Pascoe v Park - [2009] FMCA 1244

FEDERAL MAGISTRATES COURT OF AUSTRALIA

PASCOE v PARK & ORS

[2009] FMCA 1244

BANKRUPTCY – Property vested in trustee – balance in bankrupt’s business bank account – whether after‑acquired property was income – whether whole of account was property divisible among creditors – whether other account holder had legal or equitable interest – trustee’s application for declarations not opposed – Bank ordered to pay balance to trustee.

Bankruptcy Act 1966 (Cth), ss.5, 58, 58(1), 116, 139L
Federal Magistrates Court Rules 2001 (Cth), r.16.05(2)(a)

In the Matter of the Bankrupt Estate of John Lawrence Sharpe; Re John Lawrence Sharpe; Ex Parte: Max Christopher Donnelly [1998] FCA 6
Lockwood v Vince (2007) 166 FCR 305
Rodway v White [2009] WASC 201

Applicant:

SCOTT DARREN PASCOE

First Respondent:

SO YOUNG PARK

Second Respondent:

KYOUNGA KIM

Third Respondent:

YONG SEON EAU

Fourth Respondent:

WESTPAC BANKING CORPORATION

File Number:

SYG2722 of 2009

Judgment of:

Smith FM

Hearing date:

3 December 2009

Delivered at:

Sydney

Delivered on:

3 December 2009

REPRESENTATION

Counsel for the Applicant:

Ms S Nash

Solicitors for the Applicant:

Sally Nash & Co

Counsel for the First to Third Respondents:

No appearance by or on behalf of the First to Third Respondents

Solicitors for the Fourth Respondent:

No appearance by or on behalf of the Fourth Respondent

ORDERS

All money now credited to the account held by the Westpac Banking Corporation at its Lane Cove Branch and numbered 732‑085/2085 53‑5701 in the name of the first and third respondents is property which has vested in the applicant as trustee of the bankrupt estate of Yong Seon Eau pursuant to s.58(1) of the Bankruptcy Act 1966 (Cth).
The fourth respondent must pay the outstanding balance of that account to the applicant.
All parties have liberty to apply to vacate or vary these orders by filing an interim application supported by affidavits.
The applicant must within 2 working days serve a copy of this order by registered post to the last known address of each of the respondents.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG2722 of 2009

SCOTT DARREN PASCOE

Applicant

And

SO YOUNG PARK

First Respondent

KYOUNGA KIM

Second Respondent

YONG SEON EAU

Third Respondent

WESTPAC BANKING CORPORATION

Fourth Respondent

REASONS FOR JUDGMENT

(Revised from transcript)

Mr Pascoe is the trustee of the bankrupt estate of Yong Seon Eau (“Mr Eau”), pursuant to a sequestration order made on 18 March 2009. Mr Pascoe applies for orders which would confirm that there has vested in the bankrupt estate the current balance in a bank account at the Westpac Lane Cove branch in the name of the bankrupt and another person, So Young Park. It is possible that this person is the spouse of Mr Eau, and she certainly lives at the same residence. She is named as the first respondent, and Mr Eau is the third respondent. Also living at their residence is the second respondent, named as Kyounga Kim. The evidence as to the identity of this person is obscure, as is the reason for their joinder. However, they appear to be associated with Mr Eau and Ms Park, and they were served at the same residence.
I am satisfied that service on all of these three persons of Mr Pascoe’s application and the affidavit in support has been effected personally, and that they did not attend at the appointed time and place for hearing on 24 November 2009 when it was called before the Registrar, and later when it was called before Barnes FM. I am also satisfied that each of the three persons has been sent a letter as directed by Barnes FM, notifying them of the adjourned hearing date today.
The matter has been called outside my court, and outside Barnes FM’s court, several times in the course of the morning, and they have not appeared today. They have not filed any appearance or address for service, nor any other document responding to the application.
The Westpac Bank was named as fourth respondent, and has presumably been served with the application and affidavit. Its solicitors have filed an appearance submitting “to the making of all orders sought, and the giving or entry of judgment in respect of all claims made, save as to costs”. There was no appearance on its behalf today.
From bank statements in relation to the account, it appears that on the date of Mr Eau’s bankruptcy there was a small credit balance in the account of $123.28, but that subsequently further amounts were paid into the account by Jani‑King (NSW) Pty Ltd (“Jani‑King”) under an agreement which I shall discuss below. The last bank statement for the account prior to its being frozen shows a closing balance of $32,767.16. I am satisfied that this should be treated as deriving from a deposit made on 14 April 2009 by Jani‑King.
The explanation for that payment, and numerous similar payments made at earlier periods during the preceding year, is provided by a franchise agreement between Mr Eau and Jani‑King made on 3 June 1999. Under this agreement Mr Eau became the franchisee to operate a cleaning business as sole proprietor. The agreement provided for his business to receive cleaning contracts, together with related accounting and other services from Jani‑King in relation to those contracts and in relation to other cleaning contracts made by Mr Eau during the currency of the agreement.
The agreement required Mr Eau to devote his time to the business, but there is no implication from the terms of the agreement that Mr Eau was providing personal services of any particular nature to his business, to Jani‑King, or to the persons or bodies with whom he contracted to provide cleaning services. Rather, the agreement seems to anticipate that he would employ agents and employees to perform the cleaning work (see clause 4.11).
A term of the contract makes clear that he would “… act at all times as an independent contractor and will not, at any time, directly or indirectly, hold itself out as an agent, servant or employee of Franchisor” (see clause 11.7).
There was also a clause confirming that Mr Eau was the sole beneficial owner of the business operated under the franchise, and “… shall remain beneficially entitled during the term and any renewal term”. There was confirmation that “… the Franchisee does not enter into this Agreement nor conduct or intend to conduct the Business as trustee of any trust” (see clause 16).
The invoices which are in evidence in relation to the conduct of Mr Eau’s business during 2008 and 2009 show that regular and substantial payments were made into the Westpac account by Jani‑King pursuant to its obligations under the franchise agreement to be responsible for the computerised billing of customers of Mr Eau’s business, and to remit monthly collections after deduction of franchising fees and other amounts (see clause 4.7). It appears to me clear that the payments represented gross cleaning fees earned by Mr Eau’s business, rather than his personal remuneration from the business. Apart from one relatively significant payment, all of the amounts credited to the account were of this character.
The character of the account therefore appears clearly to be that of a business account for the collection of the gross proceeds of the business as monies held to meet the expenses of the business and, in the event of the business being in profit, for the use of Mr Eau as personal income for himself and his family. Among his expenses were those of his employees, of which there is suggestion that he had at least ten around the time of his bankruptcy. Whether the business was profitable to Mr Eau at the time of his bankruptcy is entirely obscure on the evidence before me. I note that he has failed to file a statement of affairs and provide information to Mr Pascoe, so as to enable Mr Pascoe to clarify this situation. The better inference from the mere fact of his bankruptcy would be that Mr Eau and his business were insolvent.
In those circumstances, and in view of Mr Eau’s failure to oppose Mr Pascoe’s present application, I accept the submission that I should characterise the amounts held in the Westpac account, both before and after Mr Eau’s bankruptcy, as gross business receipts of his business intended primarily for payment of its creditors, and not of the nature of personal income of Mr Eau under the ordinary concepts of income. The usual tests for the ordinary concept of income were applied in the context of the Bankruptcy Act 1966 (Cth) by Finkelstein J in Lockwood v Vince (2007) 166 FCR 305 at [15]:
Whether or not a payment is income according to ordinary concepts depends upon the characterisation of the payment in the hands of the recipient. A payment will be income if it is received as a reward for the provision of services or for some other revenue producing activity: Scott v Federal Commissioner of Taxation [1966] HCA 48; (1966) 117 CLR 514; Hayes v Federal Commissioner of Taxation [1956] HCA 21; (1956) 96 CLR 47; Squatting Investment Co Ltd v Federal Commissioner of Taxation [1953] HCA 13; (1953) 86 CLR 570. That is, for a payment to be income the payment must be remuneration obtained from personal exertion (eg wages), from carrying on a business (eg profit) or from the use of capital (eg dividends, interest).
(see also Lockhart J in In the Matter of the Bankrupt Estate of John Lawrence Sharpe; Re John Lawrence Sharpe; Ex Parte: Max Christopher Donnelly [1998] FCA 6).
The characterisation of regular payments of money as property in the nature of income or otherwise arises in the present application due to implications made by the Bankruptcy Act 1966 (Cth) in relation to the vesting of property, both upon bankruptcy and as after‑acquired property. Vesting of such property occurs under s.58 in relation to all “the property of the bankrupt” and “after‑acquired property of the bankrupt”. However, the term “the property of the bankrupt” is defined in s.5 so as to limit it to the “property divisible among the bankrupt’s creditors” and related rights, although the term “property” itself is defined in s.5 in the widest terms. These definitions therefore invite the discovery of the species of property which vests in the trustee under s.58 through the provisions of s.116 and the implications of other provisions of the Act.
It is clear from the terms of s.116 itself, and from the implications of other provisions of the Act as discerned by bankruptcy jurisprudence, that not all receipts or accumulations of monies are to be characterised as property divisible among creditors. In particular, it has been held that property divisible among creditors within the ambit of s.116 does not include receipts by way of income which are subject to the income contribution scheme in Part VI, Division 4B (see Sharpe (supra) and the authorities cited in Rodway v White [2009] WASC 201 at [32]). For the purposes of these provisions, ‘income’ is defined in s.139L to have its ‘ordinary meaning’ subject to some particular qualifications. It was those provisions which were addressed by Finkelstein J in Lockwood, and by Lockhart J in Sharpe.
As I have indicated above, the evidence before me does not satisfy me that any part of the contents of the present bank account should be characterised as ‘income’ of Mr Eau for the purposes of Division 4B, in the absence of better accounting evidence showing that in whole or part it represented monies earned for services performed by Mr Eau or his profits from the business. Moreover, as was pointed out by Mr Pascoe’s solicitor, if the amounts paid into the account were treated as income, Mr Eau would become liable for a very large income contribution assessment. I therefore find that the current balance in the Westpac account represents property capable of vesting in Mr Pascoe pursuant to s.58(1) of the Bankruptcy Act.
I also accept her submission that the clear source of almost all the payments into this account, and certainly the credits giving rise to the present balance, was payments by Jani‑King to Mr Eau pursuant to the franchise agreement. As I have found above, the account was of the nature of a business account containing funds to be applied in a business of which he was the sole proprietor. Although the Westpac account is in the name of both Mr Eau and Ms Park, in the absence of any evidence to the contrary from them, I am not satisfied that the prima facie entitlement of Mr Eau to all of those moneys in law and equity has been displaced. It is entirely speculative on the present evidence whether Ms Park could have a claim to any equitable interest in those proceeds pursuant to express or implied trust or contractual arrangement. I am satisfied on the balance of probabilities that no such interest of Ms Park emerges from the evidence before me which would displace the vesting effects of s.58(1) in relation to the whole of the current balance of the account.
I am therefore satisfied that Mr Pascoe has established an entitlement to a declaration that the whole of the current proceeds in the bank account are vested in him for the benefit of the bankrupt estate of Mr Eau. In the absence of opposition from the Westpac Bank, it is appropriate to make the foreshadowed order requiring it to pay the balance to Mr Pascoe. Other orders were sought in the application, but Mr Pascoe does not press for their making today.
I shall direct that copies of today’s orders shall be served on the respondents. They can apply to set aside or vary the orders under Federal Magistrates Court Rule 16.05(2)(a), but any such application will need to be brought promptly, should explain the respondents’ failure to oppose the application, and should be supported by evidence allowing different findings to those made above.

I certify that the preceding eighteen (18) paragraphs are a true copy of the reasons for judgment of Smith FM

Associate: Lilian Khaw

Date: 21 December 2009