Respondent

MR ADDIS

Second Respondent

REASONS FOR JUDGMENT

Introduction

1. This case is about resolving, and assessing, competing equitable interests in a property at Property T. The property is currently registered in the name of the Second Respondent, who is the trustee in bankruptcy of the First Respondent. It is occupied, however, and treated as the home of the Applicant who was married to the First Respondent. The parties have agreed that, for the present purposes, the property (which will be called ‘the home’ in these reasons) is valued at $830,000 and is subject to a mortgage securing 2 loans totalling $645,343. The current equity in the home may be as little as $175,657. In these reasons I will describe the applicant as the wife, the first respondent as the husband, and the second respondent as the trustee.

Background

1. The wife and husband married in 1976 and had 2 sons in 1982 and 1986. In 1997 they separated, entered into consent orders for alteration of property interests under s.79 of the Family Law Act 1975, but did not divorce. The husband was first made bankrupt in 2000, and this was annulled pursuant to a special resolution of creditors in 2006. The husband and wife allege that on 3 September 2006 they entered into a trust agreement. One of the issues in this case relates to the validity and implications of this agreement. In 2006 the husband purchased the home for $670,000 in his name. Both husband and wife assert that he purchased the home in trust for the wife, pursuant to their 3 September 2006 trust agreement. She contributed all of the cash used to purchase the home, and the husband borrowed in his name all of the balance of the purchase price, about $595,000. In 2007 the husband unilaterally borrowed a further sum on the security of the home.

2. In October 2007 the husband filed a debtor’s petition in bankruptcy, the trustee was appointed, and the home vested in him.

3. Throughout the period of the husband’s bankruptcy a number of things occurred that are relatively uncontentious. All of the husband’s income was paid into an account in the wife’s name which was used to pay all expenses and outgoings relating to the home. Indeed, despite the lengthy separation of the husband and wife, the evidence strongly suggests that they had been mixing their finances, and indeed cohabiting in the sense of sharing a residence, for many, many years before 2007. During the period of the husband’s bankruptcy the trustee assessed the husband for compulsory income contribution under Division 4B, Part VI Bankruptcy Act, but none was paid.

4. As the years went by the trustee became increasingly interested in realising whatever equity existed in the home, and applying same for the benefit of the husband’s creditors. This led to the husband and the wife both asserting their interests in the home. The wife commenced proceedings in the Supreme Court of NSW, and then the Family Court of Australia. In the fullness of time, and in the manner that will be described below, the proceedings were transferred to the Federal Magistrates Court of Australia.

The Litigation

1. The litigation has a long and convoluted history. The wife initiated proceedings in the Supreme Court of NSW seeking a declaration of trust against the trustee which she later discontinued. What remained of these proceedings was the trustee’s cross-claim which was for possession of the home. Before discontinuing, however, the wife commenced proceedings in the Family Court of Australia and her Amended Application filed 11 January 2011 seeks orders under the Family Law Act.

2. On 4 March 2011 Macready As J ordered that the trustee’s cross-claim be transferred to the Family Court of Australia pursuant to the Jurisdiction of Courts (Cross Vesting) Act to be heard with the application of the wife under the Family Law Act. The litigation was then transferred by the Family Court of Australia to the Federal Magistrates Court of Australia.

3. In the wife’s Defence to Cross-Claim she seeks dismissal of the proceedings for possession by the trustee on the basis that the trustee holds the home on trust for her.

4. In the trustee’s further Amended Response under the Family Law Act he seeks a number of declarations which will be set out below in the context of identifying the relevant issues for determination.

5. During the course of the hearing the wife abandoned any claim under the Family Law Act. That legislation, therefore, does not govern the determination of these proceedings.

The issues to be determined

1. There is an issue as to the ownership of the home. The wife claims that it is held on trust for her pursuant to an express trust. In the alternative she claims a resulting trust based on her financial contribution to the cost of acquisition. The trustee denies the existence of any such trust. He claims that if there is a trust agreement it is a sham. He characterises any monies advanced by the wife to the husband as a loan which was subsequently repaid. The trustee seeks possession of the home and orders for sale.

2. In relation to the payments made by the husband when bankrupt to the wife, the trustee seeks declarations avoiding these payments under ss.120 and 121 Bankruptcy Act, and that until repaid, they be charged against the home. As the evidence in the case unfolded the issues requiring determination crystallised. If an express trust was found then each party raises competing equitable interests arising out of the actions of the husband while bankrupt: the wife regards the husband’s unilateral further borrowings; the trustee as regards the husband’s payments in to the wife’s bank account.

Applicable law

1. When the husband became bankrupt in October 2007 the home vested in the trustee: s.58(1) Bankruptcy Act. Indeed all of the property of the bankrupt at that time became property divisible amongst the creditors of the bankrupt: s.116(1) Bankruptcy Act. The home was encumbered by mortgage securing 2 loans, so of course the trustee took the home subject to that.

2. The trustee also took the home subject to all equities which affect it in the bankrupt’s hands. This includes, potentially, equities that might be asserted against the bankrupt, as well as equities by the bankrupt. The wife asserts one such equity arising out of the husband’s unilateral borrowing of a further loan on the security of the home. The trustee asserts an equity arising out of the payments made by the husband to or for the benefit of the wife in the periods both before and after the bankruptcy.

3. The wife’s case is that the home was properly held in trust for her by the husband at the time of his bankruptcy, and thus falls within s.116(2)(a), and is not available to creditors. She asserts an express trust, or in the alternative a resulting trust. The trustee asserts that, if the bankrupt was in fact a trustee for the wife, insofar as the bankrupt has expended monies from his own funds for the benefit of trust assets, the trustee is entitled to recoup from trust assets the money used to pay trust debts, and is entitled to a charge or lien over trust assets to enforce that right: Octavo Investments Pty Ltd V Knight (1979) 144 CLR 360. This right of indemnity entitling a charge or lien is property vesting in the trustee: Juratowitch v Iannotti [2009] FMCA 1133.

4. The wife raises an issue pertaining to the characterisation of the husband’s income after bankruptcy. The income of a bankrupt does not vest in the trustee. That is the case after 1992 when Division 4B of Part VI of the Act created a compulsory contribution scheme: Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies (1993) 42 FCR 571 at 577. It was also the case before the 1992 amendments: Re Sharpe;Ex parte Donnelly (1998) 80 FCR 536 at 540. There is an issue in this case as to whether, notwithstanding the above, the husband’s post bankruptcy income was after acquired property for the purposes of s.58(1)(b). Re Gillies, and Barwick v Goodridge (2011) 255 FLR 245 suggest it is not after acquired property, and one rationale for this is that income retains its character as income, even after bankruptcy. The issue raised in this case, however, is whether income that loses its character as income because it is used to increase equity in an asset owned at bankruptcy, results in the creation of after acquired property. Re Gillies, and O’Brien v Sheahan [2002] FCA 1292 suggests that, subject to any estoppel against the trustee, the increased equity in the home is after acquired property.

5. The trustee has raised issues about the applicability of ss.120 and 121 of the Bankruptcy Act to some of the transactions in this case. I am satisfied that neither section applies to any transactions after bankruptcy. To the extent that either section might apply to transactions before the husband became bankrupt, I am satisfied that the relief sought by the trustee is available on the facts without reference to ss.120 and 121 of the Act, and with no prejudice to him. That seems to be the way the trustee’s case was presented in any event.

Jurisdiction of the Federal Magistrates Court of Australia

1. No issue was raised by the parties about this court’s jurisdiction. In any event this court has jurisdiction in bankruptcy under s.27 Bankruptcy Act 1966. Under s.14 Federal Magistrates Act 1999 the court is empowered to grant all remedies, legal or equitable, to which any of the parties appear to be entitled.

The Express Trust

1. It is the wife’s case that on 3^rd September 2006 the bankrupt husband and she entered into an agreement that constitutes an express trust. The terms of that agreement are reproduced below: 

   This agreement is made between Ms Davies, currently residing at Property C.

   I, Ms Davies, allow “the property” to be placed in the name of Mr Davies. Mr Davies agrees to the following, that “the property” belongs solely to Ms Davies. Mr Davies agrees to having no interest in “the property”. Mr Davies agrees to hold “the property” in trust for me [Ms Davies and Mr Davies further agrees that in the event of my death Mr Davies will then hold “the property” in trust for our son [X].

2. A copy of this agreement became Exhibit R7, a document which was the subject of much cross-examination by counsel for the trustee in bankruptcy. This will be discussed below. Whilst the agreement purports to be signed on 3^rd September 2006, as Exhibit R7 indicates it was not stamped with the New South Wales Duty until 20 May 2011, about 8 months after the wife commenced proceedings in the Supreme Court of New South Wales.

3. The evidence before the Court is that on 17 October 2006, about 6 weeks after the agreement was signed, the bankrupt husband signed the contract to purchase the home for $670,000. The evidence also establishes that the wife paid the deposit of $67,000. Moreover I am satisfied the evidence demonstrates that the wife paid the stamp duty of $25,644 and then a further $26,551 towards the balance of the purchase price that was paid on settlement which was either on 27 or 28 November 2006. The husband obtained a loan in his name for the balance of the purchase price. Whatever the characterisation of the wife’s interest in the property may be, the Court finds she paid a total of $119,155 towards the purchase price including stamp duty. There was no question that she had the money available to do so.

4. There are a number of other relevant facts that go to the alleged creation of an express trust whereby the husband held the home in trust for the wife.

5. The first relevant fact is that on 8 June 2006, just a few months before the agreement was allegedly signed, the first bankruptcy of the husband had been annulled pursuant to a special resolution of his creditors. The husband had been made a bankrupt in February 2000. Even though the bankrupt husband and the wife had separated in October 1997, the unchallenged evidence is that they remained involved in each others lives. This is not surprising. They remained parents. Whilst both marriages and bankruptcies can be dissolved or annulled, parenthood is indissoluble. Thus, for example, the bankrupt husband felt that he had “ruined our marriage” in 1997 when they separated (aff. 16 April 2011, para.3). When their son [Y] tragically drowned in a backyard swimming pool in 2002 their evidence suggests, unsurprisingly, that they were united in their grief. The wife says that after separation the husband “would come and visit the children at my home in [omitted] regularly” (aff. 30 March 2012, para.10) and that although “we were separated and living apart Mr Davies and I became more amicable while we were researching causes of drowning prior to the coronial inquest into [Y]’s death in 2004” (aff. 30 March 2012, para.11). It is also clear that in about July 2006 the husband had represented to the wife that his only debt was one to the Commonwealth Bank of $13,272 which the wife paid out because it would otherwise have been an obstacle to the husband obtaining a loan to purchase the property (aff. 30 March 2012, paras.23 and 24).

6. All of this evidence satisfies me that, despite their separation in 1997, and notwithstanding their property settlement that year, both the husband and the wife remained involved in each other’s personal and financial lives right up until 2006 when the trust was allegedly created. Indeed the wife’s unchallenged evidence is that from the date of marriage in 1976, continuing after separation, and continuing through the husband’s first bankruptcy, his pay was paid into a joint bank account (aff. 30 March 2012, paras.36 and 37). I accept the wife knew about the husband’s first bankruptcy both as to when it commenced and ended. I am prepared to accept that one of the factors in the wife’s mind prior to the document dated 3 September 2006 is a clear appreciation that the husband had been bankrupt and was no longer so.

7. The second relevant factor as to the creation of the alleged trust is the wife’s own state of health. Once again her evidence is unchallenged here. She had a history of melanoma diagnoses in 1989, then a few years later, and also in 2005-2006. She suffered lymphoedema, severe back pain and a number of other ailments. In 2006 she had gradually increasing liver problems. Part of her [omitted] was removed in surgery (aff. 30 March 2012, paras15-17). In 2006 she was so concerned about her health that she transferred some money to her son [X] “because I wanted him to have the money if anything happened to me” (aff. 30 March 2012, para.21). The wife deposes that she “did not know whether I was going to survive my cancer treatment and therefore decided not to have my name on the transfer documents” (aff. 21 September 2010, para.16). She also deposes she said to the husband in relation to the purchase “you will have to go ahead with the purchase, I am too ill” (aff. 18 April 2011, page 2).

8. The third relevant facts go to explaining why her name was on the contract to purchase the property in the first place but was subsequently removed. In her affidavit of 30 March 2012 at paragraph 22 she explains that she proposed to the husband buying a house “in our joint names because you will qualify for a loan and I won’t”. She then deposes to saying to the husband that if he agreed “you will have to enter into an agreement that says you hold half the property in trust for me”. The wife deposes to this conversation occurring sometime after receiving the money from her mother that she used towards the property, which was sometime after 4 November 2005. It seems reasonably clear, therefore, that the conversation deposed to in paragraph 22 above was a general conversation about a joint house purchase, not a specific one in relation to the home in question in this case. The husband has a different version of these events. In his affidavit of 16 April 2011 at paragraph 3 he deposes that in 2006 the wife wanted “to purchase a house for herself”, and referred to “an agreement…that I would have no interest in the property”. The husband’s affidavit of 2 April 2012 (paragraphs 9 and 10) is consistent with his affidavit of 16 April 2011, and the wife’s affidavit of 30 March 2012.

1. Curiously, the wife’s affidavit of 21 September 2010 filed in the Family Court of Australia has a slightly different version of the events. At paragraph 4 she deposes to the husband and she purchasing the home, but this is clearly incorrect as the annexed contract only refers to the husband as a purchaser. This might be more consistent with a trust as to a one-half share, though of course is plainly inconsistent with the agreement herself. The wife’s affidavit of 21 September 2010 filed in the Supreme Court of New South Wales is, insofar as is relevant to the present issue, consistent with her affidavit of the same date filed in the Family Court of Australia. There is clearly some lack of clarity in the wife’s evidence about whether the trust was as to the whole of the interest in the property, or as to a one-half share. The wife’s most recent affidavit of 30 March 2012, the oral evidence she gave to me, her affidavit of 18 April 2011, the husband’s affidavits of 16 April 2011 and 2 April 2012, and the agreement dated 3^rd September 2006 are all consistent with a trust in her favour of the whole interest in the property. The two affidavits sworn 21 September 2010 are more indicative of a trust as to a one-half interest. The latter documents were prepared by solicitors different to those who prepared the 30 March 2012 affidavit. The affidavit of 18 April 2011 and the agreement dated 3^rd September 2006 were prepared by the wife.

2. The fourth relevant facts go to the signing of the 3^rd September 2006 agreement. In this regard there is a high level of consistency in the evidence about this event. The wife’s affidavit of 30 March 2012 (paragraphs 25 and 26), her affidavit of 18 April 2011 (page 2), the husband’s affidavit of 2 April 2012 (paragraphs 9-11) and the affidavits of witnesses to the agreement Mr D and Mr C both filed 10 August 2011 all depose to the signing of an original of the document being Exhibit R7 on 3^rd September 2006.

3. What is the Court to make of this evidence, albeit tentatively because I have not yet recorded what transpired in cross-examination on this issue? I accept that before a Court can hold that there is an express trust it must be satisfied that there was an intention to create a trust, the subject matter of the trust must be certain, and the objects of a private trust must be identified with sufficient certainty: Jacobs’ Law of Trusts in Australia, 7^th Edition, J.D Heydon and M.J Leeming, chapter 5. At this point, and subject of course to the matters to which I will shortly make reference, there is ample evidence to satisfy me about these three certainties: intention, subject matter and object. Any issue about whether the trust is as to the whole interest, or only a half interest in the property, is to be resolved by reference to the agreement itself which clearly relates to the whole of the property.

4. The trustee in bankruptcy argues that there is no such trust and even if there were it is a sham. The trustee submits that given the centrality of the express trust in the wife’s case it is extraordinary that its existence was not consistently asserted throughout the proceedings involving the trustee in bankruptcy. It is in fact correct that in 3 separate affidavits of the wife: one sworn 11 January 2011 in the Family Court, and two sworn 21 September 2010 (one in the Supreme Court of New South Wales, one in the Family Court) there is no reference at all to the express trust. The consistent feature of these 3 documents is that they were prepared by the same lawyer, Ms Ly of Jade Lawyers. Moreover, as the trustee rightly points out, the existence of the express trust was not pleaded before the Supreme Court of New South Wales or the Family Court. Indeed the evidence establishes that the express trust is not asserted in her instructions to solicitors, in correspondence with the trustee, and on the caveat the wife lodged on the property following the husband’s current bankruptcy. These are formidable concerns about the existence of the trust asserted by the wife.

5. The evidence indicates that the wife notified the trustee of the existence of an express trust based on the 3^rd September 2006 document for the first time by way of a letter to the trustee’s solicitors dated 11 May 2011 which attached a copy of the document.

6. The original of Exhibit R7, the agreement dated 3^rd September 2006, was certainly in existence on 28 April 2011. Mr P, a witness in the wife’s case, and himself a registered bankruptcy trustee deposes in his affidavit of 9 August 2011 at paragraphs 6 and 7 as follows:

   Ms Davies and Mr Davies arrived at about 8.30pm and they were carrying a cardboard box full of papers. We sat at my dining room table and they advised me of some of the issues that they were having with Mr Davies’s trustee. During the course of the meeting Ms Davies took out a document and said, “I am really frustrated. I was suffering from cancer at the time. Some years ago my mother gave me some money and I bought a property in Mr Davies’s name in case I didn’t make it through. I prepared this document myself but Legal Aid told me that it is of no use because it is not stamped and registered at the Land Titles Office.” She then handed me an original document a copy of which is annexed hereto marked “SP1”

   I recall that one of the signatures on the document was in blue ink. I said to Ms Davies, “Why haven’t you shown this to Mr Davies’s trustee? Trust property doesn’t vest in a trustee in bankruptcy. This should really be the end of the matter on the issue of ownership of the house. I don’t see how the trustee can claim an interest in it in the light of this document.” She said, “So what you are telling me?” I said, “Legal Aid gave you bad advice. The stamp duty issue can be easily overcome by having the document stamped. Trust documents are not lodged at the Land Titles Office. You could have lodged a caveat. You need a solicitor to represent you. I don’t practice as one anymore.”

   
   

   Ms Davies said, “Do you know anyone? My former solicitors, Jade Lawyers, have let me down. I don’t know who to turn to.” I said, “I will ask around. What about the witnesses, are they still contactable?” Ms Davies said, “Yes, we can find them.” I said, “You don’t want to drag this matter though the Courts unnecessarily. I will send the trustee a copy of the Declaration of Trust and see what response you get although by rights he should back off. In the mean time, I will see if I can find a solicitor who is prepared to represent you. Who is the trustee using as a solicitor?” Ms Davies said, “Sally Nash.”

7. The wife’s case is that her explanation to Mr P explains why she did not raise the existence of the agreement before that time. She agreed in cross-examination, however, that it was in her possession the whole time until it was lost shortly after seeing Mr P. She had made some photocopies before seeing him. The wife firmly refuted the suggestion that after seeing Mr P she decided to make the original unavailable, especially for forensic testing. She firmly rejected the proposition that the document was a fabrication and did not in fact come into existence until May 2011. I accept the wife as a credible witness on this issue.

8. Mr P, Mr D and Mr C were all cross-examined. My strong impression of these witnesses is that they were reluctant, disinterested participants in this litigation. Nothing was said by these witnesses in cross-examination that would cause me to doubt their evidence.

9. The bankrupt husband gave evidence on the issue of the express trust. He was clearly the least impressive of all the witnesses in this case. I formed the impression that he was something of an opportunist seeking to maximise benefit to himself whilst trying to meet the needs of others including the wife to whom, I accept, he felt a degree of obligation born out of guilt and shared grief. He did not strike me as a particularly intelligent man, though clearly hard-working. It is not possible to generalise and say that his evidence was either honest or dishonest. Some of it was honest, some of it dishonest. I find the Statement of Affairs he gave to the trustee on 4 October 2006 to be false. The affidavit he filed in the Supreme Court of New South Wales in the context of the proceedings relating to his late mother’s estate was also false. He was, in my opinion, playing one person off against another. As regards the wife I accept that he did sign a document dated 3^rd September 2006 declaring himself trustee of the property in favour of the wife. He then represented to the trustee in bankruptcy, and others, precisely the opposite. He had a desire to want to please others as well as himself without realising that eventually his duplicity would be revealed. He betrayed his wife’s trust by later re-mortgaging the property, partly for his own personal purposes which, from his evidence, included gambling debts. He betrayed the trustee’s trust by making blatantly false representations about his financial position. At the end of the day, however, and for present purposes only, I accept his evidence about the trust document because it is consistent with, and corroborated by, the wife, Mr P, Mr C and Mr D.

10. Counsel for the trustee referred me to the definition of “sham” contained in the judgment of Lockhart J in Sharment v Official Trustee in Bankruptcy (1988) 22ALR 530 at 537. I ask myself – does the totality of the evidence demonstrate that the document dated 3^rd September 2006 purporting to create an express trust in favour of the wife over the property owned by the husband is “a spurious imitation, a counterfeit, a disguise or a false front”? In order to answer in the affirmative I would need to reject the evidence of Mr P, Mr C and

    
    

    Mr D as well as the evidence of the husband and the wife. I cannot do so. I have no reason whatsoever to reject the evidence of Mr P, Mr C and Mr D. This then lends a consistency and credibility to both the wife and bankrupt husband’s evidence about the agreement which I find constitutes an express trust. Without the evidence of these three gentlemen, it may well be that I would have found the wife’s explanation for not invoking the document before she did quite implausible. The fact is, there was a document creating a trust dated 3^rd September 2006. There is certainty of intention, subject matter and object evident in that document. Once that premise is accepted it is not implausible that the wife, a layperson with only some experience in business and legal affairs, would be as it turns out incorrectly led to believe that the document had no validity. It was not until she was finally confronted with the reality of the trustee’s proceedings to recover possession of the property that she would seek other advice about it.

11. I acknowledge the thoughtful and comprehensive submissions made by counsel for the trustee on this issue. Counsel’s summary of the evidence is in many ways correct, but his characterisation of the evidence is not. I do not accept that the wife’s evidence was “obfuscatory, evasive”. My impression is she plainly acknowledged the many inconsistencies and problems with her evidence, whilst maintaining her assertion about the express trust. I have already expressed the Court’s concerns about the bankrupt husband’s evidence. The Court does not accept that Mr P’s evidence was tainted in any way. The Court does not accept that the evidence of Mr D and Mr C was unreliable and tainted by the evidence of longstanding relations with the bankrupt.

12. Once a finding is made about the existence of the trust document it follows it cannot be a sham simply because the person who had the benefit of it acted inconsistently as regards it at times. If the Court accepts, as it does, that the wife had a document that she was advised was invalid in circumstances where she was entitled to rely on that advice, it does not “stretch the bounds of credibility to beyond breaking point” to assert that she did not raise it as a defence until much, much later. Sometimes truth in human affairs is indeed stranger than fiction. Once the Court accepts, as it does, that on 3 September 2006 a trust was established in relation to the home, whether a lay beneficiary of that trust acts in a manner consistent or inconsistent with that fact does not change the fact of the existence of the trust. Nothing the wife could have done after that date, short of renouncing her interest if that were possible, would change the fact of the existence of the trust.

Resulting Trust

1. Should my finding about the existence of an express trust be wrong, then I find that a resulting trust in favour of the wife is created by virtue of her contribution of $119,155 towards the purchase price including stamp duty. I am satisfied that the wife had at least this amount at the relevant time, as she had received from her mother a gift of $175,000 in 2005. I do not accept the trustee’s submission that this initial advance was a loan which was subsequently repaid in July 2008 as a result of money belonging to the husband, specifically $120,000, being paid by him into the wife’s account. The monies paid by the husband to the wife after the purchase of the property, and its characterisation, is a separate issue. None of the matters put to the wife in cross-examination about the alleged loan, and its repayment, satisfy me that it was as the trustee alleges. The wife’s denials about the loan were convincing.

2. For the wife it was argued that should the Court find there is a resulting trust, it should also reflect a further payment of $13,272 made by the wife to the husband, at his request, to discharge a personal loan in order for the husband to be able to borrow the balance of the purchase price. Thus the wife asserts that the total contribution of the wife, $132,387, should be reflected in the declaration of a resulting trust in her favour as to 19% of its value. I do not accept, however, that the wife’s payment to the husband of $13,272 so that he could discharge a personal loan, should result in a trust in her favour. If a resulting trust arises, it arises because a person other than the legal owner paid or contributed to the purchase price. The purchase price is the aggregate cost to the purchaser including incidental costs, fees and disbursements: McLelland J in Currie v Hamilton [1984] NSWLR 687 at 691, followed in Ryan v Dries [2003] ANZConvR45 at 52, cited and approved in Jacobs (op cit at para.1211). The wife’s payment was not a cost to her of purchasing the property, it was a peripheral cost associated with enhancing the husband’s borrowing capacity.

3. This means the wife’s payments totalling $119,195 out of a gross purchase price of $695,644 ($670,000 plus $26,644 stamp duty) leads to a resulting trust in her favour of 17.13% of the net sale proceeds of the property. The trustee, having had vested in him the bankrupt husband’s remaining interest on the property, would be entitled to the balance but would be required to discharge the mortgage out of the bankrupt’s share.

Equitable claims: the factual matrix

1. This issue arises as a consequence of my preceding finding in relation to an express trust. The issue arises from the fact that it was common ground that notwithstanding the husband and wife’s separation, property settlement under s.79 of the Family Law Act 1975, the husband’s first bankruptcy, and the eventual annulment of the same in 2006, his income was at all times either paid into a joint account which the wife controlled, or an account in the wife’s sole name. This account was used to pay the mortgage secured over the property.

2. The trustee submits that these facts mean that after acquired property was created, being the creation of the equity or net value in the property, or manifested as the right of redemption whether at law or in equity. This property is divisible amongst creditors. In short the trustee argues that the bankrupt made a valuable contribution by paying the mortgage, thus increasing the equity in the property. Indeed this proposition may be demonstrated on the facts of this case. The only equity in the property at acquisition was the wife’s contribution of $119,195. However the equity in the property today would be approximately its agreed current market value $830,000, less the amount of the mortgage $654,343, a sum of $175,657. This is an approximate figure only because no sale costs have been considered, and the mortgage balance dates back to February 2012. Nonetheless it illustrates in broad terms that the equity in the property increased from $119,195 to $175,657, an increase of $56,462. The trustee submits that this increase represents the fruits of the bankrupt’s mortgage payments. It is after-acquired property vesting in the trustee. The trustee asserts that for the wife to deny this contribution is unconscionable, and a constructive trust should be imposed for at least the sum of the bankrupt husband’s payments into the wife’s account. In the alternative the trustee submits that as the bankrupt husband is a trustee for the wife, he would be entitled to a charge as an indemnity for the expenditure he incurred. I accept that these are propositions firmly based in the applicable law.

3. The wife’s response to these issues raises complex issues. Indeed as the wife’s submissions are very much dependent on factual findings I will discuss the relevant evidence, and make the necessary findings about this, before I proceed further. Thus, for example, as the wife’s counsel correctly submits, there are two relevant periods. Firstly there is the period between the date of settlement of the purchase of the property, 30 November 2006, and the date the husband filed his debtors petition and his property vested in the trustee, 4 October 2007. Secondly there is the period after that date i.e. during the husband’s bankruptcy.

4. During the first period, the husband unilaterally increased the mortgage from $596,000 on 28 November 2006 to $655,000 on 29 June 2007, an increase of $59,010. The wife’s case is that the husband unilaterally increased the loan by $85,000 for his own purpose. The unilateral nature of this transaction is not in doubt on the evidence before me. The quantification is an issue however. A close examination of the documentation relating to the increased loan, which is adduced as part of the trustee’s case, (trustee aff 22 September 2010, annexure at p.19) shows that the total loan taken out was $655,000, an increase of $59,000. As the documents demonstrate, this was structured as 2 loans, one for $580,000, another for $85,000. The husband represented to the lender that the amount of $580,000 was at that time owed to the mortgagee (trustee aff 22 September 2010, annexure at p.19). This would have meant that the principal was reduced from $596,000 to $580,000 in 7 months. On the evidence before me, this is unlikely. In the bankrupt husband’s affidavit of 16 April 2011 he asserts at paragraph 4 that “unbeknown to Ms Davies I refinanced the house for $60,000 to try to pay my creditors.” I think it is more likely than not that this is the amount by which the loan was increased, and I so find. I will discuss the legal implications of this unilateral transaction in due course.

5. I have previously commented about the mixing of the husband and the wife’s finances at all relevant times. This continued during the time periods which are the present subject of discussion. The husband deposes in his affidavit of 16 April 2011 at paragraph 5 that in November 2002 he moved back into the property, but lived separately from the wife (para.5). He explains that his “drinking and gambling had become worse” and links this to the further loan of $60,000 he obtained without the wife’s knowledge (para.4). The duplicity extended to having “all the documentation sent to my work’s post office box so Ms Davies wouldn’t find out” (para.4). In November 2007 he had aspirations of reconciliation with the wife but he “knew if Ms Davies was to find out about my financial position this would surely ruin any chance of us getting back together” (para.5). The duplicity as against the wife continued, he deposes, to 2008. When he became redundant some of the correspondence he had been having with the trustee that had been sent to his work’s post office box was on-forwarded to the property. He deposes that “Ms Davies was devastated when she found the paperwork and wanted me to explain what was going on” (para.6). On the husband’s evidence, therefore, the wife did not know about his bankruptcy until sometime in 2008 after his redundancy. This can be dated to sometime after 12 July 2008 as the trustee’s evidence shows that on that date the husband’s redundancy payment of $116,403 was paid into the wife’s cheque account. It will be recalled that I have previously rejected the trustee’s submission that this payment was a repayment of the wife’s “loan” to the husband of $119,155, thus negating the existence of any trust.

1. The husband’s affidavit of 2 April 2012 at paragraphs 12-14 is quite consistent with the account he gives above. He confirms that his earnings continued to be paid into an account controlled by the wife throughout this period. The wife’s evidence in this regard is certainly consistent with that of the husband’s. She deposes in her affidavit of 21 September 2010 in the Family Court of Australia that in July 2008 the husband was made redundant from his job as [omitted] (para.21), and was unable to find employment for some 16 months thereafter (para.22), As a consequence, she deposes at paragraphs 23 and 24, the redundancy payment paid into her account was used for “day to day expenses” as set out therein, presumably including for their son [X] whom they were providing care for 6 months after a back injury. It was not until October 2009, the wife deposes, that the husband returned to work (para.25).

2. On the question of when the wife became aware of the husband’s bankruptcy her affidavit of 21 September 2010 suggests July 2008 as she deposes at paragraph 26 to being aware of a letter the husband received from the trustee dated 11 July 2008. In her affidavit of 18 April 2011, one prepared by herself, the wife deposes on page 2 to discovering that the husband was bankrupt at the end of 2008. This is probably the least reliable evidence on this issue. In the wife’s account at paragraph 41 of her affidavit of 30 March 2012 she says she did not become aware of the husband’s bankruptcy until the time that he was made redundant. The wife was carefully cross-examined on this issue. I am satisfied from all the available evidence that she became aware of the husband’s bankruptcy in July 2008, but not beforehand. I acknowledge that paragraph 45 of her affidavit of 30 March 2012 contains evidence of a conversation with the husband “in late 2007” in which he told her of his bankruptcy. In cross-examination the wife explained this as an error, and that ‘2007’ should have read ‘2008’. Whilst in cross-examination the wife was confused about when the husband became redundant (she thought it was the end of 2008, not mid 2008) but she was nonetheless insistent that her knowledge of bankruptcy was linked to the redundancy, which was clearly July 2008. The trustee’s case is, in effect, that the wife’s knowledge of the bankruptcy was linked to the receipt of correspondence at the property, addressed to the husband, in late 2007, and a discussion the husband had with her. But this is not consistent with the husband’s evidence, and most of the wife’s evidence. On balance, and accepting that this is not clear beyond doubt, I find she became aware of her husband’s bankruptcy in July 2008.

3. In relation to the redundancy payment received in July 2008, the wife deposes in her affidavit sworn 30 March 2012 (para.41) that the $116,403 was paid into her cheque account. She then paid $65,000 into an account she opened in her name only. I must say that I found the wife’s explanation for these transfers to be minimalist and unconvincing. She was, at this time, aware or at least highly suspicious about the bankruptcy, and her actions seem consistent with this. The legal implications of this will be dealt with below. In any event, consistent with all the other evidence before the Court, throughout this period the husband’s income was being paid to her. Indeed she deposes at paragraph 42 that at about this time the husband was paying $5881.34 into the cheque account on a monthly basis, and that about $5000 was needed to pay the mortgage each month. Of course there was then a lengthy period where he was unemployed after July 2008. In October 2009 the wife deposes that $807 per week was paid into her account (para.43) after the husband returned to work. The husband was made redundant in May 2010, found alternative work a few weeks later earning about $910 weekly, reducing to about $720 per week from October 2010. These facts were not the subject of serious contention, though their legal characterisation raises complex legal issues.

4. I note that there is considerable evidence before the Court about the payments from the husband to the wife in the post bankruptcy period e.g. wife’s affidavit of 15 May 2012. I was greatly assisted in understanding this evidence by the analysis contained in wife’s counsel’s outline of closing argument, and an aide memoire prepared by the trustee’s counsel and used in his closing submissions. The characterisation of these payments is an important issue.

5. In her affidavit of 15 May 2012 the wife asserts that as to mortgage payments paid by the husband this was an obligation created in the orders made under the Family Law Act 1975. To the extent that the wife argues, either expressly or by implication, that this obligation arose under the 1997 orders for property settlement, that is plainly incorrect. I accept however, that on 28 June 2011 Justice Le Poer Trench in the Family Court made orders that the husband and wife pay all outgoings in relation to the property, including the mortgage. I do not accept that His Honour intended to deal with the issue presently before the Court i.e. the legal characterisation of these payments, and I do not consider that these orders do anything other than seek to preserve the property of the parties pending the outcome of these proceedings.

Equitable claims: legal issues

1. The first argument for a further adjustment to the interest of the parties in the property subject to the express trust I have found above is in fact made by the wife as beneficiary of the trust, and as will be seen below, is used in effect to defeat or off-set claims for adjustment on behalf of the trustee. This equitable claim arises out of the bankrupt’s unilateral actions in borrowing a further $59,000 secured against the property, and applying it for his own personal, non-trust purposes. The husband was not bankrupt at this time, but this would not have made any difference. He was a trustee for the wife, and remained so whether he was a bankrupt or not. His actions were, in effect, a breach of trust. The breach of fiduciary duty in these circumstances invites the imposition of a constructive trust. This is, in my opinion, the application of conventional trust principles: see Jacob’s op cit at para.1330 et seq. and the law applicable to this case. In his opening counsel for the wife submitted that an equity of exoneration applied in her favour pursuant to principles stated in cases such as Parsons v McBain (2001) 109 FCR 120. I am not sure that this is in fact so. In any event by his closing submissions counsel conceded that general trust principles applied in favour of the wife to create, in effect, a charge in her favour for the amount of loss suffered as a result of the breach of trust i.e. $59,000.

2. But counsel for the wife quite properly conceded that the corollary of the above was that if the husband as trustee spends money or creates a liability in discharge or for the benefit of the trust, the trustee in bankruptcy has a right of indemnity and recoupment which results in a charge in his favour, which in the circumstances of this cases passes to the trustee (Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367), subject to the complex issues of quantification which will be discussed below. The facts of this case are quite clear: all of the bankrupt’s income for many, many years preceding his bankruptcy, and then afterwards, was paid into either a joint account with the wife, or an account in the wife’s sole name. She had control of these accounts. It is common ground that the mortgage payments relating to the property come from these accounts.

3. There are two relevant periods in this regard: before the husband’s bankruptcy on 4 October 2007, and afterwards. For all practical purposes the wife conceded that the sum of $31,074.58, being the pre-bankruptcy mortgage payments, are monies that the trustee on behalf of the husband is entitled to recoup. The wife invites the Court to impose a charge over the property to the amount of $31,074.58, subject of course to the charge in her favour of $59,000. I did not understand the trustee to cavil with the quantification of the charge, or its application in the period before bankruptcy, though most of the trustee’s submissions focussed on the mortgage payments in the post bankruptcy period. In circumstances where the trustee did not cavil with the amount of $31,074.58, and indeed invoked the same equitable principles for payments made after the date of bankruptcy, I consider it appropriate to impose the charge in the trustees favour in the sum of $31,074.58.

4. The trustee of course argues that a constructive trust must be applied in his favour as regards all of the payments made to the mortgage after bankruptcy, and other expenses relating to the maintenance of the property, coming from the bankrupt’s income. His argument is that it was the bankrupt’s income that, in effect, created equity in the property, an asset vesting in the trustee, and entitling the trustee to claim that money out of the net sale proceeds of the property. The trustee’s counsel submits that based on the decision of French J in Re Gillies; Ex parte Official Trustee in Bankruptcy (1993) 115 ALR 631 and EM Hennan J in Rodway v White [2009] WASC 201, the income of the bankrupt used to pay the mortgage purchased after acquired property which is divisible amongst creditors. It would be unconscionable for the wife to deny this contribution, and thus a constructive trust should be imposed for at least the sum of the bankrupt’s income payments, or a charge as an indemnity for such expenditure. I accept that this proposition is firmly based in the applicable law.

5. I pause here to observe that much was said in submissions about when the wife became aware of the husband’s bankruptcy, but I think nothing turns on this. If both the trustee and the wife agree that the bankrupt’s income applied to the mortgage may give rise to a charge, this arises because of those payments and not because of the wife’s notice.

6. It is important to recognise that the only relevant payments from the bankrupt to the wife are those that may lead to the imposition of a constructive trust, or a charge. For all practical purposes in this case this means the mortgage payments though, conceivably, and if the evidence were to allow this, it would include all payments the purpose and effect of which were to preserve the home and increase its equity. Thus the focus can only be on the payments made for these purposes, and none other. The issue, therefore, is not framed by reference to how much the bankrupt earned and (and paid into the wife’s account) in the relevant period, but how much of what he earned was used by the wife for a purpose which justifies the imposition of a constructive trust or a charge? The evidence must allow me to make findings in this regard in order to quantify the trust or charge.

7. The wife’s counsel raises another issue about the quantification of this trust or charge. Another fact limiting the quantification of the trust or charge is the characterisation of the bankrupt’s income paid to the wife. He submits that the trustee’s analysis of the application of the law to these facts is, in effect, simplistic and fails to consider the impact of the Bankruptcy Act itself, and the income contribution scheme established under that Act. The wife’s counsel accepts, of course, that s.116 of the Bankruptcy Act provides that as a general proposition property or money (other than income) that comes to a bankrupt is after acquired property. However income does not fully fit into that category. Indeed he cites Re Gillies as authority for that proposition. He submits that the income contribution scheme contained in the Act rests on the continuing assumption that after acquired income of the bankrupt does not vest in the trustee: Re Gillies at pp.636-7. This is clearly the case.

8. On behalf of the wife the income contribution scheme within the Act was described in these terms. There are 3 levels of income which the scheme contemplates. The first level of income is that which the legislation allows the bankrupt to keep. He can use this for whatever purpose he wants. It is only relevant if it creates after acquired property, that then vests in the trustee.

9. The second level of income is that which the legislation requires to be contributed. This was clearly described in the evidence given in this case by the trustee, Mr Addis. Counsel for the wife characterised this as a liability due by the bankrupt to the trustee, enforceable as any other liability might be in the civil courts. The trustee’s evidence is that as at 23 November 2010 the bankrupt was assessed for a compulsory contribution of $66,048.71. That is the most recent evidence before the Court of the contribution due. The wife’s counsel submits that when the bankrupt paid this money to the wife instead of to the trustee, the legislation did not give the trustee rights to pursue that money as against the wife, it gave the trustee rights to pursue the bankrupt. It is no more than an unsecured debt owing to the trustee, and not property of the trustee that has someone vested in him, or in respect of which he has some special equitable right. The bankruptcy statute defines those rights and that statutory definition of rights therefore precludes any equities arising. Accordingly the quantum of the unpaid statutory contribution does not assist in quantifying the trust or charge.

10. The third level of income that is referred to in Re Gillies i.e. income which is in excess of contribution because it is extra income not disclosed to the trustee. Counsel for the wife submits that this extra income does not vest in the trustee automatically, but according to Re Gillies, if it becomes property it vests in the trustee under s.116 of the Act. Counsel for the wife only faintly argued that the obiter comments to the above effect of French J in Re Gillies, approved as it was by the West Australian Supreme Court in Rodway v White [2009] WASC 201, are wrong and should not be followed. Ultimately he accepted that both are bankruptcy decisions of superior courts that I would be bound to follow. I agree. This third level of income, therefore, if found to be used in a way that creates property, clearly vests that property in the trustee.

11. I think the real significance of these submissions (if they are correct) is that even if the evidence allows findings about what payments justify the imposition of a trust or charge, one cannot necessarily quantify the trust or charge in favour of the trustee that arises because the bankrupt’s income was used to pay the mortgage on the property simply by calculating how much he earned after bankruptcy or even how much was paid off the mortgage. This is because the first level of income is income the bankrupt could do whatever he wants to, including paying to the wife whatever purpose. The second level of income i.e. the statutory contribution requested but unpaid does not give rise to any equities but only a statutory right of recovery against the bankrupt by his trustee. The third level of income must, however, even on counsels own characterisation of the same, lead to an equity because it was property that vested in the trustee once it was used to reduce the mortgage and increase equity in the property.

12. The matter is even more complex. Money that was used to pay the mortgage may have come from other sources. Certainly the wife asserts that her income was used to that effect after bankruptcy. The trustee raises the possibility that a third party’s income was used in part to pay the mortgage: i.e. their son [X]. There is, therefore, a competition of equities. The husband could, in theory, seek recoupment of those monies of his that were paid into the mortgage representing the first and second levels of income described above. The trustee may well seek recoupment for some and possibly all that the husband seeks on the basis that the recoupment he seeks is, in fact, the trustee’s. The wife seeks recoupment in respect of her monies. This is somewhat theoretical though because the wife is the equitable owner of the property. In reality all she would be doing is seeking to ensure that the assessment of any other person’s equity in the property does not ignore her equity in the same. In theory, but not on the facts of this case, any other person whose money was used to pay the mortgage could also seek recoupment.

13. Counsel for the wife frames the question for the Court as how to divide up in a fair, rational and equitable manner these competing equitable interests. I agree that is one way of framing the question.

Relevance of assessed but unpaid income contributions

1. The trustee in bankruptcy’s own evidence about this is set out at paragraph 11 of the affidavit of Mr Addis sworn 31 January 2011:

   Income is not property under the Bankruptcy Act and is not vested bankruptcy property. However the Bankruptcy Act scheme is that a bankrupt is required to make income contributions towards the bankrupt’s estate. Division 4B of Part VI of the Bankruptcy Act sets out the income contribution regime for bankrupts. Assessments have been issued by me to the Husband under this Division. He has not sought to review the income contribution assessments I have made. He has not sought to reduce the income contribution assessments I have made on any hardship ground. I have not been served with any application to the Administrative Appeals Tribunal or to the Inspector General in Bankruptcy of his own initiative has not reviewed the income contribution assessments I have made. Under the Bankruptcy Act the Applicant has no power to review the income contribution assessments I have made against the Husband. Under the Family Law Act, the Applicant has no power to review the income contribution assessments I have made.

2. The trustee’s evidence is that the contribution assessed against the bankrupt husband but unpaid is $66,048.71. There seems to be no dispute about this, and so I accept this figure. In the circumstances of this case, does the trustee in bankruptcy have the right to recover this, directly or indirectly, from the applicant wife, or is he left with his statutory remedies against the bankrupt? The wife says that the trustee’s rights are exclusively set out in the statutory scheme contained in the Bankruptcy Act and go no further. The trustee submits that the income contribution scheme is irrelevant because, once it is accepted that it was the bankrupt’s money that was used to contribute to the property by way of mortgage and other preservation type payments, it does not matter what he was obliged to contribute to the trustee. Both the quantum and nature of the statutory contribution are irrelevant, according to the trustee. The focus should be on the benefit accruing to the wife as a result of the bankrupt’s payments, and the increased equity in the property resulting from this, which creates property vesting in the trustee in bankruptcy in the final analysis.

3. I do not believe that the trustee can dismiss the income contribution argument so lightly but that is an argument for another day. I think the trustee is correct, though, in focussing on payments from the bankrupt that have a particular purpose or outcome, and not payments generally. It is only payments from the bankrupt that justify the imposition of a trust or charge that are relevant in the present context. Thus any payments made by the bankrupt of this character are relevant. What is problematic, however, is if the trustee is asserting either expressly or by implication that the amount of assessed but unpaid contributions should be relevant to quantifying the charge or trust. The wife submits this cannot be the case because the trustee gets no special rights in relation to the unpaid statutory contribution in the present context. I accept that this is correct. At no place in Division 4B of Part VI of the Act is the trustee given any privileged status or rights as against the wife in this case, because the bankrupt has not done what he was required to do. Counsel for the wife submits that the trustee has certain civil remedies against the bankrupt. I make no comment about this. What the Act clearly does do is to characterise the husband’s failures as having potential criminal consequences which may include the imposition of penalties and imprisonment. Indeed a curious feature of this case is that the trustee allowed the husband to get away with no contributions for so long, and did not invoke a range of remedies that might have been available to the trustee under the Act. In the circumstances therefore I find that the amount of assessed but unpaid contribution is irrelevant on the facts of this case.

Evidence about payments in the post-bankruptcy period

1. As previously noted, it is clear that in the period from October 2007 all of the bankrupt husband’s earnings were paid into an account in the wife’s name held with the NAB. The wife’s affidavit of 15 May 2012 annexes the vast majority, but not necessarily all of these statements. Out of the wife’s NAB account was paid the mortgage. There are 2 payments clearly noted each moth: one on the -[1] account and one on the -[2] account. Annexure Q to the affidavit of Mr R, sworn 19 April 2012 suggests that the -[1] payment relates to the further advance made to the husband without the wife’s knowledge, and that the -[2] account relates to the loan to purchase the property of $570,000. Indeed annexure Q purports to calculate the total loan repayments in the period 17.8.2007 to 16.1.2012 on both of those accounts. The total repayments of the -[1] account appears to be $31,888 and the total for the main loan, account -[2] is $213,371.40.

2. The only repayments that I am prepared to consider in assessing the trustee’s claim (however it is characterised) is in respect of the -[2] account. The -[1] account is a borrowing by the husband in breach of his duties as trustee for the wife. It would be inequitable in the present circumstances to consider the repayments of this loan in assessing the trustee’s claim. This means the maximum amount the trustee could recover is $213,371.40.

3. The next issue is to consider who paid this money in the relevant period? The trustee’s case is that the bankrupt husband did and that therefore all of the $213,371.40 should be taken into account. The trustee over-simplifies the situation, however. An aide memoire prepared on behalf of the trustee and provided in closing submissions establishes, for example, that whilst the bankrupt earnt $283,542.83 (significantly more than the loan repayments) there were other deposits onto the wife’s NAB account that could, in theory, have been the source of the funds for the repayment. The trustee’s aide memoire concedes that the statements evidence Centrelink income of $3215.19, and other cash deposits of $51,206.

4. Regrettably the trustee’s aide memoire is quite incomplete and omits many other payments into the account. Indeed if the trustee’s aide memoire is correct, only $337,963 would have been deposited into the account. Even a cursory comparison of the actual bank statements annexed to the wife’s affidavit of 15 May 2012, to the trustee’s aide memoire, shows glaring discrepancies. In statement no. 123, for example, the aide memoire misses a credit into the account of $800. In statement 124 a credit of $104.55 is missed. In statement 130 credits totalling $6500 are missed. In statement 134 $3700 in credit is missed. The aide memoire is not reliable insofar as it purports to identify other payments into the NAB account that might have been used to pay the mortgages. Indeed, on my own calculation of deposits into the NAB account there was over $620,000 in the relevant period.

5. The aide memoire prepared by the wife in her counsel’s written closing submissions provides a different set of figures. Mr Ash calculated the husband’s deposits into that account to be $264,517, but in his oral closing submissions conceded he had made at least one error, and it should probably be higher. In these circumstances I am prepared to accept the trustee’s calculation of the husband’s income deposited in the sum of $283,542.83. Mr Ash calculated the other deposits into the NAB account in the relevant period to be $349,339. The total of these 2 figures is $632,881 which is broadly in the range of my own calculations. In the circumstances I will accept Mr Ash’s calculations, particularly in the absence of better evidence. I do not regard it as being the Court’s responsibility to laboriously study the voluminous bank statements in evidence in order to establish these amounts.

6. On the available evidence, therefore, about $630,000 was paid into the wife’s NAB account during the period 12.10.2007 to 29.3.2012. Money in this account, and this account only, was used to pay the mortgage over the home. For the trustee to establish that it should recover all of the mortgage repayments on the main loan, which total $213,371, the trustee would need to prove that the bankrupt husband’s income was used for that purpose. True it is that the bankrupt husband’s income in this period was $283,542, but there is no evidence to indicate that his income was used to pay the mortgage. Not even an inference can be drawn in this regard. The appearance of transactions on the bank statements, and the evidence of the bankrupt husband and the wife, is that all of their money went into the NAB account, which was used to pay the mortgage. This is entirely consistent with their evidence that for many years after separation, property settlement and bankruptcy, they continued to mix their personal finances.

7. It is clear therefore that not all of the bankrupt’s income was used to pay the mortgage, but how is one to achieve equity for the trustee and the wife in these circumstances? Mr Ash submits the starting point is to look at the percentage of their respective contributions to that account. On this analysis the bankrupt husband contributed 44.7% and the wife 55.3% into the account, and therefore the bankrupt’s share of the mortgage repayments could not exceed 44.7 x $213,371 = $95,377.00.

8. Mr Ash submits that this figure must be further adjusted, and that it would be inequitable to he wife to have the trustee’s claim calculated on this basis. The argument here is that the trustee should only be able to claim that part of the bankrupt’s income used to pay the mortgage on the property that would have been available to the trustee. He submits that a further adjustment must be made to account for monies that the trustee would never have been entitled to i.e. all sums below the ‘actual income threshold account’ in s.139P of the Act. Moreover, he submits, that part of the bankrupt’s income that should have been paid pursuant to the income contribution scheme but was not, should also be excluded because the trustee’s only right is to pursue remedies under the Act. In short the submission is that as none of this income vests in the trustee, he cannot now claim it in the present context.

9. The distinctions Mr Ash seeks to draw based on the income of the bankrupt that was the source of the payments on the mortgage ignores the critical factor – the purpose for which it was used. On the Re Gillies analysis, which I accept, it does not matter how the payments from the bankrupt are characterised because the effect of these payments was to create property which vests in the trustee. Unlike Mr Gillies who had accumulated $4000 in income, which was not after-acquired property, and could thus be offered to his known creditors in the form of a composition, used his money to acquire an asset i.e. increased equity in the home, and this clearly vested in the trustee in bankruptcy. I concur with French J, as he then was, in Re Gillies at p.637 where His Honour says:

   I am inclined to the view that assets purchased by a bankrupt with after-acquired income will, if not within any of the excluded categories in s116(2), constitute property divisible amongst the creditors and vest in the trustee.”

   Thus the trustee is entitled to have all of the $95,377 taken into account, and to have a charge over the said property to this amount.

Conclusion

1. The effect of my findings in these reasons is that the trustee in bankruptcy, currently the legal owner of the property, holds the same on trust for the wife because of the express trust evidenced in the agreement dated 3 September 2006. The wife is entitled to a charge over the bankrupt estate of the husband in the sum of $59,000 owing out of the bankrupt’s unilateral actions in borrowing a further $59,000 on the security of the home. The trustee, however, is entitled to a charge over the property for mortgage payments made before bankruptcy of $31,074 and made after bankruptcy, $95,377.

2. The totality of the charges is $185,451 of which the wife represents 32% and the trustee 68%. To borrow the words of Carr J in O’Brien v Sheahan [2002] FCA 1292 at para.64 of the reasons, how can this court achieve “equitable symmetry” on the facts of this case? In circumstances where the net value of this property is in reality unknown, but is accepted to be $175,657 for present purposes, the relief should be framed in terms of percentages of the equity in the property. In its simplest terms, therefore, a declaration will be made that Ms Davies has a charge over the bankrupt estate of Mr Davies to the extent of 32% of the same.

3. A number of ancillary orders need to be made however. These are derived from the trustee’s Further Amended Response filed 15 March 2012. I am satisfied that most of these flow naturally from the findings I have made in my reasons above. There should be a declaration that the home is vested in the trustee, subject of course to the charge in favour of the wife as to 32% of the same. The trustee should be appointed trustee for sale of the home, with all the usual powers consequent therein including the ability to sell to the wife. Instead of making detailed orders for sale and distribution of the sale proceeds, I prefer to grant leave to relist in this regard should the parties disagree about the same. Likewise I will grant leave to relist should a writ of possession become necessary. Given the relatively small equity in the home, I suspect that the parties may be able to reach a satisfactory settlement which has regard to these reasons.

4. In conclusion, I record that there was evidence before me that might have amounted to an equitable estoppel argument against the trustee based on the facts. It did not feature in submissions. For the sake of completeness, however, I record that I would have rejected an O’Brien v Sheahan [2002] FCA 1292 equitable estoppel argument for two main reasons. Firstly, for this argument to succeed I would need to have much greater faith in the evidence of the bankrupt husband. I do not have this faith. Secondly, to the extent that the husband was relying on equitable estoppel, the husband clearly did not come to equity with ‘clean hands’. Equitable relief would have been denied to the husband because of his blatant disregard of his obligations under the income contribution scheme.

I certify that the preceding eighty (80) paragraphs are a true copy of the reasons for judgment of FM Altobelli FM

Associate: 

Date:  22 August 2012