Re Kastropil, P.J. v Ex parte Official Trustee in Bankruptcy

[1989] FCA 380

Re: PETER JOHN KASTROPIL
Ex parte: THE OFFICIAL TRUSTEE IN BANKRUPTCY the Trustee of Peter John
Kastropil, a bankrupt
And: CORAL CECILIA KASTROPIL
No. 751 of 1986
FED No. 380
Bankruptcy
(1989) 33 FCR 135

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
French J.(1)

CATCHWORDS

Bankruptcy - voluntary settlement - meaning of - legislative history - judicial interpretations - permanency test - assumption of liability by bankrupt jointly with wife - payments by bankrupt to account in wife's name.

Statutory Interpretation - Bankruptcy Act 1966

- s/120(1) - "settlement" - legislative history

Words and Phrases - "settlement"

34 and 35 Hen VIII c 4 (1542)

13 Eliz c 5 (1570)

13 Eliz c 7 (1570)

1 Jac c 15 (1604)

6 Geo IV c 16 (1825)

Blackstone Comm v II p 472

Bankruptcy Act 1966 s.55, s.120

The Bankruptcy Law Consolidation Act, 1849

The Bankruptcy Act, 1869

Bankruptcy Act, 1914 (UK)

Bankruptcy Act 1924

Insolvency Act 1870 (Vic) s.72

Bankruptcy Act 1898 (NSW)

Ex parte Shorland (1802) 7 Ves Jun 89

Ex parte Skerratt; Re Hewitt (1816) Rose 3894

Kensington v Chantler (1813) 2 M & S 36

Re Player (1885) 15 QBD 682

Re Vansittart (1893) 1 QB 181

Re Tankard (1899) 2 QB 57

Re Plummer (1900) 2 QB 790

Jack v SMail (1905) 2 CLR 684

Re Hermann (1916) 16 SR (NSW) 264

Williams v Lloyd (1934) 50 CLR 341

Re Pahoff; Ex parte Ogilvie (1961) 20 ABC 17

Re Hyams (1970) 19 FLR 232

Re Ward (1984) 55 ALR 395

Re Barton (1983) 52 ALR 95

Barton v Official Receiver (1986) 161 CLR 75

HEARING

PERTH

#DATE 14:7:1989

Counsel for the Applicant: Mr R. Harrison

Solicitors for the Applicant: Warren Harrison

ORDER

The respondent pay to the applicant the sum of $10,000.

Each party bear its own costs.

Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

JUDGE1

On 28 November 1986 Peter John Kastropil became a bankrupt upon presentation of his petition under s.55 of the Bankrupcty Act 1966. In these proceedings the Official Trustee seeks declarations and consequential orders relating to various payments said to constitute settlements by Mr Kastropil in favour of his wife, who is the respondent.

Factual Background

1. The evidence before the Court was limited comprising an affidavit sworn by Francis Daniel O'Driscoll, Official Receiver for the Bankruptcy District of the State of Western Australia and another by the respondent, verifying facts set out in a Notice of Intention to Oppose the Application. Neither deponent was cross examined, nor do their affidavits conflict on any material point. The facts as I find them, are therefore based upon an acceptance of that uncontradicted material.

2. By way of background it appears that Mr and Mrs Kastropil were married in 1965. Mrs Kastropil who had been in employment as an unregistered nurse, ceased work and in July 1966 gave birth to the first of four children of the marriage. Her husband, who was a drilling rig worker, spent long periods overseas. All four children live at home. The eldest who has a child of her own, suffers from an illness which was not specified in evidence and Mrs Kastropil looks after her and her child. In October 1985 Mr Kastropil lost his job and until 16 December 1985 neither received any income. In December however, he received $65,928.97 from State Mutual Life Assurance Co. of America being moneys due under a group annuity contract. His disposition of that sum will be referred to below. Mr Kastropil's bankruptcy appears largely to relate to an amount of $48,070 owing to the Deputy Commissioner of Taxation. One other creditor, Custom Credit Corporation, is shown on the statement of affairs for an amount of $1,419.

3. The first transaction with which the Official Trustee is concerned, arises out of the purchase by Mrs Kastropil of a vacant block at Lot 45 Marshall Road, Beechboro on 19 January 1984. The purchase price was $72,000. The land was registered in Mrs Kastropil's name alone. There is no evidence as to the source of the funds for that purchase and no suggestion made that the purchase reflected any settlement in Mrs Kastropil's favour. However on 18 March 1985 and at a time when the block was unencumbered, Mr and Mrs Kastropil applied to the Rural and Industries Bank of Western Australia for a loan of $63,000 to build a house there. The loan was approved on security of a mortgage over the land and according to Mr O'Driscoll's affidavit was "credited to the joint account of the bankrupt and the respondent". Progress payments were made from the joint account to the builders, Webb & Brown Neaves Pty Ltd. The relevant building contract was made between Mrs Kastropil and the builder. Payment could only be made subject to the bank's supervision of the progress of the construction. In the case of each of the three progress payments that were made, there appears to have been an inspection and certification on behalf of the bank prior to the authorisation of the payment. The house and land were sold in March 1987. $50,634.42 of the proceeds of sale was applied to discharge the mortgage over the land. $78,000 was used by Mrs Kastropil to buy her present residence at Lot 669 Horley Street, Bayswater. $10,000 was used to discharge debts of the bankrupt and $5,000 was seized by the Trustee.

4. It is not in dispute that the advance for the house in Marshall Road was only available to pay for the cost of the building and was not to be used for any other purpose. Payments totalling $63,284 were made and debited to the joint account. The Official Trustee contends that coming as they did from a joint account, the payments constitute as to half, a settlement by the bankrupt upon his wife. In this respect he seeks recovery of $31,500.

5. The other payments said to comprise settlements arise out of the bankrupt's disposition of the $65,928.97 annuity and in particular the following payments, all of which were made on 19 December 1985:
   

1. $2,871.84 being one half of the sum of $5,743.68 deposited in a joint savings account with the Rural and Industries Bank of Western Australia in the names of Mr and Mrs Kastropil being account 42.29100.1

2. $4,599.65 being half of the sum of $9,199.30 used to pay out a joint personal loan account 42.711229.4 in the names of the Kastropils in the Rural and Industries Bank of Western Australia.

3. $10,000 being one half of the sum of $20,000 credited to the joint housing loan account 42.700109.9 in the joint names of the Kastropils.

4. $15,000 being an amount deposited in the respondent's cheque account with the Rural and Industries Bank of Western Australia, account 42.496634.3.

5. $16,000 being an amount deposited in the respondent's savings account with the Rural and Industries Bank of Western Australia, being account 42.305529.8.

1. Mrs Kastropil says that at the date of the various deposits referred to in the Trustee's affidavit, her only income was from unemployment benefits and as this was insufficient to meet the family's commitments "the deposits by the bankrupt" mentioned in paragraphs 1, 4 and 5 above were used to supplement income. Moneys from these accounts were also used to pay for Mr Kastropil's own activities, including the owning and racing of a racehorse and his extensive and expensive gambling. Other than family support, food and household expenses, Mrs Kastropil says she received no benefit for herself from the alleged settlements.

2. As to payments of $9,199.30 and $20,000.00 mentioned in paragraphs 2 and 3 above, these related, she says, to the construction of the house at Lot 45 Marshall Road, Beechboro. The loan for the house was in their joint names and it was proper that Mr Kastropil as the only recipient of income and the "breadwinner" of the household should make some contribution to the repayment of that loan.

3. The sums said to comprise settlements including the sum of $31,500 in respect of the housing loan, amount to $79.971.49. The Official Trustee however only seeks to recover the sum of $57,595.95, being that necessary to pay creditors of the bankrupt in full together with the costs of administration of the estate.

4. Before turning to the question whether all or any of these sums are recoverable, it is necessary to refer to the relevant legislation.
   Statutory Framework

5. Provision for the avoidance of settlements of property is made by s.120 of the Bankruptcy Act 1966:
   

"120.(1) A settlement of property, whether made before or after the commencement of this Act, not being -

(a) a settlement made before and in consideration of marriage, or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration; or

(b) a settlement made on or for the spouse or children of the settlor of property that has accrued to the settlor after marriage in right of the spouse of the settlor,

is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in bankruptcy.

(2) A settlement of property, whether made before or after the commencement of this Act, not being a settlement referred to in paragraph (1)(a) or (b) or a settlement that is void as against the trustee by reason of the operation of that sub-section, is , if the settlor becomes a bankrupt and the settlement came into operation after, or within 5 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy, unless the parties claiming under the settlement prove -

(a) that the settlor was, at the time of making the settlement, able to pay all his debts without the aid of the property comprised in the settlement; and

(b) that the settlor's interest in the property passed to the trustee of the settlement or to the donee under the settlement on its execution. .

.

.

(7) Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has, in good faith and for valuable consideration, purchased or acquired from the persons entitled to the benefit of the settlement, covenant or contract or from the trustee of the settlement the money or property the subject of the settlement, covenant or contract or an interest in that money or property.

(8) In this section, "settlement of property" includes any disposition of property."

1. Recovery of property the subject of a void settlement is effected by the exercise of the jurisdiction and powers conferred on the Court by s.30 of the Act which provides in the relevant parts:
   

"30(1) The Court -

(a) has full power to decide all questions, whether of law or of fact, in any case of bankruptcy or any matter under Part X or Part XI coming within the cognizance of the Court; and

(b) may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter."

1. This case concerns the interpretation of the word "settlement" and its operation in s.120. It is helpful in that context to briefly review its legal history and statutory antecedents.
   The Meaning of "Settlement"

2. The first English bankruptcy statute - "An act against such persons as do make bankrupts" was enacted in 1542 in the reign of Henry VIII - 34 and 35 Hen. VIII c.4 - see Blackstone Comm v.II p 472 note "e". It provided in s.4 for recovery back of "debts, goods, chattels, wares or merchandises" which the debtor might "suffer or cause any other person or persons, to recover against him". In 1570, 13 Eliz c.5 was enacted and declared all conveyances and dispositions of property, real or personal, made with the intention of defrauding creditors to be null and void against them. 13 Eliz c.7, "An act touching orders for bankrupts", was enacted in the same year and made provision for the appointment of Commissioners to administer the bankrupt's estate. 1 Jac c.15, passed in 1604 as "An act for the better relief of the creditors of such as shall become bankrupts" provided for the avoidance as against the Bankruptcy Commissioners of transactions whereby the bankrupt "shall convey, or procure or cause to be conveyed" property to his children or other person or persons. A similar collocation appeared in s.73 of 6 Geo IV c.16 (1825) directed to the case where a bankrupt, being at the time insolvent, "shall...have conveyed, assigned or transferred to any of his Children or any other Person," any of various classes of real or personal property there set out. In such case the Commissioners were given power to "sell and dispose of the same...and every such Sale shall be valid against the Bankrupt, and such Children and Persons as aforesaid, and against all Persons claiming under him". And in s.126 of The Bankruptcy Law Consolidation Act, 1849 (12 and 13 Vict c.106), the language of s.73 in the Act of 1825 was followed save that a provision empowering the Court to order the sale of the subject property was substituted for the power previously reposed in the Commissioners.

3. The term "settlement" made its first appearance in English bankruptcy legislation when The Bankruptcy Act, 1869 was enacted. Section 91 provided:
   

"Any settlement of property made by a trader not being a settlement...made in favour of a purchaser or incumbrancer in good faith and for valuable consideration ... shall, if the settlor becomes bankrupt within two years after the date of such settlement, be void as against the trustee of the bankrupt appointed under this Act,..." .

.

.

""Settlement" shall for the purposes of this section include any conveyance or transfer of property."

1. Similar verbiage appeared in the relevant parts of s.47(1) of the Bankruptcy Act, 1883, save for the deletion of the limiting reference to traders. The inclusive definition of "settlement" was retained. Section 47(1) was reproduced as s.42(1) of the Bankruptcy Act, 1914 (UK). It appeared in the Bankruptcy Act 1924 (Cwlth) and is substantially reflected in s.120(1) of the Bankruptcy Act 1966. The definition of "settlement" however is extended from "any conveyance or transfer of property" to "any disposition".

2. Judicial construction of the earlier model reflected in 1 Jac 1 c.15 s.5 held that it did not cover gifts of money - Ex parte Shorland (1802) 7 Ves Jun 89; Ex parte Skerratt; Re Hewitt (1816) Rose 384, 385. That exclusion was based on the proposition that "the statute had not said the word money, and seemed to be confined to things which were the subject of conveyance, and capable of being conveyed or procured to be conveyed" - Kensington v Chantler (1813) 2 M & S 36, 38 (Lord Ellenborough CJ). A gift of money from father to son for the purpose of starting a business was not a settlement under s.47 of the Act of 1883 - Re Player (1885) 15 QBD 682. In so holding, Cave J. referred back to the language of s.126 of the 1849 Act:
   

"In that section, again, the word "money" does not occur. The section obviously contemplates the continued existence of the thing conveyed or assigned, and gives the Court power to order it to be sold for the benefit of creditors." (at p 686).

1. That limiting requirement survived the change of the language of the section in 1869 and the introduction of the word "settlement":
   

"The end and purpose of the thing must be a settlement, that is, a disposition of property to be held for the enjoyment of some other person." - Re Player (supra) at p 687

1. In Re Vansittart (1892) 1 QB 181 at 183, Vaughan Williams J. thought the change in the language of the section indicated that the impugned transaction must show an intention by the donor that the property transferred remain the property of the transferee. Thus, a present of diamonds by a man to his wife was a settlement. Wright J. in Re Tankard (1899) 2 QB 57 regarded himself as bound to follow Re Player and Re Vansittart and to treat s.47 of the Bankruptcy Act, 1883 as applicable only to dispositions of property by a person to be held and preserved for the enjoyment of another. That requirement did not involve any restriction on the power of alienation by the settlee. Nor did it prevent a gift of money for a specific purpose from being a settlement. But in Re Player a gift of money by a father to his son to purchase stock-in-trade and provide working capital to commence business as a manufacturer of builders' materials was not a settlement. These principles were approved by the Court of Appeal in Re Plummer (1900) 2 QB 790. Lord Alverston MR distinguished a gift of money to be expended at once, which is not a settlement, from a gift intended to be retained or preserved as the property of the donee which is (p 804). Rigby and Collins LJJ were of the same opinion and Rigby LJ put it this way:
   

"...a gift of money which is not hedged about with conditions that it shall be invested and kept in a certain way cannot be called a "settlement" within the meaning of s.47." (p 808)

1. There was early acceptance of the retention requirement in Australia in Jack v Smail (1905) 2 CLR 684, a case involving housekeeping money paid to a woman by her husband and saved and deposited by her in a savings bank account with his consent. The moneys so saved and invested did not constitute a "settlement" under s.72 of the Insolvency Act 1870 (Vic). Griffith CJ at 701 followed Re Plummer and referred specifically to that passage in the judgment of the Court of Appeal in which reference was made to "the very intelligible principle that a gift of money which is not hedged about with conditions that it should be invested and kept in a certain way cannot be called a "settlement" within the meaning of sec.47". Barton J. also followed the English cases to a like result.

2. Dealing with s.55 of the Bankruptcy Act 1898 (NSW) Street J. in Re Hermann (1916) 16 SR (NSW) 264 at 270 said:
   

"...the section does not extend to every gift of property, but only to such gifts as are intended to be kept and used for an indefinite period."

1. Having found in that case that land paid for by the bankrupt was purchased in his wife's name, Street J. concluded that there was as much a settlement as if the bankrupt had taken a conveyance to himself and transferred the property to her.

2. In Williams v Lloyd (1934) 50 CLR 341 the transfer by a businessman of one thousand pounds to a Savings Bank account in the names of his wife and daughter was held to be a settlement under s.94 of the Bankruptcy Act 1924. Dixon J., with whom Rich, Evatt and McTiernan JJ agreed, referred to Re Player and Re Plummer. The concept of settlement expounded in those decisions did not carry with it any requirement of a restriction on the donee's power of disposal of the thing settled "but merely that the retention of the property in some sense must be contemplated and not its immediate dissipation or consumption" (p 375). In the case before the Court he inferred that the sum of one thousand pounds was put by the bankrupt in the joint names of his wife and daughter as a provision to be retained by them in some form or other and not to be spent at once.

1. In Re Pahoff; Ex parte Ogilvie (1961) 20 ABC 17, Clyne J. construing s.94 of the Bankruptcy Act 1924, said:
   

"The word "settlement" in s.94(1) is not used in a narrow or technical sense, but according to a long line of authority means a disposition of property by the settlor for the benefit of the person on whose behalf the settlement is made and a disposition of such a nature that the retention of the property in some form is contemplated; not its immediate disposal by consumption." (at p 19)

1. And this central proposition was reiterated and accepted by Gibbs J. in Re Hyams (1970) 19 FLR 232 at 252.

2. In Re Ward (1984) 55 ALR 395 however, Wilcox J. found in the new definition of settlement under sub-s.120(8) as "any disposition of property" an opportunity to rethink the connotation of permanency of subject matter which he saw as associated with the use in the earlier definitions of the words "conveyance or transfer". At 401 his Honour said:
   

"It ought to be enough that the relevant transaction is a deliberate disposition of a capital fund. It ought to be immaterial whether the settlor contemplates that the capital fund will be held indefinitely in specie, converted to some other form of capital or spent by the settlee."

1. This wide view was, as his Honour pointed out, not necessary to the determination of the case before him which involved forgiveness of a $180,000 debt owed to the bankrupt by the trustee of his family trust. The trust assets were increased in exactly the same way as if the trustee had been paid the sum of $180,000 to be held upon the trusts of the deed. The transaction met the test of permanency specified by earlier authorities. The permanency test, it should be noted, was regarded as applicable to s.120 settlements by McGregor J. in Re Barton (1983) 52 ALR 95. That was apparently the only reported decision on the meaning of settlement under s.120 before Re Ward. The judgment of the High Court, on appeal from the Full Federal Court in that case, was not delivered until two years after Re Ward. In Barton v Official Receiver (1986) 161 CLR 75, the Court was concerned with the question whether a purported loan by the bankrupt to his uncle was made in favour of a purchaser in good faith and for valuable consideration. That it was a settlement was not disputed in the High Court. And in its judgment the Court observed that the payment clearly was a settlement:
   

"Although made in the form of a loan, no part of the principal was repayable for twenty years and the purpose of the loan was to enable the appellant to buy property in the form of a house and company shares. There being no contemplation of the immediate dissipation or consumption of the money, the established principles governing the making of a settlement were satisfied: see Williams v Lloyd; In Re Williams ((1934) 50 CLR 341, at pp 364, 375); Re Hyams; Official Trustee v Hyams ((1970) 19 FLR 232, at pp 247-253)" (p 78)

1. While the point was not argued before the Court, and Re Ward was not mentioned, the passage cited is a powerful indicator that the permanency test remains entrenched in the concept of settlement until the High Court comes to a different view or the legislature otherwise provides.

2. I should add the observation that the permanency test lays down no clear line between those transactions which are settlements and those which are not. The terms "permanency" or "retention" are used in a relative way and help to mark off the settlement from the gift intended for immediate consumption or dissipation. Judgments of degree may be involved. It may be possible broadly to say that money payments intended for expenditure of an income kind as for example a housekeeping allowance, may be difficult to characterise as a settlement. Payment of school fees or for entertainment or living expenses may fall into the same category. Each case will depend upon its own facts and it is unwise, even in the case of money payments or benefits of a monetary nature, to lay down general principles by reference to particular categories of expenditure.
   Application of the Principles
   - The Kastropil Transactions

3. The first transaction which falls for consideration is the bank loan in the joint names of Mr and Mrs Kastropil for the construction of the Beechboro house on land owned by her alone. The only security was by way of mortgage over the land. There is evidence of one payment having been made by the bankrupt in relation to that loan and that was the sum of $20,000 credited to the joint housing loan account on 19 December 1985 and of which the Official Trustee seeks to recover half as a settlement.
   

4. This payment apart, there is no other evidence of any contribution by the bankrupt to the reduction of the loan liability. The advance was ultimately repaid out of the proceeds of the sale of the house and land in March 1987. It was a case in which husband and wife were jointly and severally liable to the bank but the advance was for the benefit of the wife alone. The bankrupt neither had money nor transferred it pursuant to the loan transaction. In my opinion, his assumption of liability did not constitute a transfer of an asset from his estate to his wife, anymore than if she were the only borrower and he had signed a personal guarantee in favour of the bank. In my opinion, the mere entry by the bankrupt into the joint and several loan transaction and the subsequent advance by the bank for the benefit of the wife, did not constitute a settlement. In this respect the Official Trustee's claim will fail.

5. As to the payment of $5,743.68 deposited to a joint savings account with the bank on 19 December 1985, I am not satisfied on the evidence that the mere fact of the payment stamps it as a settlement as to half. Mrs Kastropil's uncontradicted evidence indicated that she received no benefit from it other than of an income character in relation to family support, food and household expenses and that otherwise it and payments made about that time were applied for Mr Kastropil's own purposes. This comment is equally applicable to the payments of $15,000 and $16,000 respectively made to Mrs Kastropil's cheque and savings accounts on the same day. It is for the Official Trustee to demonstrate that they constitute settlements. On Mrs Kastropil's evidence she received no benefit from them other than of an income character. There was no cross-examination of her to test that evidence and no evidence to contradict hers. I could not conclude therefore, that these payments would satisfy the permanency test of a settlement. There is no evidence to suggest that they were paid for any particular purpose and given the otherwise limited financial circumstances of the family, the probability that they were made to assist with living expenses and other outgoings is high. So far therefore, as the payments for $15,000 and $16,000 are concerned the Trustee's claim will also fail.

6. The sum of $9,199.30 was paid by the bankrupt into a joint personal loan account on 19 December 1985 and discharged liability under that account. The Court has no information of the purpose for which the account existed, other than that on Mrs Kastropil's evidence it related to the construction of the house. It was not the joint loan account on which moneys were advanced for the building of the house. Its precise purpose remains shrouded in mystery as does the nature of the benefit, if any, received by either the bankrupt or his wife from it. Given the paucity of evidence I am unable to come to a conclusion that this payment constituted a settlement in whole or in part. On the face of it it represented the discharge by the bankrupt of a debt for which he was jointly and severally liable.

7. So far as the sum of $20,000 paid into the joint loan account is concerned, this I think does represent a payment made solely for the benefit of Mrs Kastropil and is in substance a contribution to the construction cost of the house at Beechboro. I am of the view that all of this payment could be treated as a settlement on the principles previously outlined. The Trustee, however, has taken a particular view of this payment in which he seeks to recover only half of it. Argument has proceeded on that basis and in my opinion it would be unfair and inappropriate to order the recovery of the whole amount, where only half has been claimed. In the circumstances Mrs Kastropil must pay the Trustee the sum of $10,000.