Harding v Landers

[2014] FCCA 1335

FEDERAL CIRCUIT COURT OF AUSTRALIA

HARDING & ORS v LANDERS & ANOR [2014] FCCA 1335

Catchwords:
BANKRUPTCY – Deceased estate – classification of distributions from deceased estate to bankrupt estate – due administration.

Legislation:

Bankruptcy Act 1966 (Cth), ss.58, 166 and 139L(1)(a)(iv)

Federal Circuit Court (Bankruptcy) Rules 2006 (Cth)

Official Receiver in Bankruptcy v Schultz (1990) 96 ALR 327

Applicant: NOEL EDWARD HARDING, JILLIAN RUTH BILLINGTON AND NANCY ANNE REGAN AS EXECUTORS OF THE DECEASED ESTATE OF PATRICIA ANNE BILLINGTON

First Respondent:

Second Respondent:

STEFAN JAMES LANDERS

NICK COMBIS, THE TRUSTEE OF THE PROPERTY OF STEFAN JAMES LANDERS, A BANKRUPT

File Number: PEG 390 of 2013

Judgment of: Judge Jarrett

Hearing date: 13 June 2014

Date of Last Submission: 13 June 2014

Delivered at: Perth

Delivered on: 13 June 2014

REPRESENTATION

Counsel for the Applicant: Mr A F Carles

Solicitors for the Applicant:

For the First Respondent:

Carles Solicitors

No Appearance

Counsel for the Second Respondent: Mr J M Healy

Solicitors for the Second Respondent: DibbsBarker

ORDERS & DECLARATIONS

THE COURT DECLARES THAT:

1. Any payments made by the executors of the deceased estate under clause 4 of the will of PATRICIA ANNE BILLINGTON (deceased) are income for the purposes of section 139L(1)(a)(iv) of the Bankruptcy Act 1966 (Cth).

THE COURT ORDERS THAT:

1. The applicant’s and second respondent’s costs of and incidental to the proceeding as agreed, or as taxed in accordance with the Federal Circuit Court (Bankruptcy) Rules 2006 (Cth) be paid from the first respondent’s entitlements from the estate of PATRICIA ANNE BILLINGTON (deceased).

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT PERTH

PEG 390 of 2013

NOEL EDWARD HARDING, JILLIAN RUTH BILLINGTON AND NANCY ANNE REGAN AS EXECUTORS OF THE DECEASED ESTATE OF PATRICIA ANNE BILLINGTON

Applicant

And

STEFAN JAMES LANDERS

First Respondent

NICK COMBIS, THE TRUSTEE OF THE PROPERTY OF STEFAN JAMES LANDERS, A BANKRUPT
Second Respondent

REASONS FOR JUDGMENT

Ex tempore

1. The applicants in these proceedings are the executors of the estate of Patricia Anne Billington (deceased).  They have received a grant of probate.  The first respondent is the son of the deceased and is an undischarged bankrupt.  The second respondent is the trustee of the bankrupt estate of the first respondent.

2. The deceased died on 1 August, 2012 after the first respondent had been made bankrupt on 29 May, 2012.  Pursuant to cls.3 and 4 of the deceased’s Will it seems that 25 per cent of the residue of the deceased’s estate has been given to the applicants as trustees on trust for the first respondent.  However, by cl.4 of the Will he is entitled to receive, at three calendar monthly rests, income derived from any capital earned from his share, gift or bequest taken under the Will and upon his death his share – that is the 25 per cent of the corpus – will pass to his daughter.

3. The parties seem to be agreed that in essence cls.3 and 4 set up a trust, whereby the income from 25 per cent of the corpus of the trust passes to the first respondent.  He has a life interest in that income, and upon his death his daughter becomes absolutely entitled to the 25 per cent of the capital of the trust, from which the first respondent derives the income.

4. The issue between the parties is how the distributions made pursuant to those clauses ought to be characterised and whether those distributions vest in the first respondent’s trustee in bankruptcy or whether the first respondent is entitled to those monies absolutely. 

5. There is no dispute between the parties that a bankrupt’s entitlement, in the broadest sense, that might arise under a Will pursuant to which that bankrupt is a beneficiary, is a right which passes to his or her trustee in bankruptcy.

6. So much is clear from Official Receiver in Bankruptcy v Schultz (1990) 96 ALR 327. That case makes it clear that what vests in the trustee in bankruptcy is the right, which every beneficiary has, to see the deceased estate administered in accordance with the duties of the executors; that is to say in shorthand fashion, the beneficiary’s entitlement to seek due administration of the trust is vested in his trustee in bankruptcy.

7. Once the trust is administered the bankrupt may become entitled to property under the terms of the trust.  So, for example, where a trust is established in respect of the residue of an estate, and after due administration of the estate there is no residue, there is nothing which will pass to the trustee in bankruptcy.  The right to see due administration of the estate has, of course, vested in the trustee in bankruptcy but it may be the case that in some circumstances that will result in no property which ultimately vests in the trustee.

8. In my view there is a difference between the right to insist upon due administration of a trust and the entitlements that might then accrue once that trust is duly administered. The issue in this case was put by the respondent to be the point in time at which one should make the assessment of the nature of the entitlement under consideration.

9. If my view is correct that there are indeed two separate rights: a right to due administration and then a right to receive whatever due administration will bring to the beneficiaries of the relevant trust, the correct time to characterise any receipts in the hands of the bankrupt is when those receipts are received by him.

10. If that is the correct each payment to the bankrupt in this case by the trustees of the trust established by cls.3 and 4 of the will, will fall to be determined according to the provisions of the Bankruptcy Act 1966 (Cth) (“the Act”), including s.139L(1)(a)(iv); that is to say an amount received by him from the executors of the Will carrying out their duties under the trust established by the Will, might be caught by s.139L(1)(a)(iv) of the Bankruptcy Act to the extent that the amount was paid out of income of the trust.

11. If the trustees of the Will decide to make a distribution pursuant to cls.3 and 4 of the will, and the distribution is made out of income from the corpus of the trust, then it seems to me that such a payment falls within s.139L(1)(a)(iv) of the Bankruptcy Act. The income does not then vest in the first respondent’s trustee in bankruptcy.

12. The orders sought by the applicants are in the alternative. The first is that there be an order that the entitlements of the bankrupt first respondent of the last will and testament of Patricia Anne Billington (deceased) is divisible property of the first respondent which has vested in the second respondent pursuant to ss.58 and 116 of the Act.

13. I confess to being confused by that order because the “entitlements” of the bankrupt under the last will and testament of the deceased are, of course, divisible property of the first respondent which is vested in his trustee in bankruptcy by reason of ss.58 and 116 of the Act. The alternative order, an order or declaration that the “entitlements” of the bankrupt first respondent under the will constitute income of the first respondent within s.139L of the Act is not an order that I would be inclined to make, because as each payment is received by the first respondent it will be necessary to determine the nature and source of that payment. The obligation to do that comes from s.139L(1)(a)(iv) of the Bankruptcy Act because the payment or receipt which is within that section is any amount which was paid to the bankrupt out of income of the trust.

14. It may be that the scheme of cls.3 and 4 of the Will means that every payment to the bankrupt in this case by the applicants will be a payment of income for the purposes of s.139L(1)(a)(iv) of the Bankruptcy Act, but it remains to be determined each time a payment is made. So it seems to me that an order which is intended to cover all of the receipts of the bankrupt under the will at any time is inappropriate.

RECORDED – NOT TRANSCRIBED

1. I have specifically confined it to cl.4 because – and I know this isn’t raised in any of the material – but I have some doubts about the efficacy of the trusts that are established by cls.3 and 4 of the will, and the doubts arise in this way: as cl.3 seeks to establish a trust of the capital of the estate for the benefit of four named beneficiaries, but cl.4 seeks to derogate from that grant by qualifying the entitlement granted by cl.3 to at least two of the beneficiaries.  I am no trusts lawyer, and I do not know whether that is a difficulty, but if cl.3 establishes a trust in the way in which it seems to me it does, then, arguably, the beneficiaries, being sui juris, might call for a delivery of the trust property which might be unanswerable by the executors. If that was to occur, then the bankrupt would receive something under the trusts but it would probably not be income for the purposes of the Bankruptcy Act.

2. So for those reasons, the orders and declaration will be as follows:

   a)Any payments made by the executors of the deceased estate under cl.4 of the will of Patricia Anne Billington (deceased) are income for the purposes of section 139L(1)(a)(iv) of the Bankruptcy Act 1966 (Cth).

   b)The applicant’s and second respondent’s costs of and incidental to the proceeding as agreed, or as taxed in accordance with the Federal Circuit Court (Bankruptcy) Rules 2006 (Cth) be paid from the first respondent’s entitlements from the estate of Patricia Anne Billington (deceased).

I certify that the preceding sixteen (16) paragraphs are a true copy of the reasons for judgment of Judge Jarrett

Associate: 

Date:  28 July 2014