Lyford, Maurice Hodgson v Levit, Joseph

CATCHWORDS

Bankruptcy - Income of bankrupt - Court's discretion to order payment of income to trustee - Bankrupt a beneficiary of a discretionary trusi -- - Power of advancement in trust deed -

Bankrupt 1iable:hTspecial

and non-recurring expenses - Whether

-C.*

-..-:-

Court can have regard'to	other funds which may	be available to
the bankrupt.
Bankruptcy Act 1966, 5.131

Trustees Act 1962 (W.A.), 5.43.

MAURICE HODGSON LWORD v JOSEPH LEVIT

W.A. G11 of 1984

CORAM: Bowen C.J., Toohey and Fisher J.J.

19 July 1984

Perth

. ,

IN THE FEDERAL COURT OF AUSTRALIA

) )

WE3TESN AUSTRALIA DISTRICT REGISTRY	)	No. HA G11 of 1984
1
GENERAL DIVISION	)

ON APPEAL FROM THE SUPREME COURT OF

WESTERN AUSTRALIA

BFPWEEN:

MAURICE HODGSON LYFORD

Appellant

JOSEPH LEVIT

Respondent

JUDGES MAKING ORDER:	Bowen C.J., Toohey and Fisher	J.J.
DATE OF ORDER:	14 July 1984
WHERE MADE:	Perth
THE COURT ORDERS THAT:

The

appeal

allowed.

The order of Rowland J. made

on 26 January

1984 be

varied with

effect on and from the payment falling due

on 26 July

1984 by substituting the sum "$1,250.00" for

the sum "$833.33".

IN THE FEDERAL COURT OF AUSTRALIA	)
)

WESTERN AUSTRALIA DISTRICT REGISTRY )

No. KA G11 of 1984

)

GENERAL DIVISION

)

ON APPEAL FROM THE SUPREME COURT	OF
KESTERN AUSTRAGIA
BEmlEEN:

MAURICE HODGSON

LYFORD

Appellant

JOSEPH LEVIT

Respondent

m: Bowen C.J., Toohey and Fisher

J.J.

19 July 1984

REASONS FOR JUDGMENT

THE COURT: The appellant is the trustee of the bankrupt estate

of the respondent.

On	26 January 1984, in the Supreme Court of Western

Australia, an order was made that from the income of the bankrupt

the sum

of $833.33 be paid each month to the trustee for the

benefit of

the bankrupt's creditors. The appellant challenges

the adequacy of the amount

ordered to be paid and in this

appeal seeks an order that the amount be increased to

$1,666.66 a

month, alternatively that there be	a new trial	of	the issues
between.the parties.

2 .

Sub-section 131(1) of the Bankruptcy Act 1966 provides that, subject to the section,

"a bankrupt who is in receipt of

income is entitled

retain

for

his

own

benefit".

Sub-section 131(2) empowers the Court, upon the application of

the trustee, to 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". The section vests

in the Court a broad discretion though of course one that must be

exercised judicially.

The	respondent is an ear, nose and throat surgeon,

described by the learned primary Judge as a successful surgeon

who works extremely long hours. In

1982 he was divorced from his

wife who is also a medical practitioner and who was, at the time detailed reference will be necessary later.

of the hearing in the Supreme Court, a psychiatric registrar at

The respondent carries on practice through a company

structure,

the

existence

and

efficacy

of which

were

not

challenged by the appellant. He is employed by J.

Levit

Pty. Ltd. at a weekly salary of

$1,500, or such other sum as may

be agreed, in addition to which he receives a sum described as

"the bonus salary". Clause

3.1

the

employment

agreement

defines the bonus salary as a sum "equal to the net income of the

Company for that financial year as calculated pursuant to the

provisions of

section 95 of

the Income Tax Assessment Act 1936

less the base salary, the superannuation contributions referred to in clause 3.6 and any payroll tax payable on that salary". In

effect then the respondent receives

by way of salary his earnings

less

outgoings of the company

including

provision

for

his

superannuation.

J. & P. Levit

Pty. Ltd. leases consulting rooms and the

equipment necessary

for the conduct of

the practice from Double

Doc Pty.

Ltd., a company

which is trustee for the Levit Family

Trust. The operations of the company and of the trust are dealt with later in these reasons.

The profit and loss statement

for J. & P.

Levit Pty.

Ltd. for the year ended 30 June 1983 shows that for that year

the

respondent received

a total salary of $92,432.59.

An amount of

$78,000 was paid to Double Doc for ent and service fees.

For the year ended

30 June 1983 the respondent

was

assessed by the Commissloner of Taxation on a taxable income of $91,105 for which tax was assessed in the sum of $45,369.67.

should

perhaps

said

at this point that the

respondent's bankruptcy was brought about because of substantial

debts he

incurred, together with a

large liability

for tax and

penalties,

consequent upon commercial ventures upon

which

embarked at

the hands

of one Moll, a man who has received

considerable adverse publicity

in Western Australia over recent

years.

The resulting loss was in excess of $600,000.

There

are

some

unsatisfactory

and

some

extent

unexplained features of the way in which the Levit family conduct

their affairs.

The balance sheet

of Double Doc for the year

ended 30

June

1983

shows

fixed

assets

the

value

$451,066.40. Of this

amount,

$400,000 is attributed to

property in Ventnor Avenue, West

Perth and $43,000 to land at

Rockingham. Whether these values are commercially realistic

did

not appear.

The current assets of the company include a

sum of

$54,653.89,

described as “right

indemnity from the Levit

Family Trust”. This

item was not explained.

Three amounts are

listed as deferred liabilities of the company. They are:

Unsecured loans	$ 56,979.78
Parktown Holdings Pty. Ltd.	$445,332.00
J. & P. Levit Pty. Ltd.	S 10.000.00
$512,311.78

These items were

not explained although

it is apparent

from the

evidence that all the shares in Parktown Holdings Pty.

Ltd. are held by Double Doc

as trustee for the Levit Family

5 .

Trust, these shares having been purchased for $18,600. The

liability of $445,332 arising from the previous purchase of

assets of Parktown can therefore be ignored in attempting to

assess the net worth of the assets in the Family Trust. In his

reasons for judgment, the learned primary Judge commented:

"It is

stated that the bankrupt had control of a share

in Parktown Holdings Pty. Ltd. and that during the time

that he was subject to the deed of arrangement the

special powers given by the Memorandum and Articles of

Association to that share which enabled the bankrupt to

control the ultimate destiny

income and assets

amounting to some

$450,000

was

relinquished by the

bankrupt. It is also suggested that

it is within the

power of the bankrupt to regain control of those assets

and make them available to the creditors".

His Honour treated these matters

as irrelevant to the

application before him which was an application for contribution

from income.

contends that his Honour should have had regard both to the

respondent's relinquishing of his interest in Parktown Holdings

and his capacity to regain that interest, at any rate to the

extent that the interest was productive of income.

The

appellant

challenges

this

conclusion

and

The Levit Family Trust was established by deed dated

January 1979. The respondent's brother Myer Martin Levit is the settlor and Double Doc the trustee. The deed identifies

"primary beneficiaries" the six children, Colin, Marcus, Xaren,

Rochelle, Barbara and Robyn. The deed identifies as "general

beneficiaries" the primary beneficiaries and their issue; the

spouses, widows and widowers of the primary beneficiaries and of

their issue; the respondent and his former wife; the trustee of

any trust

settlement under which any of the beneficiaries

already mentioned has

an interest; and any corporation nominated

in writing by the trustee prior to the vesting date, at least one

which

owned

abeneficiary.

The

general

beneficiaries

not

presently

extend

beyond

the

primary

beneficiaries and respondent and his former wife.

As from the vesting date the trustee is required to hold

the capital and income of the trust fund upon trust for

all or

any of the general beneficiaries in such proportions as it may

determine, with power in its absolute and uncontrolled discretion

to apply the "contingent presumptive

vested share of any

beneficiary in the capital of the Trust Fund to such beneficiary capital of the trust fund and to an advancement of this share prior to the vesting date.

for the use and benefit of such beneficiary.. ." (c1.6(a)(i)).

The significance

of the distinction between a primary

and general beneficiary is that the trustee is required to hold

so much of the income

the trust fund, as has not been applied

in favour of the general beneficiaries

or accumulated before the

last day of the year of income, for the benefit of such of the

primary beneficiaries as are living on the last day of the year

of income and if more than one

as tenants in common in equal

(c1.4(b)).

The

respondent has therefore a contingent

interest in the income of

the trust fund, which is conditional

upon a proper exercise of the discretion of the trustee to apply

or pay to

him.

The children would not be entitled to a more

favourable

xercise

the

trustee's

discretion

than

the

respondent under clauses 4(a). 5(a)

or 6 merely because they are

designated as "primary beneficiaries"

The balance sheet for the

L e n t Family Tru6t

a6 at 30

June 1983 shows net assets

of only $50.

Two things should be

said about this. The first

is that Double Doc holds its assets

on behalf

of the trust. The second

that the beneficiaries'

loan accounts include debit items of $4,417.07 against the

respondent and $34,257.70 against

Mrs. Levit. Aqain, the origin

of thesc

debts

and

the

basis

their

repayment

were

not

precisely explained, although some mention was made of loans from

Double Doc before the primary Judge. The accounts reveal that

the trustee lent

Mrs. Levit in excess of $34,500 during the year

ended 30 June 1983. But counsel

for the appellant submitted that

it could not be said that

Mrs. Levit lacked capacity to repay the

debt if called upon to

so for in July 1983 she bought a house

in City Beach for $90,000

of which about $70,000

came from her

own

resources including some money loaned

by Double Doc, the

balance of $20,000 being secured

by mortgage to a

bank.

The profit and loss statement

for the Levit Family Trust

for the year ended 30 June 1983 shows a distribution f so called profit of $7,421.24 to two of the children and $7,421.25 to four

of them, consequent upon

the decision

of the trustee in their

favour under clause 4(a) or possibly by operation of clause 4(b). In this year the loan account of five of the children increased

each by approximately $4,000, being the amount

of income which at

that stage had

not been expended for their benefit.

The gross

income of

the trust was $96,437.24 and

it is neither profitable

nor possible to

pursue all

the

items that constitute the very

substantial

expenses of the trust of

$51,909.76.

The gross

income is

derived largely from the $60,000

and $18,000 paid for

service fees and rent by J. & P. Levit Pty. Ltd.

The income

includes an amount

of $14,400 (previous year $4,314) described as

"interest earned". We find

it quite extraordinary that when Mr.

Putnin, the trust's accountant, was questioned about this item	in
the Supreme Court, the most he could say was:

"I would say that it is interest earned on deposits

in a

bank account.	I do not have the details here at this
stage".

Since the interest earned would indicate a capital

sum

of $150,000 or thereabouts, Mr. Putnin's nebulous answer was most

unsatisfactory.

The

significance

of the Levit Family Trust for the

purposes of the present appeal is, we think, twofold. First, it provides a source of income for the respondent's children. To that extent it relieves the respondent of the need to provide for

them; in turn the salary paid to him by J. & P. Levit Pty. Ltd. is to that extent uncommitted.

Second, the respondent is himself

a	potential beneficiary, being contingently entitled under the

trust

deed to an interest

in both capital and income

so that

regard must

be had to

the trust when determining the financial

position of the respondent. It

is necessary to look at each of

those matters in

turn.

At the time of the hearing in the Supreme Court the

children ranged in age from 20 to 13.

Three were still at school

and three were at tertiary institutions. For the most part they lived with the respondent at 16 Seymour Avenue, Dianella, the matrimonial home which was owned by Mrs. Levit and leased to the

respondent at a monthly rental of $520. The children spent quite

a lot of time with their

mother, particularly on weekends, and to

that limited extent they were provided for by her.

In the Supreme Court the respondent tendered what was described as an estimated cash flow

budget for the period 1 July

1983 to-30 June 1984.

The document lists the

respondent's income

and expenditure for the

period in question, ending with an

10.

estimated shortfall of $113.

The expenses include rent, food,

housekeeping and items referable to the maintenance

the

household

as well

as an amount of $10.000 being "payments to

trustees".

There

must

be,

these

items,

asubstantial

component attributable to the care of the children. The finding

of the learned primary judge was in these terms:

"It is clear that each child is in receipt of income and

in my opinion it has not been established by the

bankrupt that they require any contribution from his

income to their clothing,

educational requirements or

transport requirements.

Whether they should make some

contribution to him for his housing and	feeding them is
not for me to decide. That involves	moral and other

considerations outside my jurisdiction.

In the end one

relevant and perhaps practical consideration may be the

amount of any order that I make".

Having regard to the income which the children receive

or are entitled to receive from the trust fund and the general

contribution made to their upkeep by their father and mother, we

are satisfied that

a consideration of the appropriate order

to be

made under s.131 of the Bankruptcy Act should exclude any need

for a direct contribution by the respondent for the support and

upbringing of the children. It is true, as his Honour said, that

it is not for the Court to determine whether the children should

make some contribution to the respondent for the board and

lodging he provides. At the same time, we do not think that it

should exclude from consideration the fact that the outgoings of

the respondent include itcms to which some contribution might

reasonably be expected from the children.

11.

The relevance of the position of the respondent as a potential beneficiary under the deed

of trust arises in this

way.

At the time

of the hearing

in the Supreme Court the respondent

was making

a voluntary payment to the appellant from his income

of the

sum of $110,000 a year.

Having

considered the evidence,

the learned primary Judge said:

"I have

reached the conclusion that based on his

past

commitments and his prospective income

would not

inconvenience the bankrupt to an unreasonable extent to

contribute the sum of $15,000 per annum from

his

income.

!Chat however does not take into account his

commitment or probable commitment for	legal fees for
the future".

It should be mentioned in passing that notwithstanding

the reference in this passage to "inconvenience" to

the bankrupt,

it is apparent from

his judgment as a whole that his Honour

sought to apply the test

laid down in Re McLachlan, Infra.

At the time the matter was heard, criminal charges were

pending against the respondent and other persons arising out of certain transactions in which the respondent had been involved. His Honour was told that, if the charges proceeded to committal

and to trial, the respondent	would	incur	legal	fees up to
$40,000.

His Honour's judgment was delivered in January 1984. The appeal came before this Court in May.

On the hearing of the

appeal

admitted

additional

evidence

the

form of an

12.

affidavit by the respondent that, since the proceedings

in the

Supreme Court, a committal hearing of

days had been completed

in respect of certain conspiracy charges against him and

that a

further committal hearing was to take place within the next two

months. Thus the likelihood of legal expenses to which his

Honour adverted had become a reality, at least to the committal

stage. Committal expenses to date amount to nearly

$19,000. The

respondent must face the costs of

further committal proceedings

and, in all probability, of a trial. It was the likelihood of

this expense that prompted his Honour not to increase the payment

being made voluntarily. Instead he gave the appellant liberty to

apply for an increase to	$15,000 "in the event	of such charge not
proceeding further".

Counsel debated the power and propriety of the trustee

of	the Levit Family Trust applying income or capital for the

benefit

the additional expense to which he has

respondent

particularly

alleviate

this

been and will be put. They

discussed the position of the respondent as "Guardian" and

whether it might be possible to remove the existing trustee and

replace him with another trustee who might be disposed to apply

income from the trust fund for the benefit

of the respondent. It

should be stressed that these submissions were hypothetical in the sense that there was no evidence of the present trustee's

willingness or otherwise

include

the

respondent

any

13.

distribution from the trust fund,

nor was there any suggestion

that it had been approached to do

so.

In our view, it is

unnecessary for the Court to pursue these questions. It is

enough to note that it is within the power of the trustee to make

a distribution of income or advancement of capital in favour of

the respondent b#--that any substantial reduction in the income

of the children ..would make them more dependent upon the

-A=. .

respondent. This was not an aspect to which his Honour had

regard in reaching the conclusion

he did.

We have already referred to the generality

the

language in which sub-s.131(2) is cast.	In Re McLachlan (1975)	8
A.L.R. 162 at p. 165 Riley J. said:

"The burden of proof of what is required

or reasonably

necessary

borne

the

bankrupt:

v Carte

(1881) 17 Ch.D.

768 at 769; Re Robertson (1931) 4 ABC

133 at 142 (affd (1932)

47 CLR 482)."

In the matter now before this Court the learned primary

Judge described that onus

as evidentiary, saying that "in the

long run the burden of establishing that

n order should be made

and the quantum of that order lies on the trustee". With

respect, we agree with his Honour's view. Sub-section 131(1)

beqins with the assertion that

a bankrupt is entitled to retain

income for his own benefit.

It is true that the assertion is

prefaced with the words "Subject to this section". But where, as

14.

in sub-s.131(2), a statute permits someone to approach

t e Court

for an order against another, commonsense and logic dictate that

it is for the applicant to satisfy the Court that an order should

be made.

Of the application before

him, the learned primary Judge

said:

“The

inquiry

aimed

scertaining

proper

distribution of actucll income“.

His Honour elaborated this statement by saying that if

trustee is of the

view

that

a bankrupt

has

entered

into

transactions with a view to defeating his creditors, there is

appropriate machinery in the Bankruptcy Act available

the

trustee. In his Honour’s view, the hearing

an application

under sub-s.131(2) is not the appropriate place for such an

inquiry. We agree with his Honour,

so long as the reference to

“actual income” is not confined to income in the hands of the

bankrupt. If there is a source of income

or capital available to

the bankrupt, the Court is entitled to and indeed should consider

the extent to which

the bankrupt may benefit therefrom. The

existence of the trust deed constituting the Levit Family Trust

is a good illustration of a situation in which this principle may

operate. So too is the respondent’s relationship with Parktown Holdings though, since the respondent’s interest in that company

15.

found its way into the Levit Family Trust, one must

be careful

not to duplicate sources of income.

The power of the Court to

order that

of the bankrupt‘s income be

paid

to the trustee

suggests that the Court may have regard to and take into

account

the bankrupt‘s capacity to draw on income

or other funds which he

is not actually receiving

but which could be made available

consequent upon an exercise of discretion in his favour.

The legislature having conferred a discretion on

the

primary Judge, the question for this Court must be whether

it is

satisfied that his Honour‘s exercise of discretion miscarried in

some way. It is open

the

appellant

show

this

establishing

that the primary Judge proceeded

wrong

principle, that

he took irrelevant matters into account

or left

relevant matters out of account or that the very order made

demonstrates	on	its	face	that	he	xercise	of disFretion
miscarried.

There is in some of the 19th century decisions a notion

that the Court should

look at the conduct of the bankrupt and

“where the

bankrupt has behaved badly he should be made to feel

the pinch of having less to live

on...”.

(Re Lawson (1892) 2

B.C. 78 at p.79.

to relieve a person from liability to pay to the trustee	[of his
bankrupt estate3 amounts that have become payable under the

[1984] FCA 207

17 Jul 1984