Quinlivan v Prentice
[2004] FMCA 1
•17 February 2004
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| QUINLIVAN v PRENTICE & ANOR | [2004] FMCA 1 |
| BANKRUPTCY – Income contributions – surplus contributions paid by bankrupt to the trustee – payments made in advance of income contribution assessments – whether the trustee is entitled to retain the surplus contributions – the trustee is entitled to retain surplus contributions until the process of making income contribution assessments is complete – thereafter the funds could only be retained if the funds could be treated as a voluntary contribution – the funds were not a voluntary contribution – they were paid under a mistake and should now be disbursed as the bankrupt intended. |
Bankruptcy Act 1966 (Cth), ss.82, 134, 139K, 139P, 139W, 139WA, 139ZH, 178
Legal Profession Act 1987 (NSW), s.38FC
Challen v Benedeich [1999] FCA 845
Codelfa Construction Pty Limited v State Rail Authority of New South Wales (1982) 149CLR 337
David Securities Pty Ltd v Commonwealth Bank (1992) 175 CLR 353
Ex parte James; In re Condon (1874) LR 9 Ch App 609
Hepworth v Hepworth (1963) 110 CLR 309
Hypec Electronics Pty Ltd (in liq) v Mead & Ors [2003] NSWSC 934
Lloyd v Federal Commissioner of Land Tax (1933) 49 CLR 160
Macchia v Nilant [2001] FCA 7
Muschinski v Dodds (1984) 160 CLR 583
Re Gillies; ex parte the Official Trustee in Bankruptcy v Gillies (1993) 42 FCR 571
Re Lofthouse (2001) 107 FCR 151
Re Tyndall; ex parte Official Receiver (1977) 17 ALR 182
In the matter of the bankrupt estate of Sharpe (1998) 80 FCR 536
| Applicant: | ANTHONY PHILIP QUINLIVAN |
| First Respondent: Second Respondent: | MAXWELL WILLIAM PRENTICE COMMISSIONER OF TAXATION |
| File No: | SZ1753 of 2003 |
| Delivered on: | 17 February 2004 |
| Delivered at: | Sydney |
| Hearing dates: | 9 & 23 December 2003 |
| Judgment of: | Driver FM |
REPRESENTATION
| Counsel for the Applicant: | Mr M F Holmes, QC |
| Solicitors for the Applicant: | Horton Rhodes |
| Counsel for the Respondent: | Mr D Pritchard |
| Solicitors for the Respondent: | Henry Davis York |
ORDERS
Within 60 days the trustee shall complete any outstanding compulsory income contribution assessments pursuant to s.139W of the Bankruptcy Act 1966 (Cth).
At the end of that period the trustee shall pay any surplus income contributions to the Commissioner of Taxation, on account of taxation liabilities incurred by the bankrupt since the commencement of the bankruptcy.
The costs of these proceedings are reserved.
Pending further order of the Court as to costs, the trustee may retain sufficient funds in the estate to meet his costs incurred in these proceedings as expenses incurred in the course of the administration of the estate.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SZ1753 of 2003
| ANTHONY PHILIP QUINLIVAN |
Applicant
And
| MAXWELL WILLIAM PRENTICE |
First Respondent
COMMISSIONER OF TAXATION
Second Respondent
REASONS FOR JUDGMENT
Introduction and background
The applicant is an undischarged bankrupt who formerly practised as a barrister. The respondent is the trustee of his bankrupt estate. By application filed on 10 October 2003 the applicant seeks declarations that money held by the trustee in the sum of $82,189.11 (subsequently revised to a figure of $89,740) and entitled “contributions held in advance” is not an amount paid within the meaning of s.139ZH of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”); secondly, a declaration that the trustee is not entitled to hold that sum pursuant to s.139ZH of the Bankruptcy Act; and thirdly, a declaration that the trustee has not made any assessment of the applicant under s.139W of the Bankruptcy Act. Although not stated on the face of the application, the matter has proceeded on the basis that the Court’s jurisdiction has been enlivened under s.178 of the Bankruptcy Act. No jurisdictional issue arises in any event because, by his amended response filed on 9 December 2003 the trustee seeks, as an alternative to an order that the application be dismissed with costs, directions in accordance with s.134(4) of the Bankruptcy Act as to how he should deal with the money the subject of the present application.
The second respondent, the Commonwealth of Australia represented by the Deputy Commissioner of Taxation, took no part in these proceedings. Nevertheless, the Deputy Commissioner has an interest in the proceedings in that the Deputy Commissioner is the main creditor of the bankrupt’s estate and has issued a taxation assessment in respect of a further year of income that has not been satisfied.
The factual background of the matter is largely documentary. The applicant was made bankrupt on the petition of the second respondent on 31 May 1994. The applicant was bankrupted for a second time on 5 July 2001, also on the petition of the second respondent. By these proceedings, the applicant is seeking to avoid a possible third bankruptcy, which would also be on the petition of the second respondent. There has been no break in the bankruptcy of the applicant since he was first bankrupted on 31 May 1994. It seems that, in the course of the administration of the first bankruptcy, a practice developed whereby the applicant’s accountant made periodic income contributions to the trustee in the first bankruptcy. This practice was continued by the trustee in the present bankruptcy. Early in 2001, prior to the second bankruptcy, the applicant gave instructions to his accountant, Mr Thyer, to take control of his income, due to a gambling addiction. The applicant was aware that he faced a second bankruptcy and was also concerned that he would need to demonstrate to the NSW Bar Association that he was a fit and proper person to continue practising as a barrister. Mr Thyer’s instructions were to pay bills arising from the applicant’s practice out of funds received and to pay the applicant an allowance of $500 per week. The applicant instructed Mr Thyer to pay periodically any balance in the trust account established for this purpose to his trustee in bankruptcy. The initial payments were made to the first trustee in bankruptcy and, after the applicant was bankrupted a second time, payments were made to the second trustee, the present first respondent.
It seems that Mr Quinlivan was anxious to demonstrate to the Bar Association that he had placed his affairs in the hands of an independent party, so as to deal with his gambling addiction, and also that he was applying all of his available income to meet his taxation liabilities. It seems that Mr Quinlivan anticipated that he would be required to make income contributions in the administration of both bankruptcies and, accordingly, payments were made to his trustees in bankruptcy. Further, it seems that Mr Quinlivan hoped that he might be able to satisfy the Bar Association that he was a fit and proper person to continue practising as a barrister, which might enable him to earn sufficient income to discharge his liabilities. In that, he was disappointed. His practicing certificate was withdrawn, causing him to cease practice. It followed that his income quickly and sharply reduced to effectively nothing early in 2002.
Mr Quinlivan now faces a difficulty. Mr Thyer, during the 2001/2002 financial year, paid the sum of $130,000 to the first respondent. Nothing was deducted from that amount in respect of any future income tax liability. I understand that provision was made for the applicant’s GST liability. The second respondent has issued an income tax assessment for the 2001/2002 financial year but Mr Quinlivan is unable to pay it. Having received the money, the trustee does not wish to give it back. Around two million dollars remains owing to creditors (principally the second respondent) in the administration of the bankrupt estate. The trustee has purported to assess income contributions due from Mr Quinlivan on a monthly basis totalling $47,810.89, although the applicant asserts that the assessment should have been around $40,000, leaving surplus contributions of $89, 740. Mr Quinlivan seeks to compel the trustee to pay that surplus contributions to the second respondent on account of his outstanding income tax liability for the 2001/2002 financial year, thereby hoping to avoid a third bankruptcy. The prospect of a third bankruptcy looms because the second respondent cannot prove in the present bankruptcy in respect of taxation liabilities incurred after the date of the second bankruptcy: Bankruptcy Act, s.82.
The evidence
The applicant relies upon his own affidavit filed on 20 August 2003 and the affidavit of Mr Thyer filed on 16 October 2003. Both were cross-examined. The first respondent relies upon an affidavit by Jason Lloyd Porter filed on 12 September 2003 and a bundle of documents tendered as an exhibit: R1. I also received a tender bundle from the applicant: exhibit A1.
The legislation
Sections 139ZH, 139W, 178 and 134(4) of the Bankruptcy Act provide as follows:
Section 139ZH:
(1) If:
(a)a person has paid an amount in respect of the contribution that the person was assessed to be liable to pay in respect of a contribution assessment period; and
(b)as a result of a subsequent assessment:
(i)the person is not liable to pay a contribution in respect of that period; or
(ii)the amount referred to in paragraph (a) exceeds the amount of the contribution that the person is liable to pay in respect of that period;
the person is not entitled to a refund of the amount paid or of the excess, as the case may be.
(2) If a person has paid in respect of a contribution assessment period an amount that, because of a subsequent assessment made in respect of that period, the person was not liable to pay, the trustee is to apply that amount in or towards any contribution that the person is liable to pay in respect of a later contribution assessment period.
Section 139W:
(1)As soon as practicable after the start of each contribution assessment period in relation to a bankrupt, the trustee is to make an assessment of the income that is likely to be derived, or was derived, by the bankrupt during that period, of the actual income threshold amount that is applicable in relation to the bankrupt when the assessment is made and of the contribution (if any) that the bankrupt is liable to pay in respect of that period under section 139S.
(2)If at any time, whether during or after a contribution assessment period, any one or more of the following paragraphs applies or apply:
(a)the trustee is satisfied that the income that is likely to be derived, or was derived, by the bankrupt during that period is or was greater or less than the amount of that income as assessed by the last preceding assessment in respect of that period;
(b)the base income threshold amount increased or decreased after the making of the last preceding assessment in respect of that period and before the end of that period;
(c)the trustee is satisfied that the number of the bankrupt's dependants who were wholly or partly dependent on the bankrupt for economic support increased or decreased after the making of the last preceding assessment and before the end of that period;
the trustee is to make a fresh assessment of the income that is likely to be derived, or was derived, by the bankrupt during that period, of the actual income threshold amount that is applicable in relation to the bankrupt when the assessment is made and of the contribution (if any) that the bankrupt is liable to pay in respect of that period.
(3)The powers of the trustee under subsection (2) may be exercised on the trustee's own initiative or at the bankrupt's request, but the trustee is not required to consider whether to exercise those powers at the bankrupt's request unless the bankrupt satisfies the trustee that there are reasonable grounds for the trustee to do so.
(4)As soon as practicable after the making of an assessment the trustee must give to the bankrupt written notice setting out particulars of the assessment and informing the bankrupt about the possibility of a variation under section 139T.
Section 178:
(1)If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable.
(2) The application must be made not later than 60 days after the day on which the person became aware of the trustee's act, omission or decision.
Section 134(4):
The trustee may at any time apply to the Court for directions in respect of a matter arising in connexion with the administration of the estate.
Submissions
Mr Holmes submits as follows:
The factual background of the matter is largely documentary and found in the Bundle (pages 1 to 155). This is supplemented by MFI “1”, the draft of the letter dated 8 August 2001 (with the Applicant’s annotations in handwriting) from Mr Thyer to Mr Macken of the New South Wales Bar Association which is at pages 445 to 47 of the Bundle. Since the hearing the 10 page correspondence referred to at page 133 of the Bundle being a letter from the Trustees to Mr Quinlivan dated 10 April 2003 has been produced by the Trustees and is tendered (see attached).
The evidence establishes that early in 2001 Mr Quinlivan “directed that his practice’s financial affairs be administered by (Mr Thyer’s) office and that all surplus funds be directed to his accumulated tax liabilities. He agreed to receive a living allowance of $500 per week so that all surplus contributions could be paid to the Commissioner of Taxation” (Bundle page 47). The arrangements with respect to Mr Quinlivan’s “practice’s financial affairs were devised in consultation with Mr & Mrs Quinlivan so that Mr Quinlivan’s financial affairs might be properly managed, and also so that opportunity for gambling might be minimised by reducing Mr Quinlivan’s access to surplus income” (see the handwritten draft of pages 45-47 of the Bundle).
Other reasons for implementing this arrangement relate to the likely consideration by the Bar Council of the continuation of Mr Quinlivan’s practicing certificate.
Whether these “arrangements” are regarded as constituting a (formal or loose) trust[1] established in early 2001 there was a significant intervening event on 5 July 2001 when Mr Quinlivan became bankrupt and the present Trustees were appointed to his estate.
[1] The applicant relies on this issue on the following evidence at T43.7, T47.8, T51.3, T52.2, T54.5-54.9, T55.1-55.5, T58.6
The Bundle of documents includes Item 11 at pages 27-30 which records a conversation between Mr Thyer’s office (Mr Thyer being away) and the Trustee’s office on 19 July 2001. In that conversation on 19 July 2001 it appears that there was a conversation between a representative of Mr Thyer’s office and Sonya Amelia from the Trustee’s office, in the course of which Mr Thyer’s office employee or representative said “Do we close (the) trust account and some cheque to who?” and the representative of the Trustee said “no”. (Bundle 27).
That conversation followed a letter being sent dated 17 July 2001 (received 20 July 2001) (Bundle page 31) in which the Trustees said “We have been advised by the bankrupt that you maintain a trust account on his behalf to receive funds from his practice as a barrister. We understand that you pay his ongoing expenses and provide him with $500 per week for living expenses.” The Trustees also said that in due course “We will be calculating a new income contribution assessment” and that payment for compulsory income contributions sent to the previous Trustee “should now cease”.
On 19 July 2001 Mr Thyer’s office confirmed that “we have been maintaining Mr Quinlivan’s practice income and expenses through our firm trust account since 26 March 2001” (Bundle page 33).
On 26 July 2001 the Trustees asked whether Mr Thyer intended to continue “to maintain” the trust account (Bundle page 41) and advised Mr Thyer that “any funds received by (Mr Thyer) … will constitute income”, from which the Trustees would assess contribution liability. Mr Thyer then said he was “happy to continue to maintain” the trust account (Bundle page 42).
Overview of applicant’s position
Amounts of income totalling $130,000 were paid to the Respondent on 5 September 2001 ($70,000), 4 October 2003 ($40,000) and 15 February 2002 ($20,000). These monies had been derived from the Applicant’s income as a barrister after the date of his bankruptcy, i.e., 5 July 2001. They were each described, at the time, as “an advance on the balance of accounts held on behalf of Mr Quinlivan (Bundle p58, 63 and 97) (emphasis added) (and a “transfer”, Bundle page 59, 64, 76, 102).
The Respondent’s entitlement to deal with such monies is dependent upon the provisions of Part VI - Division 4B of the Bankruptcy Act (“the Act”). Under the present provisions, there is no vesting in a Trustee of income. If income is to vest it must be the subject of an assessment. The subject moneys held in the account could only be characterised as income.
The Applicant, as a bankrupt, is obliged, subject to the provisions of s.139P of the Act, to pay contributions under the scheme of Subdivision D of Part VI – Div 4B of the Act (see Re Gillies; ex parte the Official Trustee in Bankruptcy v Gillies (1993) 42 FCR 571 at 575-576)
The Respondent made no "assessment" within the meaning of the Act. Accordingly, there was no obligation to make payments “for contribution”. The liability never arose “to pay contributions”.
Alternatively, if the Respondent was entitled to apply the money towards such contributions (which is denied), then, to the extent that the money exceeded the Applicant’s liability for contributions during the period following 5 July 2001 (the first twelve month period), the only basis for the Respondent retaining the excess is found in the provisions of s.139ZH.
As the conditions necessary to satisfy s.139ZH were never fulfilled, there is and has been no basis for the Respondent to retain the excess.
Furthermore, the Respondent is also subject to the principles and obligations recognised Ex Parte James; In re Condon (1874) LR 9 Ch App 609 (“Ex Parte James”)[2] which on the facts of this case would require the Trustee to pay the excess to the ATO as a matter of “obligation” and “duty”.
[2] As recently enunciated and applied by Campbell J. in Hypec Electronics Pty Ltd (In liq) v Mead & Ors [2003] NSWSC 934
Sections 139P and 139W
The Applicant’s liability to pay any contribution depends upon the Respondent having made an “original assessment” within the meaning of s.139P, s.139K and s.139W (1). Relevantly, S.139W (1) provides that this original assessment was itself required to be comprised of two assessments[3]:
[3] See generally Challen v Benedeich [1999] FCA 845 and Macchia v Nilant [2001] FCA 7
· an assessment of the income that is likely to be derived by (the Applicant) during (the first contribution assessment period of 5 July 2001 – 4 July 2002)
· and of the contribution that (the Applicant would be) liable to pay in respect of that period…
The Respondent never made such assessment or assessments. This is apparent from the terms of the Respondent’s correspondence and schedule headed ‘Contribution Calculation’ of 16 October 2001 (Bundle pages 65 to 66). There does not appear to be any other documentation which might even arguably be the ‘original assessment’ within the meaning of s.139W (1).
There are several ways of demonstrating that the contents of the 16 October 2001 documents do not amount to the assessment(s) required by s.139P/s.139W (1). On the face of the documents, there is no assertion of an estimate of likely income for the first contribution assessment period, nor is there an assertion, or an imposition, of a liability for an amount of contribution to be paid during that period of one year. On the contrary, the covering letter speaks of the purported s.139W assessment relating to a period of three months. None of the amounts in the schedule’s ETICY column is intended to be an original assessment of the Applicant’s likely income between 5 July 2001 and 4 July 2002. None of the amounts in the AC column is intended to be that part of the original assessment which required an assessment of the amount of the Applicant’s liability for contributions during the first contribution assessment period. For instance, if the first such entries ($667,297.44 and $157,988.96) were so intended, then there never should have been any “Contribution held in advance”, as the $110,000 that had been paid was less than the AC figure. The same can be said for the third set of figures. The next nine sets of figures are calculated on the basis of no income after 4 October 2001, which is the opposite basis on which the parties were proceeding (where a barrister does the work and later collects the fees).
Further, it was impossible for the Respondent to comply with the provisions of s.139P and s.139W (1) once they determined that they would assess the Applicant’s liability for contributions “on a monthly basis in arrears” (p.2.5 of the Respondent’s letter of 30 August 2001, Bundle page 56 and see also page 53). No doubt the Respondent could have employed the particulars of actual income, as they became available from month to month, to make many appropriate s.139W(2) assessments, but only after a proper ‘original assessment’ as required by s.139W (1) had been made. But this never occurred in the present case.
If the “original assessment” never occurred, then a liability for paying contributions never arose pursuant to s.139P. The result is that the Respondent has no justification for retaining any of the $130,000. This is apparent from Sharpe’s Case ( (1998) 80 FCR 536 ).
However, the Respondent seeks to retain so much of the $130,000 that would exceed the amount for which the Applicant ought have been assessed liable for contributions during the first contribution assessment period.
Section 139ZH
The Respondent appears to suggest that by force of s. 139ZH:
…the Bankruptcy Act does not allow for any refunds of voluntary contributions made by a Bankrupt. (see page 2.9 of the Trustees’ letter to Thyer, 11 March 2002, Bundle page 108)
More specifically as to the status of the overpayments, the Respondent says:
The Bankruptcy Act prevents us from refunding any voluntary contributions made by you. We must apply them for the benefit of estate creditors. (p.3.3 Trustees letter to the Applicant, 10 April 2003, Bundle, page 135.)
However, the money cannot be regarded as having been paid, “...in respect of the contribution that the person was assessed to be liable to pay in respect of a contribution assessment period…” ( as required by s.139ZH (1)(a) ), because the Trustees had not made any such assessment by the times of the payments of $110,000 in September/October 2001 and of $20,000 in mid-February 2002 (and it is doubtful that they have ever made such an assessment – see the observations above with respect to s.139P).
The issue is whether the Respondent has dealt properly with the after‑acquired (i.e. post-bankruptcy) income of a bankrupt. The Court in Sharpe’s case determined that the Trustees are not entitled to treat fees received as after acquired property and the fees received as “after acquired income of a bankrupt does not vest in the Trustee of the bankrupt’s estate” (supra at 540-541).
Further s.139W(2) prevents the alternative argument, that it is possible to differentiate between the two sets of payments (and on the assumption that the Trustees’ accounting on 16.10.01 amounted to an ‘original assessment’) and argue that the $20,000 is a payment within the meaning of s.139ZH (1).
In their letter of 30.8.01 to the Applicant (Bundle p.56), the Trustees informed the Applicant (p.2.5):
Pursuant to…Sharpe’s Case, your income contribution will be assessed on a cash basis. It is our intention to conduct your income contribution assessments on a monthly basis in arrears. In this regard we will be seeking advice directly from your accountant as to ..receipts…and…your accountant will remit your assessed contribution directly to us.
(This was also the view of the Trustees in the first report to creditors dated 28 August 2001, Bundle page 53).
In the letter of 10.4.03 it is said (p.3.4) (Bundle page 135):
You are assessed on a month by month cash receipt basis pursuant to the decision of the Court in Sharpe’s Case.
In fact, Sharpe’s Case has nothing to say, at all, as to the appropriate manner of calculation of a barrister’s liability for contribution due under Division 4B. The case determined that fees rendered but unpaid at the time of bankruptcy, and received after bankruptcy, are not after‑acquired property caught by Division 3 for the benefit of creditors.
In Sharpe’s Case, Lockhart J held at 540:
…Division 4B…introduced a mechanism for requiring a bankrupt who derives income during the bankruptcy to pay contributions towards the bankrupt’s estate and to enable the recovery of certain money and property for the benefit of the bankrupt’s estate…Div 4B…proceeds on the assumption that after acquired income of a bankrupt does not vest in the Trustee of the bankrupt’s estate.
…
…Div 4B establishes a comprehensive scheme of dealing with the after acquired income of the bankrupt. (bold added)
That being so, unless the overpayments can be caught by s.139ZH, they were and remain the Applicant’s, and they have been wrongly retained by the Respondent. The only basis asserted by the Trustees for retaining the payments has been to seek to rely on s.139ZH.
The notion of ‘voluntary contributions’ does not appear to be a concept recognised or contemplated under Div. 4B, nor under any other part of the Act. It appears inconsistent with Div. 4B which provides a “comprehensive” scheme or code for dealing with a bankrupt’s post-bankruptcy income, to assert that “transfers of the balance of the accounts” are “voluntary contributions” which must be withheld from current creditors and which must not be treated as income.
Division 4B sets out what is required for a proper imposition of liability for contribution. By s.139W (1) the Trustees were required to assess the bankrupt’s income likely to be derived during each contribution assessment period and were required to assess the contribution for which he was liable during each contribution assessment period. By s. 139K the first contribution assessment period began on 5.7.01, the day of bankruptcy, and ended one year afterwards. By a date in October 2001 by when the Trustees received $110,000 from the bankrupt, the Trustees, for whatever reason, had not assessed the contribution for which he was liable for the year from the day of bankruptcy. There was no doubt that the bankrupt was under a potential liability to make Division 4B contributions, and the Trustees had expressed their intentions as to how they would calculate or ‘conduct’ the contributions, but on the facts in the present case, no assessment of liability to pay contribution(s) in respect of a contribution assessment period had been undertaken by the time of the Trustees had received the payments totalling $110,000.
The clear and proper construction of s.139ZH (1)(a) requires a quantified assessment of a liability, and not merely a recognition of circumstances attracting a liability for contribution, before the consequences of the section may operate. In a sense, by the Trustees’ delay until their correspondence of 16.10.01, the first time when it could possibly be argued that they made the assessments required by s.139W, they risked the very circumstance that arose – a payment that would not trigger the provisions of s.139ZH.
Section 139W(2) contemplates and permits a fresh assessment of the amount of due contribution, during the original contribution assessment period. If, which is denied, it is held that the original assessments as required by s.139W(1) were made on 16.10.01, then the Trustees might argue that the recalculations of contribution after awareness of actual monthly income were fresh assessments within the meaning of s.139W(2), and that the methods adopted by the Trustees satisfied what was required of them under Division 4B, and the $20,000 payment is non-refundable because of s.139ZH. But even on this assumption it remains impossible, however, to attract to s.139ZH the payments totalling $110,000 which were made before any relevant assessments were made.
None of this derogates from the liability the bankrupt attracted to make from his 2001/2 income a contribution or contributions to his estate and creditors. Nor is there any basis for challenging the quantum of the assessment of that contribution on the material the Trustees had, up to about February 2002. At that time, the Trustees came to a view that there was a liability for a contribution of $41,866.22 from the income derived during the period from 5.7.01 to 4.7.02. These submissions as with the arguments advanced earlier by the bankrupt (with respect to the Trustees’ liability to refund overpayments) are confined to the contention that, by reason of the Trustees failing to make the assessments defined and required by s.139P and s.139W (1), before the payments totalling $130,000 were made, the provisions of s.139ZH were never capable of being triggered. So, as at late-February 2002 when the request was made for the return/release of money, or its payment at the bankrupt’s direction, the Trustees should have accepted they had no basis for retaining the overpayments[4].
In passing it is noted that the second alleged Contribution Calculation schedule estimates AC, Annual Contribution, at about $41,800. On that basis, there should have been recognition of about $88,200 in ‘overpayments’, and it is not clear why this did not happen. It seems that very little further income was received after about February or March 2002, more than three months after the bankrupt stopped work, but there were some further expenses. Hence the Trustees’ final estimate of the taxable income was about $5,000 too much. And the final estimate of ‘AC’ was too high as well, it seems by about $2,000. On the available material contributions for 5.7.01 – 4.7.02 should have been assessed at about $40,000, and the overpayment is about $90,000 and the present application should be amended accordingly. As the facts and calculations do not appear to be in dispute, the precise figures can be the subject of agreement.
[4] See also Ex parte James and Hypec v Mead (supra)
Mr Pritchard makes the following written submissions:
These proceedings now involve an issue concerning an amount of $89,740 held by the first respondent (“the Trustee”), the trustee of the bankrupt estate of the applicant (“the Bankrupt”). The original claim by the Bankrupt was $82,118.11.
On 5 July 2001 (page 13 of Bundle), the Bankrupt was made bankrupt consequent upon a debtor’s petition filed by the Australian Taxation Office on 8 July 2001 in a sum of $1,825,884.01 (page 3 of Bundle). The Bankrupt had already been made bankrupt on 31 May 1994 on the earlier petition of the Australian Taxation Office and outstanding obligations in the first bankruptcy of $162,187 now rank as unsecured creditor in the second and current bankruptcy.
The money in issue represents the only substantial asset held in the administration by the Trustee. As at 4 December 2001 (page 88 of Bundle), the list of creditors known were as follows:
(a) Australian Taxation Office - $2 million;
(b) Citibank Visa - $10,000;
(c) Jack Shand Chambers - $6,000;
(d) NAB – Bankcard - $1,000
(e) NAB – MasterCard - $8,000;
(f) Westpac – Visa - $10,000; and
(g) Trustee of The Bankrupt’s first bankruptcy – 1994 - $162,187
Total: $2,197,187.
The submission of the Bankrupt that, in the second bankruptcy, the only creditor is the Australian Taxation Office (T19.6) is erroneous.
The following payments were made to the Trustee from the trust account of the Bankrupt’s accountant (“Mr Thyer”) on the following dates:
(a) 6 September 2001 - $70,000 (page 58 of Bundle);
(b) 5 October 2001 - $40,000 (page 63 of Bundle); and
(c) 15 February 2002 -$20,000(page 97 of Bundle).
Total: $130,000
Between August 2001 and March 2002, the Trustee made income contribution assessments in relation to the Bankrupt totalling some $47,810.89 (page 103 of Bundle). Those assessments were met from the funds provided to the Trustee from the account of Mr Thyer. Some comment was made at the hearing to the effect that they were not formal assessments (T13.4-.5). However, that is just not an issue in circumstances where there is no dispute that the assessments were otherwise correct or a claim for repayment of that money. The money in dispute is the difference between the payments made by Mr Thyer and the income contribution assessments rendered and paid to date.
The Bankrupt moves on an application filed 28 August 2003 and has:
(a) read affidavit of Anthony Philip Quinlivan sworn 27 August 2003,
(b) read affidavit of Roderick George Thyer sworn 15 October 2003; and
(c) tendered as exhibit A1, a 155 page bundle of documents (the “Bundle”).
The Trustee moves on amended response filed in court on 9 December 2003 and read the affidavit of Jason Lloyd Porter sworn 12 September 2003.
It is the position of the Trustee, as articulated in correspondence over a considerable period, that the payments made by Mr Thyer on behalf of the Bankrupt were voluntary payments or contributions or, at the very least, contributions in advance in respect of income contribution assessments. As trustee, the Trustee has an obligation to gather and preserve the assets of the administration. While it is obviously ultimately a matter for the Court, it is for these reasons that the Trustee opposes the orders sought and, for the avoidance of any doubt, seeks directions pursuant to section 134(4) of the Bankruptcy Act. That section gives jurisdiction to the Court to give directions to the trustee as to the liability of the estate and the trustee in respect of, for example, land tax: Lloyd v Federal Commissioner of Land Tax (1933) 49 CLR 160.
While section 134(4) is not an appropriate vehicle, of itself, to determine the substantive rights of creditors as against the trustee or creditors amongst themselves: Re Lofthouse (2001) 107 FCR 151 at 154-155 per Gray J, having regard to the application of the Bankrupt and the issues raised in that application, the Court would be minded to make the directions sought by the Trustee.
The Bankrupt’s case
The Bankrupt’s case appears to proceed on the basis that the Trustee has some obligation or liability to repay the money in issue. However, the Bankrupt has failed to articulate or establish on the evidence any proper legal or equitable basis for any obligation on the Trustee to repay the money.
The outline of the appellant’s submissions dated 18 December 2003 (the “Applicant’s submissions”) do not, with respect, take the matter any further. The Applicant’s submissions only really assert that “there is and has been no basis for [the Trustee] to retain the excess” (para 14 of Applicant’s submissions) and, furthermore, make some vague generalised and unarticulated plea founded on the decision of Ex Parte James; In Re Condon (1874) LR 9 Ch App 609. The reference to a requirement on the Trustee to make any payment “as a matter of obligation and duty” is hardly helpful and no more than an appeal to idiosyncratic notions of fairness and justice. The analysis of sections 139P, 139W and 139ZH are not particularly controversial. However, none of that analysis establishes any legal or equitable basis for an obligation on the Trustee to repay the money in the circumstances which have occurred.
In turning to consider the issues in these proceedings, the Court would be mindful of the general statement made by Mr Justice Deane in Muschinski v Dodds (1984) 160 CLR 583 at 615 in respect of the analogous area of law concerning constructive trusts:
The fact that the constructive trust remains predominantly remedial does not, however, mean that it represents a medium for the indulgence of idiosyncratic notions of fairness and justice. As an equitable remedy, it is only available when warranted by established equitable principles and by the legitimate process of legal reasoning, by analogy, induction and deduction, from the starting point of a proper understanding of the conceptual foundation of such principles.
At page 616, His Honour went on to say:
The mere fact that it would be unjust or unfair in a situation of discord for the owner of a legal estate to assert his ownership against another provides, of itself, no mandate for a judicial declaration that the ownership in whole or part lies, in equity, in that other: Hepworth v Hepworth (1963) 110 CLR 309 at 317-18. Such equitable relief by way of constructive trust will only properly be available if applicable principles of the law of equity required that the person in whom the ownership of property is vested should hold it to the use or for the benefit of another.
As to James’ case, the Bankrupt does not even attempt to articulate how it is said that the money in dispute held by the Trustee is “money which in equity belongs to someone else [that is, the Bankrupt]” (page 614.5 of James’ case) or how any “obligation” and/or “duty”, of the kind now asserted, arises.
The Trustee’s Case
It is the Trustee’s case, in the interests of the unsecured creditors of the bankrupt estate of the Bankrupt, that the payments were either:
(a) voluntary payments made by a bankrupt with a view to reducing the amount of creditors in his estate and which could be made by third parties or perhaps even the bankrupt from other sources of funds, that is, post bankruptcy sourced funds (T56.7); and
(b) payments made in advance of and on account of compulsory income assessments and which are still held by the Trustee on that basis. As the Court itself has noted, the Bankruptcy Act provides that compulsory contributions may be required even after a bankruptcy (T86.8).
Submissions
The Trustee agrees with the bankrupt that all the Court is required to consider are inferences from objective communications, the terms of the communications and not what subjective assessments any party might have held or views people otherwise might have held but not expressed at the time or expressed at the time but not part of the communication between the parties (T8.5). See generally the statement by Mason J in Codelfa Construction Pty Limited v State Rail Authorityof New South Wales (1982) 149 CLR 337 at 352.8. For the avoidance of doubt, this test is to be applied as at the date of each payment.
The starting point is, of course, that the bankrupt acknowledged that all the payments to the trustee were voluntary (T45.5); were not forced upon him in any sense whatsoever (T46.6); and were made with the Bankrupt’s knowledge, consent and authority (T58.7). The Bankrupt also acknowledged that the payments plainly were not moneys that were referrable to statutory contributions (T45.5).
The Bankrupt acknowledged that he intended this money was made available generally to his trustee in bankruptcy to deal with his liabilities to creditors including the Australian Taxation Office and including on going tax liabilities (T47.5).
The most important background fact going to the objective intention of the parties was, of course, that by letter dated 23 July 2001 (page 36 of Bundle), the Bankrupt was required, on or before 23 October 2001 (that is, within 3 months of the letter dated 23 July 2001), to show cause why his practising certificate should not be cancelled. The parties knew that the Bankrupt’s practising certificate was being considered by the Bar Association (T12.5). At this stage, the trustee was supporting the Bankrupt’s wish to be allowed to remain at the Bar and to continue to generate income (T13.1).
The Bankrupt was anxious, to the extent that he could, to ensure that he satisfied the requirement of the Bar Association that he show that he was a fit and proper person to continue to hold a practising certificate (T38.8). The Bankrupt regarded that it was most important that the Bankrupt be continued to practice (T33.9).
The Bankrupt did not dispute that he was telling the Bar Association that all surplus moneys were being directed to the payment of accumulated tax liabilities but qualified it by saying that the thing that was not expressed in the letter to the Bar Association was the question of what was going to happen in relation to on going tax liabilities from the income after the second bankruptcy (T41.3-4). The Bankrupt acknowledged that the purpose of telling the Bar Association these things, like surplus funds being directed to accumulated tax liabilities, was to bolster his representations to the Bar Association (T742.2). The Bankrupt acknowledged that if he was making every single last cent that he possibly could that this would not be improved any further than that (T42.2).
At the time the bankrupt made the payments to the Trustee, the Bankrupt had an estimated gross income of between $500,000 and $600,000 per annum (T42.4). Provided his practising certificate was not cancelled, he had a belief that he would be able to meet all tax liabilities for the year 2001-2002 when they fell due (T49.8). It was the Bankrupt’s belief that his obligation to pay income tax for the 2001-2002 year would not fall due until some time shortly after the year ended on 30 June 2003 (T50.1, 50.8).
In summary (and while the Trustee also rely on the facts, matters and circumstances set out below more particularly referrable to the issue of the payments being on account of compulsory income assessments when made and not withstanding the current protestations by the Bankrupt), the Court would be satisfied, on an objective basis, that the payments made by the Bankrupt to the Trustee were voluntary payments for the benefit of all unsecured creditors of the second bankruptcy (para 15(a) above).
Obviously, in usual circumstances, there would be no real incentive for a bankrupt to make or cause to be made payments to a trustee for the benefit of unsecured creditors, absent some scheme of arrangement or the like. However, this was an unusual case. As set out above, the Bankrupt was in receipt of a very substantial income ($500,000 to $600,000 a year) and the only effective way he was going to maintain that income was if the Bar Association did not cancel his practising certificate. The Bankrupt’s application was supported by the Trustee. The higher the level of payments (“Trustee Contributions”: page 79.9 of Bundle) by the Bankrupt to the Trustee, the greater the chance of the Bar Association not cancelling the Bankrupt’s practising certificate. If the practising certificate was not cancelled, the Bankrupt would have ample time before the end of the financial year ending 30 June 2002 to earn enough income to pay tax on the payments made during this period to the trustee.
Obviously, circumstances changed after the cancellation of the practising certificate of the Bankrupt. However, that does not alter the objective circumstances surrounding the payments actually made to the Trustee.
As to the alternate position that the payments were made on account of compulsory income contributions at some stage and continue to be held by the Trustee on that basis, the Court would have regard to the following facts, matters and circumstances:
(a) it is not even now disputed by the Bankrupt that the money was sent to the Trustee by Mr Thyer in expectation of an assessment of income contribution at some stage (T11.12). The Bankrupt does not want to and has never wanted the Trustee to be deprived of what his appropriate compulsory contributions are under the Act (T19.4);
(b) the Bankrupt read the statement contained in the letter dated 6 July 2001 that every bankrupt in respect of income has an obligation to make contributions for the benefit of his or her creditors (T31.5);
(c) the Bankrupt understood that the creditors of his bankrupt estate were the creditors in relation to whom he had been made bankrupt only a few days earlier (T31.7). The Bankrupt knew the Trustee was asserting that the Bankrupt had an obligation to make contributions for the benefit of creditors generally (T32.2);
(d) at the time the Bankrupt entered into the arrangement with Mr Thyer, neither the bankrupt nor Mr Thyer knew whether and how long the Bankrupt would be able to continue working (T61.5);
(e) the Bankrupt did have a belief that the money being provided to the Trustee was in respect of, in whole or part, future compulsory income assessments. Further, the Bankrupt expected, as long as he kept working and making an income, to continue to accrue a liability for compulsory contributions and therefore the money he sent he expected to be used in that regard (T68.3);
(f) Mr Thyer’s understanding (to the extent that it may be relevant) was that the moneys were being forwarded to the trustee in payment of future assessed compulsory tax assessments (T77.8);
(g) it was never part of Mr Thyer’s functions to meet the bankrupt’s accumulated tax reliabilities prior to his second bankruptcy from the funds provided to him by the Bankrupt (T87.3);
(h) there is no evidence or allegation that the money paid by Mr Thyer was paid on some kind of conditional or refundable basis as now alleged by the Bankrupt;
(i) the Bankrupt was made bankrupt on 5 July 2001 (page 13 of Bundle);
(j) on 19 July 2001 (page 33 of Bundle), Mr Thyer’s office informed the Trustee that they had been maintaining the Bankrupt’s practice income and expenses through our firm’s trust account since 26 March 2001. As it was not part of Mr Thyer’s instructions (T87.7) to meet the Bankrupt’s tax liabilities out of the funds he held during the first bankruptcy, why should the Trustee objectively assume that, the moneys paid by Mr Thyer’s office to the Trustee would be required to meet tax liabilities incurred during the period of the second bankruptcy?
(k)by letter dated 26 July 2001 (pate 41 of Bundle), Mr Thyer was informed of the requirement that monthly contributions be remitted to the Trustee in accordance with the Trustee’s assessment under the provisions of section 139ZL of the Bankruptcy Act;
(l)on 8 August 2001 (page 47 of Bundle), Mr Thyer wrote to the Bar Association on behalf of the Bankrupt (being a letter approved and settled by the Bankrupt: Exhibit 1) in the following terms:
In March 2001, Mr Quinlivan directed that his practice’s financial affairs be administered by our office and that all surplus funds be directed to his accumulated tax liabilities. He agreed to receive a living allowance of $500 per week so that all surplus contribution could be paid to the Commissioner of Taxation. These arrangements were undertaken after notification to and consent from Mr Quinlivan’s trustees, ITSA, and later Messrs Prentice and Robinson.
(m)on 30 August 2001 (page 56 of Bundle), the Trustee wrote to the Bankrupt referring to the trust account of Mr Thyer and stating:
Any funds deposited into that account after that date will form part of your income for income contribution assessment purposes…it is our intention to conduct your income contribution assessments on a monthly basis in arrears. In this regard, we will be seeking advice directly from your accountant as to the receipts into and payments from the trust account whereby your account will remit your assessed contribution directly to us.
(n)on 5 September 2001 (page 58 of Bundle), Mr Thyer made the first payment of $70,000 “being an advance on the balance of accounts held on behalf of Mr Quinlivan as at 31 August 2001”;
(o)on 28 September 2001 (page 62 of Bundle), the Trustee wrote to the Taxation Office in the following terms:
I confirm that I have received a further $70,000 from the bankrupt’s accountants….from the trust account held by them on the bankrupt’s behalf. These funds will be applied towards the bankrupt’s compulsory income contributions once they have been assessed. We are currently making an assessment based on the details supplied by the bankrupt’s accountant as the bankrupt has not provided any information whatsoever.
(p)on 4 October 2001 (page 63 of Bundle), Mr Thyer forwarded $40,000 to the Trustee “being an advance on the balance of the accounts held on behalf of Mr Quinlivan as at 30 September 2001”;
(q)on 16 October 2001 (page 65 of Bundle), the Trustee wrote to the Bankrupt in the following terms:
Mr Thyer has advanced an amount totalling $110,000 from his trust account held on your behalf. $28,156.61 of this has been applied as your compulsory income contribution to 4 October 2001.”
(r)on 21 October 2001 (page 79 of Bundle), Mr Thyer wrote to the Bar Association in the following terms:
All surpluses held in our trust account have been paid to Mr Quinlivan’s trustee in bankruptcy.
Further, there is a reference to:
Trustee contributions $154,618.70;
Clearly, as part of his application to oppose the cancellation of his practising certificate, the Bankrupt was content to characterise the payments made to the trustee up until 21 October 2001 as “Trustee Contributions”. The Bankrupt appears to have now resigned from that position consequent upon the Bar Council of the New South Wales Bar Association resolving, pursuant to section 38FC of the Legal Profession Act 1987 (Cth) to cancel his practising certificate on 1 November 2001 with effect from midnight on 30 November 2001 (page 84 of Bundle);
(s)on 4 December 2001 (page 88 of Bundle), the Trustee provided a notice to creditors of bankruptcy recording the circumstances surrounding the income contribution by the Bankrupt;
(t)in or about December 2001, there was a disputed conversation between Mr Porter, an employee of the Trustee, and the Bankrupt (see para 7 of the affidavit of the Bankrupt and para 14 of the affidavit of Mr Porter). However, it has been agreed that the Court does not need to make any determination in relation to the terms of this disputed conversation or, in fact, any disputed conversation the subject of evidence before the Court;
(u)on 15 February 2002 (page 97 of Bundle), Mr Thyer forwarded $20,000 to the Trustee “being an advance on the balance of accounts held on behalf of Mr Quinlivan as at 15 February 2002”;
(v)on 28 February 2002 (page 103 of Bundle), the Trustee wrote letters to the Bankrupt and Mr Thyer. In the letter to the Bankrupt, it was stated:
We confirm we have received a total of $130,000 in voluntary contributions. Your monthly assessments will be deducted from the advanced payments. You may continue to make voluntary contributions.
In the letter to Mr Thyer, it was stated:
You will note from the spreadsheet that the amount you have forwarded to this office from your trust account held on behalf of the bankrupt is more than enough to cover the bankrupt’s compulsory income contribution liability to date. We have treated the surplus of $82,189.11 as the bankrupt’s voluntary contribution. At this stage, you are not required to forward any more moneys to this office until further notification.
Please be aware that the bankrupt is liable to lodge income tax and BAS returns and that he remains liable to pay GST or income tax liabilities on post bankruptcy income. You should ensure that you retain sufficient funds in your trust account to pay the liability to the Australian Taxation Office when due. Failure to pay post bankruptcy tax may lead to a third bankruptcy.”; (emphasis added)
(w)on 11 March 2002 (page 107 of Bundle), the Trustee wrote to Mr Thyer setting out his position in relation to the payments made by Mr Thyer (bottom of page 1, bottom of page 2 and top of page 3);
(x)on 10 April 2003 (page 133 of Bundle), the Trustee again wrote to the Bankrupt setting out his position in relation to the payments which had been made; and
(y)on 28 August 2003, these proceedings were commenced.
The Court would be satisfied, on an assessment of the objective circumstances, that the payments made by Mr Thyer on behalf of the Bankrupt to the Trustee of $130,000 were voluntary payments or contributions by the Bankrupt or, at least, voluntary contributions in respect of anticipated income contribution assessments (for the benefit of the creditors of his second bankruptcy). The Bankrupt now disputes this, notwithstanding that the payments were voluntarily and knowingly made. The inconsistency of the Bankrupt’s current position is demonstrated by the fact that no complaint is made about or recovery sought in relation to the $46,687.03 as income contribution assessment actually deducted from the payments made by Mr Thyer to the Trustee. There is no real doubt that the payments made by Mr Thyer were voluntary contributions or, at least, on account of income contribution assessments.
The Bankrupt has not sought to establish the terms of any express trust as between himself and Mr Thyer. The Bankrupt certainly does not allege any express trust in respect of any money held by the Trustee and does not articulate the grounds for any constructive or implied trust.
The application should be dismissed with costs. Alternatively, if the Court is of the view that a different form of direction should be given to the Trustee, the Court would give such a direction pursuant to section 134(4) of the Bankruptcy Act. In all the circumstances, irrespective of the orders made by the Court, the Court would order that the Trustee have his costs of these proceedings, such costs to be paid out of the assets of the estate prior to any payment to the Bankrupt.
Further and in any event, the Bankrupt has not been able to articulate any basis for any alleged breach of duty by the Trustee to the Bankrupt (whether pursuant to the Bankruptcy Act or otherwise) so as to justify any order other than (if the Court was minded to so order – which it would not do so) the payment of the moneys in dispute, that is, there is no basis for the claim for interest and any penalty payable by the Bankrupt to the Australian Taxation Office. There is no evidence in that regard in any event.
It has been agreed that questions of costs are to be severed to another occasion (T27.1). However, for the avoidance of any doubt, irrespective of the outcome of these proceedings, the Trustee is, prima facie, entitled to and will be seeking his costs of these proceedings out of the estate. In circumstances where it now appears likely that, if the full amount claimed by the Bankrupt is to be paid to the Bankrupt, there will be a shortfall in the estate in respect of the Trustee’s costs, application is to be made that the Trustee’s costs should be first deducted from the estate prior to the payment to the Bankrupt of any moneys (should the Court so order, which the Court would not do).
Reasoning
The Court has broad powers under s.178 of the Bankruptcy Act to direct the conduct of the trustee: Re Tyndall; ex parte Official Receiver (1977) 17 ALR 182. Further, the trustee having sought a specific direction from the Court as to what he should do with the surplus money held, it is appropriate in the context of this case that a direction from the Court be made. The following issues are clear. First, income derived by the bankrupt following the commencement of the bankruptcy does not vest in the trustee in bankruptcy. Secondly, the trustee may require the bankrupt to make contributions from his income. Thirdly, the process to be followed by the trustee involves the making of assessments of required income contributions. Fourthly, it is always open to a bankrupt to make a voluntary contribution to his estate for the benefit of his creditors.
Notwithstanding the terms of the application, the applicant asserts that he is not liable to pay any income contributions because no lawful assessments have been made within the meaning of ss.139P, 139K and 139W. A challenge to the purported assessments was based upon the submission that assessments need to be made on an annual basis. That is clear from the definition of “contribution assessment period” in s.139K of the Bankruptcy Act and it is not disputed by the first respondent that s.139W requires annual assessments. In fact, assessments were made on a monthly basis in arrears. This basis of assessment appears to have been inherited by the present trustee from the trustee in the first bankruptcy. It was a procedure apparently accepted by the bankrupt and his accountant, Mr Thyer. In the circumstances, it is arguable that the applicant should be estopped from denying now the validity of the assessments. It is not necessary to reach a view on whether an estoppel arises, however, because the applicant accepts that a valid assessment in respect of the 2001-2002 year could still be made: s.139WA, and accepts that provided that there is an annual assessment, there could also be monthly assessments in arrears. That concession was properly made. In my view, in the terms of s.139W, as it has existed since 1996, periodic assessments in arrears may be made. I see nothing in the decision in the Full Federal Court in Challen v Bendeich [1999] FCA 845 to contradict that view, noting that the Court in that case was dealing with legislation in an earlier form. Nevertheless, their Honours referred to the 1996 amendments and made reference to the explanatory memorandum in paragraph 27 of their reasons as follows:
The Explanatory Memorandum issued in relation to the 1996 amending Act contains the following statement:
"98.2 The income that the bankrupt actually derived during a contribution assessment period can only be ascertained precisely after the period has concluded. In the case of contribution assessment periods at the end of a bankruptcy, the trustee is precluded from making a revised assessment of the bankrupt's income to reflect the exact income of the bankrupt, because an assessment must be made before the bankrupt is discharged. The amendments proposed to section 139W by items 256-259 of the Bill will enable a trustee to make an assessment of the bankrupt's income for a contribution assessment period which has come to an end because of the discharge of the bankrupt after the discharge, so ensuring the bankrupt is liable to make contributions to the estate commensurate with his or her total income during the period concerned. These amendments will apply in relation to bankruptcies where the date of the bankruptcy occurs after the commencement of the Bill."
The purpose of the amendments was to authorise retrospective income assessments by the trustee. There is, in my view, no objection to assessments being made in arrears on a cash basis in respect of a person earning income on a cash accounting basis, such as barristers. Provided that an annual assessment is made at some stage by the trustee, I see no objection to the practice of making monthly assessments.
The first respondent relies upon s.139ZH of the Bankruptcy Act as supporting the retention of the surplus funds paid by the applicant on the basis that that section provides that a trustee does not have to refund surplus income contributions made by a bankrupt. Mr Thyer gave evidence that his instructions were to make periodic payments to the trustee as income contributions in advance. That is, the payments were made in anticipation of income contribution assessments to be made by the trustee. Mr Thyer gave evidence that it was not part of his function to make provision for taxation liabilities from the moneys forwarded to the trustee and that he anticipated that surplus contributions would be refunded at some future time after income assessments had been made. Mr Thyer appears not to have considered the impact of s.139ZH. Mr Quinlivan’s evidence was not consistent. He gave evidence that he discussed taxation liabilities with Mr Thyer and was under the impression that the trustee would pay any income tax due out of the income. However, he acknowledged that Mr Thyer was warned in writing by the trustee that the bankrupt needed to make provision for his taxation liabilities out of his income and he also admitted having discussed with Mr Thyer the need to make provision for GST.
The money was received in good faith pursuant to an arrangement entered into with the trustee of the previous bankrupt estate. The present trustee owed no duty to Mr Quinlivan to attend to his post sequestration taxation affairs for him and told his accountant so. Mr Thyer was wrong in thinking that funds would necessarily be returned to the bankrupt in order for him to meet his ongoing taxation liabilities. The bankrupt was wrong in thinking that his trustee in bankruptcy would pay those liabilities out of surplus income contributions. Both probably hoped that Mr Quinlivan would be able to pay his tax out of future income derived from his barrister’s practice, but the cancellation of his practising certificate put an end to that hope. It appears now that the only funds available which could be applied towards the tax liability for the 2001-2002 year are the funds held by the first respondent.
The evidence is overwhelming that the applicant intended to and did make voluntary income contributions to his bankrupt estate in order to deal with his taxation liabilities and that he never expected to see the money again. The applicant did not bother to wait to receive income assessments from the trustee. The money was paid and accepted as income contributions in advance of assessments. The trustee was entitled to retain the contributions until the process of making assessments of required contributions could be properly completed. In theory, that process could extend beyond the end of the present bankruptcy.
However, at some stage a proper assessment or assessments of required contributions must be made. Section 139W(1) of the Bankruptcy Act requires assessments to be made “as soon as practicable”. A trustee cannot retain surplus income contributions forever. Further, surplus income contributions do not become voluntary contributions by the bankrupt to his estate available for distribution generally to his creditors unless the bankrupt intended to make such a voluntary contribution.
In the present case there is no doubt that the bankrupt’s income as a barrister has dried up following the cancellation of his practising certificate. There is no reason to believe that the bankrupt has been earning significant income from any other source. It ought now to be possible for the trustee to make annual assessments of the bankrupt’s required income contributions for the three years since the commencement of the second bankruptcy. Once that is done, and unless the surplus funds were a voluntary contribution generally to the bankrupt estate, the funds ought to be applied to meet the bankrupt’s outstanding taxation liabilities that arose since the commencement of the present bankruptcy. If that does not occur, then there is a prospect of a third bankruptcy, which would probably be an arid exercise. Of course, the bankruptcy court might refuse to make a third sequestration order if there would be no point in doing so, because there is no more money to be had.
The trustee has purported to elect to treat the surplus contributions as a voluntary contribution by the bankrupt to the administration of his estate. The effect is to treat the surplus income contribution as a voluntary contribution (whether of capital or income) available for the benefit of all creditors. The applicant was advised of this approach by the trustee by letter dated 28 February 2002. The first respondent asserts that this is consistent with the bankrupt’s intention. That is not correct. Mr Quinlivan personally settled a letter Mr Thyer sent on his behalf on 8 August 2001 to the NSW Bar Association in order to demonstrate that Mr Quinlivan was a fit and proper person. The letter advised that in March 2001 Mr Quinlivan directed that his practice’s financial affairs be administered by Mr Thyer and that “all surplus funds be directed to his accumulated tax liabilities”. He agreed to receive a living allowance of $500 per week (so that all surplus contributions could be paid to the Commissioner of Taxation). Mr Quinlivan added the following words:
These arrangements were undertaken after notification to and consent from Mr Quinlivan’s trustees, ITSA and later Messrs Prentice and M J Robinson of Prentice, Parbury and Barilla.
Mr Quinlivan was representing to the Bar Association that he was applying all of his surplus income to the administration of his bankrupt estate on account of his taxation liabilities. Mr Quinlivan represented to the Bar Association that all of his surplus income was being directed to his accumulated taxation liabilities. He probably did not understand at the time that his new taxation liabilities could not be dealt with as part of his bankrupt estate. He was not purporting to make a voluntary contribution to his bankrupt estate generally. The trustee of course must act in the interests of all creditors, not simply the Taxation Commissioner. But the bankrupt was making a voluntary contribution to deal with his taxation liabilities in particular, including liabilities arising after the commencement of the bankruptcy. The money was paid under a mistake, namely that the trustee could deal with the surplus contributions for that limited purpose. Prima facie, the surplus paid is recoverable: David Securities Pty Ltd v Commonwealth Bank (1992) 175 CLR 353. The trustee still holds the money. He has not changed his position in reliance upon the payments such that an obligation to refund the surplus contributions would be unjust. Indeed, the trustee seeks the Court’s directions as to what he should do with the money. It follows, in my view, that the trustee is not entitled to retain the surplus income contribution as a voluntary contribution to the estate generally, but is only entitled to retain the surplus funds to be applied to meet taxation liabilities. That is what should now occur. I will make orders accordingly pursuant to s.134(4) of the Bankruptcy Act.
I will, as agreed, hear the parties later, either orally or in writing, on the question of costs. For the moment, however, the trustee should be able to retain funds sufficient to meet his costs of these proceedings, until the question of costs has been resolved.
I certify that the preceding twenty-four (24) paragraphs are a true copy of the reasons for judgment of Driver FM
Associate:
Date: 17 February 2004
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