Re Manivilovski; Ex parte Official Trustee in Bankruptcy
[1993] FCA 755
•1 Oct 1993
7 s 93 I . C
JUDGMENT No. ...n......,......./ ........ ,... I
C A T C H W O R D S
I
BANKRUPTCY - Administration of property - fair apportionment requued in
relation to the outlay of protected money - whether moneys paid improving the property should be taken into account - calculation to be made by the Official Trustee
L
.
- effect of joint tenancy on calculation. Bankruptcy Act 1966 (Cth) - s.116(3) and (4) Re Iskendenan: Ex Parte Iskendenan Bros Ptv Lim~ted (1989) 21 F.C.R. 363
BLAGOJCO MANIVILOVSKI. EX PARTE: OFFICIAL TRUSTEE IN . I 6 BANKRUPTCY 1 ' No. 1693 of 1990 . .
REGISTRY
| ! | i |
Dames J.
1 October 1993 Sydney RECEIVED
FEDERAL COURT OF
AUSTRAUA PRINCIPAL
IN THE FEDERAL COURT OF AUSTRAT .IA 1 1 BANKRUPTCY DISTRICT ) No 1693 OF 1990 1 OF THE STATE OF NEW SOUTH WALES
1 1
RE: BLAGOJCO MANIVILOVSKI EX PARTE: OFFICIAL TRUSTEE M BANKRUPTCY I L
Trustee of the Estate of the Bankrupt
I
m: Davies J. Date: 1 October 1993 Place: Sydney
MINUTES OF ORDER
The Court answers the questions ra~sed by the Official Trustee in Bankruptcy
as follows:-
Quest~on 1.
As to whether or not the payment of S15,000.00 by the Bankrupt out of funds rece~ved by h ~ m as compensation for personal injury to him, helng the principal ouutand~ng pursuant to a mortgage in favour of the Commonwealth Bank of Australia over property known as 28 Merran Avenue, Charlestown bung the whole of the land comprised m Folio Identifier 22/218545 jointly owned by the Bankrupt and hls wife:-
(a) was a payment of protected money (as d e h e d by Section 116(2D) of the Bankruptcy Act) used in the acquisition of said property; and
Answer: - Yes.
@) whether Sect~on 116(3) of the Bankruptcy Act applios to the said property so
that it IS not divisible property amongst the Bankrupt's cred~tors; alternatively,
Answer: NO.
(c)
whether Section 116(4) of the Bankruptcy Act apphes to the said payment and property.
Answer. Yes. Question 2. In the event that Section 116(4) apphes, as to whether the trustee would be entitled:.
(a) to determine the amount of the proceeds of realizing any property that can be
attr~buted to protected money by:-
(I) add~ng
the cost of improvements to the said property to the costs used in the aquisi t~on
of property made from protecled money.
Answer: Yes (li) calculatlng the percentage of the total cost constituted by the sum amved at m (l),
Answer: No.
(IN) calculatlng as the Bankrupt's entitlement the percentage obtamed in (n) of the net proceeds of the sale of the said property;
Answer: No.
(b) In the case where the Banhrupt is one of two joint tenants whether:-
(1) to take the whole of the cost of ~mprovements and payments into
account of the Bankrupt's share; or
Answer: No.
( i~) to take one-half of the cost of improvements and payments into
account of the Bankrupt's share." .
Answer: Yes =E: Settlement and entry of orders IS dealt with m Order 36 of the Federal
Court Rules.~ ) ) BANKRUPTCY DISTRICT ) No 1693 OF 1990
1OF THE STATE OF NEW SOUTH WALES
) )
RE:
- BLAGOJCO MANIVILOVSKI EX PARTE: OFFICIAL TRUSTEE IN BANKRUPTCY
Trustee of the Estate of the Bankrupt
m: Davies J. Date: 1 October 1993 Place: Sydney
REASONS FOR JUDGMENT
In this matter, the Official Trustee In Bankruptcy seeks directions under s.134(4) of the Bankruntcv Act 1966 (Cth) with respect to the following questions in connection with the administration of the estate of the bankrupt, Blagojco As to whether or not the payment of S15.000.00 by the Bankrupt out of funds received by him as compensation for personal injury to h~m, bang the pnncipal outstand~ng pursuant to a mortgage m favour of the Commonwealth Bank of Australia over property known as 28 Merran Avenue, Charlestown be~ng the whole of the land comprised m Folio Identifier 27018545 jointly owned by the Bankrupt and his wife:-
was a payment of protected money (as defined by Sectlon 116(2D) of the
(a) Bankruptcy Act) used in the aquisltion of said property, and whether Section 116(3) of the Bankruptcy Act applies to the said property so @) that it is not divisible property amongst the Bankrupt's creditors, alternatively, (c) whethcr Section 116(4) of the Banlcruptcy Act applles to the said payment and property. 2 In the event that Sectlon 116(4) applies, as to whether the trustee would be entitled:-
to determine the amount of the proceeds of realizing any property that can be
(a) attributed to protected money by:-
(I) adding the cost of improvements to the said property to the costs used in the nquisitlon of propcrty made from protected money.
(U) calculatlng the percentage of the total cost constituted by the sum
arrived at in (i),(111) calculatlng as the Bankrupt's entitlement the percentage obtained in
(ii) of the net proceeds of the sale of the sald property,
(b) In the casc where the Bankrupt IS one of two jolnt tenants whether:-
(I) to take the whole of the cost of lmproveplents and payments into
account of the Bankrupt's share; or(ii)
to take one-half of the cost of improvements and payments into account of the Bankrupt's share."
I am asked not to make findings of fact as to precise amounts of money, but only to
enunciate the principles to be applied.
Blagojco Manivilovski became a bankrupt on 11 September 1990. On that date, he and his wife Anna were the registered propnetors as joint tenants of the land comprising the~r matnmonial home. That property had been purchased on or about 7 April 1978 for $44,500. The purchase price was paid as to $9,988.30 from a joint account of the bankrupt and his wife, as to $3,211.70 from moneys borrowed from the bankrupt's parents and as to $31,500 by way of loan to the banluupt and his wife by
the Commonwealth Savings Bank of Australia Limited. That loan was secured by
mortgage over the property.
On 14 March 1986, Blagojco Manivilovski obtained an award from the
Workers Compensation Commission of New South Wales for a lump sum by way ofredemption of $65,000. There is in evldence a copy of a letter from the banlaupt to the Official Receiver in April 1986 which stated that $15,000 was paid from this sum as a final payment off the housing loan. That is the sum referred to in question 1. A copy of a letter from the Bank and a copy of the Bank's statement concerning the loan shows that a final payment was made of $11,736.61, and it may be that that is the sum which will be adopted. However, that is a matter for the Official Receiver.
The letter from the bankrupt also stated that, of the redemption sum, $11,000 was spent on the matrimonial home in various ways:-
"l. bu~lding a driveway December 1989 .. S2,000
2 bullt-in wardrobes October 1989 . S4,000
3 bu~ld~ng a carport November 1986 .. $2,000
4. Vertical Bllnds 1986 .. $1,500 5. Verandah Tiles 1990 ..
Mr M.R. Aldridge of counsel, with whom MS J. Keys of counsel appeared for the Official Trustee, foreshadowed that this evldence would be accepted, but that the
expenditure on the improvement of property would be reduced to $9,500, excluding
the expenditure on the vertical blmds.The evidence does not disclose the fact, but I was informed that the properly was sold in the course of the bankruptcy and that the trustee regarded one half of the net proceeds as belonging to the bankrupt's wife. There is no reason to doubt that view.
An issue has ansen under s.116 of the Bankru~tcv Act, which specifies what
property is divisible among creditors. Relevant prov~sions read:-
"(1) Subject to this Act - (a) all property that belonged to, or was vested m, a bankrupt at the commencement of the bankruptcy, or has been aqulred or is acquired by hlm, or has devolved or devolves on hlm, after the commencement of the bankruptcy, and before hls d~scharge; ...
(2) Subsecuon (1) does not extend to the following property:- ... (g) any nght of the bankrupt to recover damages or compensatlon -
(I) for personal injury or wrong done to the bankrupt, the spouse of the
bankrupt or a member of the fanuly of the bankrupt; or(I?) In respect of the death of the spouse of the bankrupt or a member of
the famlly of the bankrupt,
and any damages or compensatlon recovered by the banlaupt (whether before or after
person; he became a bankrupt) in respect of such an Injury or wrong or the death of such a
(n) property to whlch, by vlrtue of subsection (3), this paragraph applies .. (2D) In subsections (3) and (4)
' ~ e m p t loan money: in relatlon to a particular tlme, means so much of the prinapal sum of a loan to the bankrupt, or to the bankrupt and another person or other persons, as was repald, before that tlme, out of exempt money;
'exempt money' means money of any of the followng lunds. (a) proceeds of a land referred to in paragraph (2)(d) or (e),
p) damages or compensation of a kmd referred to m paragraph (2)(g);
(c) amounts of a kind referred to m paragraph (2)(k), (m) or (ma); 'outlay', in relation to property, in relation to a part~cular tune, means all of the following; (a) the money paid for the purchase, or used in the acquisition, of the property; (b) the money paid before that time in respect of the extensions, alterations and Improvements, if any, of the property constructed or made since that purchase or
acquaition;
'protected money: In relatlon to a partlcular time, means:
(a) exempt money, or (b) exempt loan money in relation to that tlme. (3) Where, as at the time when the bankrupt becomes a bankrupt, the whole, or substant~ally
the whole, of the money paid for the purchase, or used in the acqulsit~on, of particular
property e protected money, paragraph (2)(n) applles to the property.
(4) Where, as at the tune when the trustee realises particular property to wh~ch paragraph
(2)(n) does not apply, the outlay in relation to the property is in part protected money and in
part other money, the trustee shall pay to the bankrupt so much of the proceeds of realis~ng
the property as can fauly be attr~buted to that protected money."
It is not in dispute that the $65,000 redemption sum was "exempt money" as defined and that the sum of $15,000 or $11,736.61 or, more strictly, the one-half thereof which went to the benefit of the banhpt ' s interest, was "exempt loan money" as defined. The first issue is whether the exempt loan money was an "outlay" as defined, being money which was "paid for the purchase, or used in the acquisition, of
the property".
It is the contention of Mr Aldridge that moneys used to pay off a mortgage are not paid in the purchase or used in acquisition of the property which the mortgage encumbers. In my opinion, however, the section in its present form, as introduced by the Bankruotcv Amendment Act 1987 (Cth), was intended to achieve and achieved the result that exempt money used to pay off a mortgage or charge on property is to be treated as money outlayed in the acquisition of the property, at least in the -
circumstance that the mortgage or charge secured moneys borrowed to finance the
acquis~tion of the property. The bankrupt and his wife did not, as from April 1978, hold as jolnt tenants the whole of the interest in that property. A registered mortgagee has an interest in the land; see ss.40, 42 and 56 of the Real Properhr Act 1900 (NSW). Even absent registration, a person who has lent money on the security of a property may have an interest in the property recognised by equity pending repayment of the moneys lent.
See v. He~der (1914) 19 C.L.R. 197. And so, when the balance of the moneys
due to the Bank were paid off and the mortgage was discharged, the interest which
the bankrupt and his wife had m the property was enhanced and the interest which the Bank had in the property ceased. This effectively amounted to an acquisition of property. It was the enhanced interest, the joint interest as registered proprietor of
an estate in fee simple unencumbered by the interest of a registered mortgagee which was the property whch, in the bankrupt's estate, became divisible among the creditors. It is this process which is recognised by the speclfic provisions of s.116 as to "exempt loan money" and "outlay". The term "used in the acquisition" is wide enough,
when associated wth the words "paid for the purchase", to encompass moneys used to pay off a capital sum borrowed to enable a property to be acquired and secured by mortgage or charge on that property.
In Re Iskenderian: Ex parte Iskenderian ~ r o s Ptv Limited (1989) 21 F.C.R.
363, Neaves J. discussed some problems arising from the terminology used in the
subsections of s.116, specifically s.116(3). At 372, his Honour said:-
-
'Notwithstanding the dlIliculties to whch the language of the prowsion g~ves nse, 1 am of opinion that s 116(2)(g) and (U) and subs (3) suffinently reflect a legislative intention that a bankrupt, notwithstandng his bankruptcy, a to continue to have the benefit not only of any damages or compensatlon of the kind referred to in s 116(2)(g) recovered by hlm, but also of any property which can, a . at the tlme when he becomes a bankrupt, properly be described as representing such damages or compensation. Those prowsions are, therefore, to be construed accordmgly."
His Honour's remarks apply equally to the interpretation of s.116(4). That interpretation also accords with the explanatory memorandum to the Bankruptcy
Amendment Act 1987 by which the present form of the subsections was introduced.
Mr Aldridge submitted that the payment off of the loan could not be characterised as constitut~ng a payment for the purchase or acquisition of the property the subject of the loan. He submitted that the property was purchased in 1978 and that the purchase price of $44,500 was then paid. But to take that view would not only give no effect to the specific reference to "exempt loan moneys" but would also be contrary to the intent of the 1987 amendments, which was to ensure that, when
protected moneys are used to benefit a property, even by way of the payment off of a
loan on the property, they may be traced and that any part of the ultimate proceeds
of sale as can fairly be attributed to the protected moneys should be paid to the
bankrupt. In Re Iskenderian at 372, Neaves J. rejected the approach that the
immediate source of the money used m the purchase or acqu~sition of the property should-be fastened on to the exclusion of all other considerations. His Honour said:-
"In my opinion, s116(3) requires that the totality of the circumstances be considered and the
question asked whether the property, in truth, represents such damages or compensatlon". - I entirely agree with his Honour's approach.
In the present case, as the whole or substantially the whole of the money
paid for the purchase or used in the acquisition of property was not protected money,
s.116(3) could not apply and the matter falls for consideration under s.116(4).
Therefore Question 1 should be answered (a) Yes, (b) No, (c) Yes.
The next lssue is whether the moneys totalling $11,000 paid in improving the
property should be taken into account. I agree wth Mr Aldridge that at least the
$9,500 identified by him could be regarded as money which was paid "in respect of
the extensions, alterations and improvements ... of the property".
A more d~fficult question is whether the Official Trustee is entitled to make
h s calculation by adopting a simple percentage which compares the traceable
protected money to the total costs of the acquisition of the property and. its
improvement. Mr Aldrldge subm~tted that the costs of acquisition would be the
$54,000, and that the traceable protected money would be the $15,000 or $11,736.61 $44,500 paid in April 1978 and the cost of the improvements $9,500, a total of paid off the loan and the $9,500 paid for the improvements. He submitted that a
percentage should be calculated from these figures.In my opinion, that is too simplistic an approach. Section 116(4) requires the
trustee to pay to the bankrupt so much of the proceeds of realising the property "ascan fairly be attributed to that protected money". The whole of the circumstances of the case must be taken into account. To ascertain what sum can fairly be attributed to the outlay of the protected money requires that a fair assessment be made of the part which the payment of the protected money played in the achievement of the final
receipt. In this task, it may be necessary, in a particular case, to apportion or dlssect expenditure or to make allowances or adjustments so as to achieve a sum which fairly reflects the significance of the protected expenditure in relation to the overall expenditure in the purchase or acquisition or improvement of the property.
Thus, the $15,000 or $11,736.61 paid in 1986 could not fairly be compared without adjustment to the moneys pald in April 1978. During the Intervening 8 years there were changes in the value of money and m the value of the property. If the $44,500 paid in April 1978 was taken as an element of the cost, its value would have
to be increased, as by an allowance of interest, to reflect the earlier time of its payment and inflation thereafter. As the $15,000 or $11,736.61 constituted the final payment of the mortgage, it may be preferable to compare it not with the capital sum
paid in April 1978 but with the totality of the sums actually paid by the bankrupt and
hls wife includ~ng the regular sums paid off the mortgage. At least those sums lncluded an element of interest. However the calculation be made, it must be
dlrected to obtaining a sum which falrly reflects the contribution which the protected
moneys made to the net sale price of the property.
The calculation is a matter in the first instance for the Official Trustee. I give
no direction as to that. However, I am of the mew that Questions 2(a)(ii) and (lii)
should be answered "No" for the reason that the adoption of a slmple percentage as suggested by Mr Aldridge as a means of making the calculation will not in the present case be sufficient to achleve a sum which "can fairly be attributed to (the) protected money".
Mr Aldndge alternatively submitted that, when protected money is used in the repayment of a loan, the bankrupt should get back only that sum of money and not a proportion of the value of the property or that money plus interest. Mr Aldridge
submitted that that was so because, by paying off the mortgage early, the bankrupt gained the benefit of not having to pay future interest on the principal and the
interest that he saved could be equated to the Interest that he would have received
had the funds been invested. However, the sub-sections treat protected money that is
used to pay off a mortgage as money that was paid for the purchase or acquisition of the property and s.116(4) requires the Trustee to pay to the bankrupt such of the proceeds of realising the property as can fairly be attributed to that protected money.
Accordingly, the protected money, whether it is used directly m the purchase of the
property or in the repayment of a loan secured on the property or in the making of -
other moneys so expended and the net proceeds of realisation must be fairly extensions, alterations and Improvements to the property must be compared wth any apportioned as between them. That is the task and it must be undertaken, however complex it may be, to arrive at a sum which represents a fair attribution of the protected money to the net proceeds of realisation.
The h a 1 questions anse with respect to the joint tenancy. As Mr Aldndge
submitted, the proper course must be to treat the protected money as having been
paid for the benefit of both the bankrupt and his wife and therefore to take into
account only the bankrupt's share thereof, that is to say one half of the expenditure.
Question 2 will therefore be answered as follows:-
(a)(i) Yes
(4 No (iii) No
(b)(i) No 61) Yes
I certify that this and the 10 preceding pages
are a true copy of the reasons for judgmentherein of the Honourable Mr Justlce Davies.
I
Date: 1 October 1993
Counsel for the applicant: Mr. M.R. Aldridge & MS J. Keys
Solicitors for the applicant: Maurice Freidman & Company Date of hearing: 6 April 1993 &
28 July 1993Date of judgment: 1 October 1993
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