Nicholls v Sheaffe
[2003] FMCA 387
•15 September 2003
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| NICHOLLS v SHEAFFE & ANOR | [2003] FMCA 387 |
| BANKRUPTCY – Application for a direction from the Court under s.30 of the Bankruptcy Act – whether payments made under the Dairy Structural Adjustment Scheme in accordance with the Dairy Produce Act are to be considered income or a chose in action – whether the payments can be considered a debt recoverable – where the payments are made quarterly by electronic transfer – whether the units issued are income producing property similar to units in a unit trust, shares or rental property – where the Australian Taxation Office views the payments as assessable income for tax purposes – whether the payments can be likened to other subsidies – whether the payment rights constitute a chose in action and after-acquired property. |
Bankruptcy Act 1966, ss.4, 30, 58, 116
Dairy Produce Act 1986, ss.28(7), 31, 32
Income Tax Assessment Act 1936, s.26(g)
Bounty (Books) Act 1986, s.13
Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies (1993) 115 ALR 631
Sheahan v O’Brien & Anor [2002] FMCA 25
O’Brien v Sheahan [2002] FCA 1292
Australian Trust Ltd v Ho Chin (1932) 33 SR NSW 55; WN (NSW) 28
Catlin v Cypress Finance Corp (London) Ltd (1983) QB 759
ReModin; Ex parte Bradshaw (1985) 60 ALR 439
Re John Lawrence Sharpe; Ex parte; Max Christopher Donnelly [1998] 6 FCA
| Applicant: | ALAN RICHARD NICHOLLS |
| First Respondent: Second Respondent: | BARRY J SHEAFFE JUSTINE M SHEAFFE |
| File No: | SZ 1454 of 2003 |
| Delivered on: | 15 September 2003 |
| Delivered at: | Sydney |
| Hearing date: | 20 August 2003 |
| Judgment of: | Raphael FM |
REPRESENTATION
| Counsel for the Applicant: | Mr J Johnson |
| Solicitors for the Applicant: | Sally Nash & Co |
| Solicitors for the Supporting Creditor: | Clayton Utz |
ORDERS
The Court directs that the 7,954 units owned by each of the bankrupts in the Dairy Adjustment Authority register of units are property available to the bankrupts’ trustee in bankruptcy for distribution to creditors generally under ss.58 and 116 of the Bankruptcy Act 1966.
The costs of the applicant be taxed pursuant to the Federal Court Act and Rules and paid from the estate of the bankrupts in equal shares.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SZ 1454 of 2003
| ALAN RICHARD NICHOLLS |
Applicant
And
| BARRY J SHEAFFE |
First Respondent
JUSTINE M SHEAFFE
Second Respondent
REASONS FOR JUDGMENT
Introduction
These proceedings are an application made under s.30 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”) which seek following relief:
A direction from this court as to how the payment is made by the Dairy Adjustment Authority (DAA) by way of dairy restructure subsidy monies to Barry James Sheaffe and Justine Marie Sheaffe or either of them jointly or severally should be treated by the applicant trustee being either as:
(a)Divisible property pursuant to ss.58 and 116(1) of Bankruptcy Act; or
(b)Non-divisible property pursuant to s.116(2) of the Bankruptcy Act; or
(c)Income pursuant to s.139L of the Bankruptcy Act.
The applicant is the registered trustee in bankruptcy of Mr and Mrs Sheaffe who are each former diary farmers entitled to receive payments under the Dairy Structural Assistance program. In an affidavit dated
22 July 2003 the trustee informs the court that he has been uncertain as to how to treat the payments which he has been advised may be considered to be income or a chose in action, as a debt recoverable by him in the estate or as non-divisible property. In his affidavit the trustee deposes to having an initial view that all the payments were income but following the receipt of a letter from Clayton Utz on behalf of a substantial unsecured creditor he became less certain. On 5 September 2001 the trustee sought the assistance of the Official Receiver and asked the views of the bankrupts. Because of the differing views which he received and which will be discussed in these reasons, the trustee sought the advice of Sally Nash & Co solicitors who informed him that there was no authority on the point and because there was a conflict between the bankrupt, the creditors and ITSA, it would be best to make an application to the court seeking directions.
When the matter was heard by me the trustee was represented by Mr Johnson of counsel who put before me the alternative views of the parties. I was assisted by a copy of the letter from Clayton Utz on behalf of Metway Bank who appeared at the hearing but did not take any further part in the process. The bankrupts also provided a submission, which I have taken into account.
History and nature of the Dairy Structural Assistance Program
On 1 July 2000 the dairy industry in Australia was de-regulated.
In order to assist existing dairy farmers the Australian government set up a structural adjustment package under the control of the DAA.
A farmer qualified for a Dairy Structural Adjustment Package (DSAP) entitlement if he/she could demonstrate an interest as at 6.30pm on
28 September 1999 in a dairy farm enterprise which delivered milk during 1998/99. The bankrupts were such persons.
Eligible dairy farmers were required to make a claim to the DAA.
If that claim was accepted the total value of adjustment payments was calculated. These were called “standard payment rights” under the Dairy Structural Adjustment Scheme 2000 formulated under the Dairy Produce Act 1986. The bankrupts were entitled to a standard payment right. The scheme provides in Part 5 Division 5.1 s.31 as follows:
“31 Number of units in a payment right
(1)Each payment right consists of a number of units worked out in accordance with the following procedure:
(a)divide the face value of the payment right by 32;
(b)if the result is a whole number of dollars, that number is the number of units in the payment right;
(c)if the result is less than $1, there is 1 unit in the payment right;
(d)if the result is more than $1, but is not a whole number of dollars:
(i)round the result up or down to the nearest whole number (rounding up in the case of a number exactly half-way between 2 whole numbers); and
(ii)the rounded number is the number of units in the payment right.
(2)However, the number of units in the payment right may be affected by action taken by the DAA under Division 5.2.”
It is also important to note s.32 is in the following form:
“32 Transfer of units
(1)The owner of a unit may:
(a)transfer ownership of the unit to another entity; or
(b)grant a charge over the unit to another entity.
(2) However, the owner of a unit must not:
(a) dispose of the unit by way of a declaration of trust; or
(b) transfer a beneficial interest in the unit independently of the legal interest in the unit; or
(c) transfer ownership of a unit over which a charge is registered.
(3)A purported disposal or transfer that contravenes subsection (2) is of no effect.
(4)If an individual who owns a unit dies, ownership of the unit is transferred to the individual’s estate.
(5)A transfer of ownership or grant of a charge is of no effect unless it is registered under section 33.
(6)To avoid doubt, subsections (2) and (5) apply in relation to a transfer to a person as beneficiary of the estate of a deceased holder of units.”
On or about 21 September 2000 each of the bankrupts received a notice of decision from the DAA advising them that they were eligible for a standard payment right with a face value of $254, 519.00. The notice of decision advised that the DAA would divide the face value of the right by 32 and round it to the nearest whole number to obtain the number of units in each of the bankrupts right. The DAA would record in the register of units that the bankrupt was the owner of the units and the bankrupt would be paid $1 per unit for 32 quarters with the last quarter ending on 30 June 2008. Based upon the face value of $254, 519.00 for each bankrupts’ standard payment right, this would equate to a quarterly payment of $7,954.00.
The units were formerly allocated by way of a notification of allocation of units dated 14 December 2000. Each bankrupt had become bankrupt on 11 December 2000.
If the payment rights are treated as income they would not vest in the trustee but they would be subject to the code for income contributions to be made by the bankrupt to his trustee pursuant to s.139L of the Bankruptcy Act. If the rights were to be considered a chose in action they would vest in the trustee in bankruptcy for the benefit of all the creditors pursuant to s.58 of the Bankruptcy Act. It is submitted that the units do not consist of exempt property under s.116(2) of the Act as they are not specifically listed under that subsection and, it is argued, do not fall into any other category within the subsection.
The arrangements under the DSAP require that each quarter’s payments are made by electronic transfer to a nominated account. This has been happening in the case of the bankrupts but the account has been frozen pending the determination of the status of the payments.
The submission that the payment rights constitute a chose in action
In support of this submission it is said that the payment rights are after acquired property which vests in the trustee pursuant to s.58 of the Bankruptcy Act. The word “property” is defined in s.5 of the Act as:
“Real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit where the present or future, vested or contingent, arising out of or incident to any such real or personal property.”
In Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies (1993) 115 ALR 631 at 637 French J said:
“It is true that the after-acquired property to which ss.58 and 116 apply is defined widely enough to encompass income. However, in my opinion, the legislative scheme now in place in quite inconsistent with the application to those provisions to after acquired income. This follows from the comprehensive scheme embodied in Div 4B which approaches a code for dealing with after-acquired income of the bankrupt. There is nothing in the extrinsic material to support a change in the approach to after-acquired income which would bring it within after-acquired property vesting in the trustee. In my opinion such income does not vest in the trustee.”
I accept this dicta, which I followed in Sheahan v O’Brien & Anor [2002] FMCA 25 and which was not criticised on appeal O’Brien v Sheahan [2002] FCA 1292, as authority for the proposition that if the payment rights are considered to be income then they would fall within s.139L. But it is argued that the bankrupts are the holders of units pursuant to the notification of allocation of units dated 14 December 2000. They are existing property to which certain rights are attached. The right is to receive a payment of $1 per unit per quarter for eight years. Under s.23(7) of Schedule 2 of the Dairy Produce Act 1986 the payment when due may be recovered as a debt due to an entity by action in a court of competent jurisdiction. It is argued that the units can be traded, albeit within limitations. It is argued that the units in the DSAP are analogous to shares or stock or units in a unit trust which are legal choses in action and capable of enforcement: Australian Trust Ltd v Ho Chin (1932) 33 SR NSW 55; WN (NSW) 28. It is argued that the units in the DSAP denote an entitlement in the value of the dairy structural adjustment fund similar to the concept of shares denoting an entitlement to capital in a company. It is argued that the units are required to be entered upon a register as a precondition to establishing ownership. Transfers are required to be registered. It is noted that the scheme provides for circumstances under which the DAA may cancel units held by an entity. But provided that the DAA does not cancel the units pursuant to those provisions an entity will hold them until they are automatically redeemed for a monetary payment.
It is also argued that the right to receive each quarterly payments of money can be characterised as a chose in action and thus property, and because a legal chose in action includes debts (Catlin v Cypress Finance Corp (London) Ltd (1983) QB 759) the DSAP payments when made may be characterised as a chose in action and thus property for the purposes of ss.116 and 58. Because the obligation to pay a sum of money in the future is characterised as a chose in action (ReModin; Ex parte Bradshaw (1985) 60 ALR 439) it is suggested that the units can be characterised as a chose in action prior to being converted into a quarterly payment.
It is argued that the units are income producing property no different to units in a unit trust, shares or even a rental property and the income produced thereby should be treated no differently. It is not income which falls within the purview of s.139L. The trustee is obliged to realise the asset from which the income is derived for the benefit of the creditors and in doing so:
“ takes from the bankrupt not only his right to the corpus, but also his enjoyment of the income.” (Re Huggins; Ex parte Huggins (1882) 21 Ch D 85)
The submission that the payment rights are income
This argument proceeds on the basis that the description of the payment rights as units is no more than that. In other words what the former dairy farmers have is a right to receive income for a period of eight years based upon the income they would notionally have received had the industry not been deregulated. In support of this proposition I have seen a copy of a document produced by the Australian Taxation Office which is exhibited as annexure B to the affidavit of Alan Richard Nicholls, the trustee, which says inter alia:
“Are the DSAP payments assessable income?
Yes. Each DSAP payment deposited in the dairy farmer’s account at the financial institution by the Dairy Adjustment Authority is assessable as a subsidy in the income years it is deposited.”
It is also submitted that the characteristics of the DSAP payments indicate that they are income because of the regularity of the payment of the funds. But perhaps the strongest argument in favour of the payments being received by the bankrupt as income is the analogy of these payments to those made to the bankrupt in the case of Sharpe
(Re John Lawrence Sharpe; Ex parte; Max Christopher Donnelly [1998] 6 FCA). In that case fees due to the bankrupt barrister and outstanding at the date of his bankruptcy and the subject of previous memoranda of fees were held not to be property available for the payment of the bankrupt’s debts within Part VI of Div 3 of the Bankruptcy Act. They were held to constitute income within Part VI of Div 4B of the Bankruptcy Act. It is argued that the payment rights are no different to accounts rendered by a barrister who accounts on a cash basis so that in each year when the subsidy payment is made it constitutes assessable income which falls within s.139L of the Bankruptcy Act and is subject to the scheme found in Div 4B of the Bankruptcy Act.
It is argued that it would be wrong to define the payments as a single right because of their ability to be traded or charged as the limitations thereon show that such rights were designed for the very limited purpose of allowing the recipients to continue their investment in the farming industry or to secure another form of income. In s.139L “income” in relation to a bankrupt has its ordinary meaning subject to the following qualifications:
“(a) the following are income in relation to a bankrupt (whether or not they come within the ordinary meaning of “income”);
(i)an annuity or pension paid to the bankrupt from a provident, benefit, superannuation, retirement or approved deposit fund;
(ia) an annuity or pension paid to the bankrupt from a RSA;…
It is argued that these payments are analogous to an annuity or pension.
Findings
Although I can see the force of the argument that a regular payment made at quarterly intervals over a period of eight years in consideration for the loss of certain other income rights should be considered to be income for the purpose of s.139L I believe that on balance the better argument is in favour of the payment rights constituting a chose and after-acquired property as defined in s.58(1)(b). I say this because of the nature of the arrangements created by the DSAP. When the Australian government decides to provide assistance to a particular group within the community it is not limited in the manner in which such assistance can be provided. The legislation creating the assistance scheme also creates the financial packaging by which the assistance is provided. Thus the ‘Vine Pull Scheme’ created in the mid-1980’s provided a loan to encourage uneconomic wine grape growers to leave the industry by pulling up vines. Provided that vines were not replanted on the land within the succeeding five years the loan was transferred into a grant. Alternative types of financing assistance are through bounties such as the scheme created under the Bounty (Books) Act 1986 where a direct payment is made to printers or publishers of bountiable books. An advance on bounty payments could be obtained through a mechanism contained in s.13 of the Act. It would not be difficult to cite another half dozen different approaches to the provision of assistance. Each of these approaches has its own effects, particularly for income tax purposes. The Vine Pull Scheme was subject to Income Tax ruling IT23/02 which made it clear that payments under the scheme were not taxable under any circumstances. On the other hand payments under bounty schemes or other subsidies are. (s.26(g) of the Income Tax Assessment Act 1936).
What is created by the Dairy Structural Adjustment payment is a right to a future income stream. It is similar to the right to receive income from rent in a stapled security found commonly today in listed property trusts. In both cases a unit is created representing the right and the number of units held by any particular person represents the total bundle of that person’s rights to receive the income. In the stapled trust the owner of the unit will generally have paid for it in cash but he may not have done so. He may have sold a property into the trust for the consideration of units. In the stapled trust this would mean a share in the underlying property and units representing the income flow.
The units created in the Dairy Scheme are owned by the unit holder upon issue. They are not just an inchoate income right to future income. They are an existing right, which is entered into a register and can be both traded and charged. The fact that the right to trade the units is limited does not detract from their nature as a property or chose in action. The thing that can be transferred or charged is the unit or units held by the recipient. The owner of the right does not have to charge it all, he does not have to transfer it all. This ability to deal with part only of the property further enforces its existence as something temporally different from the receipt of the payment. In the jargon of today the right to receive future income under the scheme has been ‘securitised’. The securitisation has created a separate and new piece of property, the unit. That piece of property is after-acquired property which vests in the trustee pursuant to s.58(1)(b) of the Bankruptcy Act. It is not income that would be excluded from that section by virtue of Div 4B arrangements. I am likewise satisfied that the property does not fall within s.116(2) of the Bankruptcy Act. In that section certain payments under the Rural Adjustment Act or the Farm Household Support Act are not included in property divisible amongst a bankrupt’s creditors. But there is no mention of the Dairy Produce Act 1986 and it must be taken to have been excluded. I will give a direction accordingly.
I certify that the preceding nineteen (19) paragraphs are a true copy of the reasons for judgment of Raphael FM
Associate:
Date:
2
4
0