Kerrison, B. v Ex Parte Official Receiver

[1989] FCA 147

Re: BAIBA KERRISON
Ex Parte: OFFICIAL RECEIVER
No. 591 of 1987
FED No. 147
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
Von Doussa J.(1)

CATCHWORDS

Bankruptcy - application by bankrupt seeking declaration against the title of the trustee to sums of cash - whether cash saved from the receipt of income which the bankrupt is entitled to retain - onus of proof - effect of rejection of bankrupt's evidence.

Bankruptcy Act 1966 s.131

HEARING

ADELAIDE

#DATE 10:4:1989

Counsel for the applicant : Mrs B. Kerrison and Dr

Kerrison appeared for themselves

Counsel for the respondent : Mr S.M. Adams

Solicitor for the respondent : Adams & Gilbertson

ORDER

The application of the bankrupt made on 22 February 1989 be dismissed.

Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124.

JUDGE1

This application is brought by the bankrupt. By its terms the application seeks an order:

"That the Official Receiver withdraw his illegitimate claim for any monies paid by Baiba Kerrison as schooling fees."

It is necessary to have regard to the background facts and events regarding the payment of schooling fees for the bankrupt's three youngest children for the 1989 year to understand the object of the application.

1. A sequestration order was made against the bankrupt on 29 May 1987 on her own petition. The bankrupt is by occupation a registered nurse. She was in full time employment at the date of the sequestration order and has been in employment continuously since then. She presently holds a well paid and responsible position. Her husband is a medical practitioner who, apparently for reasons of his own, does not work. He became bankrupt on 3 October 1988. The bankrupt and her husband have for some years resided at an address in Panorama with all or most of their seven children whose ages now range from 23 down to 13. According to the bankrupt, her husband has had no employment nor source of income of which she is aware, since her bankruptcy. He has assumed a domestic role keeping house whilst she pursues her nursing career.

2. The bankrupt has one substantial creditor, the Commissioner of Taxation. At the time of the bankruptcy the debt to the Commissioner was in the order of $265,000. It has since been reduced somewhat as a result of the Commissioner garnisheeing the proceeds of a bodily injury compensation claim which the bankrupt prosecuted in the Supreme Court. The liability to the Commissioner apparently arose under an assessment following an asset betterment calculation. In her statement of affairs the bankrupt disclosed assets of $12 cash at banks and $200 cash in hand.

3. The present application was precipitated by the Official Receiver, the bankrupt's trustee, seeking to recover sums of money which he discovered were held by two Adelaide schools as pre-paid school fees for 1989. On 3 January 1989 the sum of $9,000 cash had been paid to Annesley College for the 1989 fees of the bankrupt's two youngest daughters. On 10 January 1989 $5,000 cash had been paid to Prince Alfred College for the 1989 school fees of her youngest son, and on 27 January 1989 a further $376 had been paid to Prince Alfred College. The bankrupt admits she paid these sums of money to the schools.

4. On 31 January 1989, realising that the Official Receiver had or was about to claim these sums as assets of the bankrupt's estate, her husband requested Annesley College to refund the sum of $9,000. The College drew a cheque for this sum which was collected the following day by the bankrupt and later cashed by her husband with her assistance. The whereabouts and disposition of the proceeds of the cheque was a matter of enquiry by the Official Receiver on the public examination of the bankrupt on 27 February 1989 and was a topic for further cross-examination of the bankrupt before me when she was cross-examined on her affidavit in support of her application. She says the money was retained by her husband, and she assumes it is safe in his possession although she has not asked what has happened to it. The pre-payment of fees to Prince Alfred College was not recovered by the bankrupt. The College has since paid the sum of $5,000 to the Official Receiver, but the evidence before the court does not dislose whether that payment was made before or after the application now before the court was issued.

5. The bankrupt claims that the moneys paid to the Colleges were savings she had accumulated "by dint of personal denial and thrift" to continue the secondary education of her youngest children at the schools at which they had become established. She contends that the moneys do not form part of her property divisible amongst her creditors as they are the accumulation of income, which she is entitled to retain for her own benefit pursuant to s.131(1) of the Bankruptcy Act 1966. The Official Receiver disputes this assertion.

6. The bankrupt's affidavit in support of the application includes a strong emotional plea that it would be disastrous to remove her children from their schools, especially as they are in matriculation or pre-matriculation years. The affidavit concludes with a request that :
   

"I ask the Court, under Provision of Section 178 Bankruptcy Act 1966 to assess and weigh the above facts, circumstances and legalities and rights and direct the Official Receiver to desist in the continuation of almost ten years of fruitless Financial and Personal Vendetta against me and my Family, by ceasing this iniquitous pursuit of his illegal claim to my paid school fees."

(The period of the vendetta includes years of investigation by taxation authorities in which the Official Receiver had no part). Notwithstanding a reference to s.178, it became clear in the course of submissions that what the bankrupt seeks is declaratory orders declaring against the title of the trustee to the sums of money prepaid as 1989 school fees. The Court has jurisdiction to so declare: ss.30, 31(1)(f) of the Bankruptcy Act. The bankrupt's application is in the form appropriate to an application under s.30. With the concurrence of the parties, I propose to so treat the application, notwithstanding the language it employs, so as to resolve the real issue in dispute between the parties.

1. It is important to determine which party in the proceedings carries the onus of proof. In my opinion it is the bankrupt who carries the ultimate burden of establishing the facts which justify the declarations sought. The general rule was expressed by Walsh J. in Currie v. Dempsey (1967) 2 NSWR 532 at 539 when he said :
   

"In my opinion, the burden of proof" (in the sense of establishing a case) "lies on a plaintiff, if the fact alleged (whether affirmative or negative in form) is an essential element in his cause of action, e.g. if its existence is a condition precedent to his right to maintain the action. The onus is on the defendant, if the allegation is not a denial of an essential ingredient in the cause of action, but is one which, if established, will constitute a good defence, that is, an 'avoidance' of the claim which, prima facie, the plaintiff has."

The general rule may be displaced by some statutory or other rule to the contrary applying to a specific situation but this is not such a case. In my view the general rule applies here.

1. In so far as material, s.131 upon which the bankrupt presents her case provides :
   

"(1) Subject to this section, a bankrupt who is in receipt of income is entitled to retain it for his own benefit.

(2) The Court may, upon the application of the trustee, order that all, or such part as the Court thinks fit, of the income of the bankrupt shall be paid to the trustee for the benefit of the bankrupt's creditors."

If an application were made under sub.s.(2) by the trustee the question could then arise whether the school fees were a reasonably necessary outgoing for the maintenance of the bankrupt and her family, regard being had to her occupation and station in life; see Re McLachlan (1985) 8 ALR 162 at 165. On such an application the ultimate burden of establishing that an order should be made, and the quantum of that order, would lie on the trustee, although, during the trial, an evidentiary burden might move to the bankrupt to show what are required or necessary outgoings; see Lyford v. Levit (1984) 2 FCR 264 at 269. The issues in such a case would however be quite different to the issues which arise in the present proceedings, and the fact that the onus would lie upon the trustee if an application were made under s.131(2) is no reason, in my view, for displacing the general rule that the party seeking to establish a case carries the burden of proof.

1. To obtain the declaratory relief which she seeks, the bankrupt must establish her title to the money in question. How she came into so large an amount of money in January 1989 is a matter peculiarly within her knowledge. In weighing the evidence it is pertinent to bear in mind the famous observation of Lord Mansfield in Blatch v. Archer (1774) 1 Cowp 63 at 65 :
   

"It is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to produce, and in the power of the other to have contradicted."

1. I consider the bankrupt is plainly correct in her submission that by the receipt of fortnightly payments of wages from the hospital by which she is employed she "is in receipt of income" within the meaning of s.131(1). So much is conceded by the Official Receiver. No order has been applied for or made against the bankrupt under sub.s(2). The bankrupt is therefore entitled to retain her wages for her own benefit. That income is not bound in her hands. She may use her wages in whatever manner she sees fit. If she pays them in whole or in part into a bank account and there accumulates savings, even to a substantial sum, those savings retain the character of income which she is entitled to retain for her own benefit: see Federal Commissioner of Taxation v. Official Receiver & Anor. (1956) 95 CLR 300 and In re Walter: Slocock v. Official Receiver & Ors. (1929) 1 Ch 647. If instead of accumulating savings from her income in a bank, the bankrupt from the same source accumulates cash which she hides at home (which is what the bankrupt says she did) the cash retains the character of income to which the bankrupt is entitled. The essential question in this case is therefore whether the cash which was paid by the bankrupt to the two colleges is money accumulated from her income received from her employment.

2. If a bankrupt abandons the use of the banking system and chooses to accumulate savings in cash from income to which s.131 applies, real practical difficulties are likely to arise if the bankrupt is required to prove the source of the savings. If the banking system is used, there will be reliable records which will establish the pattern of savings, and in many instances will be proof enough of the source of the money. The other mode of saving will not be accompanied by independent records which can serve this purpose. A bankrupt may well have a variety of annual, quarterly and other periodic outgoings which are an ordinary and necessary incident of daily living - for such things as water rates, power and telephone bills, and insurance - where prudent management would require savings to be made from income to meet the outgoings as they arise. Where funds are accumulated for such purposes, the resultant credit in a bank account would not provide evidence that the bankrupt had income in excess of what is reasonably necessary for maintenance requirements. On the contrary, the banking records would provide reliable evidence of the periodic nature of the savings, and evidence of periodic withdrawals in the past which could be matched with domestic outgoings. In the present case the bankrupt cannot call in aid records of this kind, and she offered an explanation for her failure to save through the banking system. For a year or so after the sequestration order her wages were paid by her employer into a bank account which she maintained, but almost immediately the bankrupt withdrew all but $30 per week which was transferred through that account to her eldest son for, she says, rent of his car. Counsel for the Official Receiver argues that the immediate withdrawal of the wages in cash suggests that the money was needed for immediate living expenses for the bankrupt's family. The bankrupt however says she withdrew the cash as she feared that any credit in a bank account would receive unwarranted attention, presumably from the Official Receiver or the Commissioner of Taxation. I gained the clear impression from the bankrupt whilst she was giving evidence that she is now a very suspicious person who perceives that she is the victim of a campaign of harassment. In that frame of mind I think it is unlikely that she would allow moneys to remain in a bank account even if they were savings from her wages. I treat the fact that she withdrew her wages, apart from the car rental money, as soon as possible after her wages cheque was cleared as a neutral consideration. I do not think the timing of the withdrawal proves one way or the other what happened to the money. The withdrawal is consistent both with the money being expended forthwith, or with some or all of it being saved in the manner described by the bankrupt.

3. In the period from the sequestration order to the date of the prepayment of the 1989 school fees, the bankrupt received from her employer approximately $53,500 gross, which left her with approximately $39,200 after tax. She also received in this period about $1,400 in Social Security payments as family allowance. The bankrupt's banking records confirm that she paid in that period about $2,400 for rent of a car. The balance of about $38,200 went into her hands in cash, and there is only her oral evidence as to the use to which it was put. The effect of her evidence is that part of the money was used by her to meet outgoings on her son's car which she used, to pay for self education expenses, to pay for her uniforms, and to meet an unspecified but small part of her family's daily living expenses. After these various expenses there was enough left over to enable her to save "considerably". By the end of 1988 she had saved 15 or 16 thousand dollars in cash which she kept in a "safe place", usually about her home. The school fees were paid from these savings.

4. The bankrupt's case was attacked by the Official Receiver in two ways. Firstly, he adduced evidence of cash payments in the years 1987 to 1989 to the two colleges in question. Including the $14,000 now under challenge, a total of approximately $32,000 in cash had been paid to the colleges. However all the payments, apart from those now under challenge, had been made prior to October 1988 when the bankrupt's husband became bankrupt. As part of its positive case the Official Receiver also relied upon undisputed evidence adduced through the bankrupt as to the situation of her family, in particular the fact that her husband has had no apparent source of income since the sequestration order was made against her, the fact that at all times there have been at least five dependent children living with the bankrupt and her husband, and the fact that although the house and three cars used by the family are registered in the names of her children, the outgoings in respect of the house and cars have been met from some source or another. Secondly, the Official Receiver, through his counsel, attacked the veracity of the applicant's evidence relating to the disposition of her income and the source of the funds which have been used to meet her family's living expenses. To this end she was cross-examined in particular about the recovery of the sum of $9,000 from Annesley College, and about a European excursion undertaken by her son with his school during the 1988 Christmas vacation, an excursion which the bankrupt concedes cost about $4,000 in addition to the spending money which her son had saved from his own endeavours. The Official Receiver submits that the bankrupt's evidence should be rejected, that the overwhelming probability is that the bankrupt's earnings have been expended as they have been received on the maintenance of the family, and that the large cash payments must have come from an undisclosed asset.

5. In answer to the positive case adduced by the Official Receiver, the bankrupt said that the school fees in 1987 and 1988, and most of the family living expenses prior to October 1988, had been paid by her husband. Although he had no source of income of which she was aware, "he had money of some sort" which she later described as "savings". She said also that her husband paid her son's fares to Europe (presumably before he became bankrupt on 3 October 1988). However the bankrupt's husband was not called to give evidence to support these explanations although he was in court during the hearing and the desirability for supporting evidence was pointed out to the bankrupt by the court. Again, the truthfulness and reliability of these important explanations depend wholly on the oral testimony of the bankrupt.

6. I am unable to accept the evidence of the bankrupt. Her answers about the family outgoings, and the sources of funds to meet them, was evasive, devoid of detail, and improbable. Her answers to questions about the arrangement under which the family home was occupied, about the source of funds available to her husband prior to his bankruptcy, and about the proceeds of the cheque for $9,000 recovered from Annesley College were, in my assessment, deliberate falsifications of her true state of knowledge.

7. The rejection of the bankrupt's evidence means that the court is without any credible evidence or explanation as to the source of the $14,000 college fees which are in dispute. The court is simply unable to find where the money came from. A possibility is that some of it came from the bankrupt's earnings as a nurse, although I am unable to say on the evidence that this possibility - as to even a small part of the money - is a probability. The suggestion that all the money was the product of savings in cash from her earnings seems unlikely in the extreme. It is however unnecessary and fruitless to speculate further as to these or other possibilities. As the bankrupt carries the onus of proof, the rejection of her evidence, coupled with her failure to adduce any other credible evidence to establish that the cash payments were the product of her income to which she is entitled under s.131(1), is sufficient to dispose of the application.

8. In my opinion the bankrupt's application should be dismissed.

9. I add that the fate of the application would be the same even if it were treated as an application under s.178 of the Bankruptcy Act. Under that section, in my opinion the bankrupt would carry the onus of proving that the Official Receiver's quest to recover the school fees was an "illegal claim", and that the act or decision of the trustee under attack should be disturbed.