Re Sharpe; Ex parte Donnelly

Case [1998] FCA 6

FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - administration of property - fees earned by bankrupt before bankruptcy but received during bankruptcy - whether fees are property available for payment of debts or income within Part VI Division 4B of Bankruptcy Act

Bankruptcy Act 1966 (Cth): Part VI Division 4B

Kennedy v Broun (1863) 13 CB (NS) 677; 143 ER 268: cited
Rondel v Worsley [1969] 1 AC 191: cited
Re Neville; Ex parte Pike (1896) 17 NSWR (Bankruptcy and Probate Cases) 24: cited
Giannarelli v Wraith (1988) 165 CLR 543: cited
Re May 4 Jur NS 1169: cited
Morris v Hunt [1819] 1 Chit 544: cited
In Re Roberts [1900] 1 QB 122: cited
Slocock v Official Receiver [1929] 1 Ch 647: cited
Nette v Howarth (1935) 53 CLR 55
Federal Commissioner of Taxation v Official Receiver (1956) 95 CLR 300: cited
Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies (1993) 42 FCR 571
Re Connie Hawkins; Ex parte Ivor Warrell, Spender J, unreported, 20 December 1996

IN THE MATTER OF THE BANKRUPT ESTATE OF JOHN LAWRENCE SHARPE: RE: JOHN LAWRENCE SHARPE; EX PARTE: MAX CHRISTOPHER DONNELLY

NG 7633 of 1997

LOCKHART J
SYDNEY
16 JANUARY 1998

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NG 7633  of   1997

IN THE MATTER OF THE BANKRUPT ESTATE OF JOHN LAWRENCE SHARPE:

  RE:

JOHN LAWRENCE SHARPE
       BANKRUPT

                 EX PARTE:

MAX CHRISTOPHER DONNELLY
       TRUSTEE

DATE OF ORDER:

16 JANUARY 1998

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

  1. The questions reserved for the consideration of the Court be answered as follows:

Question 1
Whether fees due to the Bankrupt and outstanding at the date of his bankruptcy and the subject of previous memoranda of fees are property available for payment of the Bankrupt’s debts within Part VI Division 3 of the Bankruptcy Act 1966 (Cth), or whether those fees constitute income within Part VI Division 4B of the Bankruptcy Act.

Answer
Fees which are the subject of memoranda of fees issued by the Bankrupt and outstanding at the date of his bankruptcy are not property available for payment of his debts within Part VI Division 3 of the Bankruptcy Act. They constitute income within Part VI Division 4B of the Bankruptcy Act.

Question 2
If the fees are property of the Bankrupt available for payment of his debts and are recovered by the Trustee, are they income in the hands of the Trustee under the Income Tax Assessment Act 1936 (“the Assessment Act”)?

Answer
The fees are not property available for payment of the Bankrupt’s debts.  It is, therefore, unnecessary to answer this question.

Question 3
How does the Trustee treat fees rendered by the Bankrupt before the date of bankruptcy, but before or after 1 July 1994 (the date of amendment to the Legal Profession Act)?

Answer
The Trustee should treat memoranda of fees rendered by the Bankrupt before the date of his bankruptcy, whether rendered…

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Details
AGLC
Re Sharpe; Ex parte Donnelly [1998] FCA 6
Case
[1998] FCA 6
Decision Date

CaseChat Overview and Summary

In the matter of Re Sharpe; Ex parte Donnelly, the Federal Court of Australia addressed a dispute concerning the classification of fees due to a bankrupt individual. The case involved the determination of whether these fees, which were outstanding at the time of bankruptcy, constituted property available for the payment of the bankrupt's debts under the Bankruptcy Act 1966, or if they were to be considered income under a different division of the Act. This classification had implications for both the administration of the bankruptcy and the taxation obligations of the trustee.

The legal issues that the Court had to decide included whether the outstanding fees were property under Part VI Division 3 of the Bankruptcy Act, or if they fell under the definition of income in Part VI Division 4B. Additionally, if the fees were considered property, the Court needed to determine if they would be treated as income by the trustee for the purposes of the Income Tax Assessment Act 1936. The case also required the Court to provide guidance on how the trustee should treat fees rendered by the bankrupt before the date of bankruptcy, but after a specific amendment date in the Legal Profession Act.

The Court ruled that the fees in question were not property available for payment of the bankrupt's debts, but rather constituted income under Part VI Division 4B of the Bankruptcy Act. Consequently, the Court found it unnecessary to address the second question regarding the taxation of these fees as income in the hands of the trustee. As for the third issue, the Court determined that the trustee should treat the memoranda of fees rendered before the bankruptcy as income derived by the bankrupt post the commencement of his bankruptcy, and thus, subject to inclusion in income contribution assessments under Division 4B of Part VI of the Bankruptcy Act. The costs associated with the Deputy Commissioner of Taxation and the bankrupt were to be allowed out of the bankrupt's estate according to the usual order of priority.

Orders

Orders of the court

1.

The questions reserved for the consideration of the Court be answered as follows:

Question 1

Whether fees due to the Bankrupt and outstanding at the date of his bankruptcy and the subject of previous memoranda of fees are property available for payment of the Bankrupt’s debts within Part VI Division 3 of the Bankruptcy Act 1966 (Cth), or whether those fees constitute income within Part VI Division 4B of the Bankruptcy Act.

Answer

Fees which are the subject of memoranda of fees issued by the Bankrupt and outstanding at the date of his bankruptcy are not property available for payment of his debts within Part VI Division 3 of the Bankruptcy Act. They constitute income within Part VI Division 4B of the Bankruptcy Act.

Question 2

If the fees are property of the Bankrupt available for payment of his debts and are recovered by the Trustee, are they income in the hands of the Trustee under the Income Tax Assessment Act 1936 (“the Assessment Act”)?

Answer

The fees are not property available for payment of the Bankrupt’s debts. It is, therefore, unnecessary to answer this question.

Question 3

How does the Trustee treat fees rendered by the Bankrupt before the date of bankruptcy, but before or after 1 July 1994 (the date of amendment to the Legal Profession Act)?

Answer

The Trustee should treat memoranda of fees rendered by the Bankrupt before the date of his bankruptcy, whether rendered before or after 1 July 1994, as income derived by the Bankrupt after commencement of his bankruptcy and as capable of inclusion in the calculation of income contribution assessments under Division 4B of Part VI of the Bankruptcy Act.

2.

The costs of the Deputy Commissioner of Taxation and of the Bankrupt should each be allowed out of the Bankrupt’s estate in the usual order of priority.

Note:

Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

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Ratio Decidendi

Legal Principle Established

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