Sheahan v Birdseye - [2002] FMCA 41

FEDERAL MAGISTRATES COURT OF AUSTRALIA

SHEAHAN v BIRDSEYE

[2002] FMCA 41

BANKRUPTCY – Application under s.139A of the Bankruptcy Act – claim under s.139D of the Bankruptcy Act – supply of personal services where remuneration was substantially less in amount or value – respondent provided services to accountancy practice – respondent trustee of a family trading trust – moneys debited to beneficiaries loan account and not distributed indicated under payment of remuneration – moneys paid to another beneficiary but debited to bankrupt’s loan account found to be loaned to other beneficiary – all criteria of s.139D(i) to (iv) satisfied – order vesting chose in action constituted by beneficiary’s loan account in trustee in bankruptcy.

BANKRUPTCY – Application for orders directing payment of moneys from family trust to which debtor entitled as trustee – trustee’s entitlement to exoneration – claim not defeated by trustee owing money to trust qua beneficiary – declaration granted.

Horne v Concore Australia Pty Limited & Anor (1997) 503 FCA North J
re John Lesley Crawford; ex-parte Robert Thomas Adcock v Tanalaw Pty Limited FCA (unreported) 10 December 1992 Drummond J

Albion Hotel Pty Limited v Federal Commissioner of Taxation

(1965)

115 CLR 78

Richard Walter Pty Limited v Federal Commissioner of Taxation

(1995) 95 ATC 440

Richard Walter Pty Limited v Commissioner of Taxation

(1996) 67 FCR 243

Richardson v Commissioner of Taxation

2001 ATC 4058
Jones v Dunkel (1959) 101 CLR 298

Brandi v Mingot

(1976) 12 ALR 551

Holli Managed Investments Pty Limited v ASC

(1998) 160 ALR 409

Octavo Investments Pty Limited v Knight

(1979) 144 CLR 360

Official Assignee v O’Neill

(1898) 16 NZLR 628

Jennings v Mather

(1901) 1 QB 108 at 117

Darke v Williamson

(1858) 53 ER 774

e Suco Gold Pty Limited (1983) 33 SASR 99

re Matheson; ex-parte Worrell v Matheson

(1994) 49 FCR 454

Cherry and Boultbee

(1839) 4 MY&CR 443

Applicant:

JOHN SHEAHAN AS TRUSTEE IN BANKRUPTCY OF THE ESTATE OF NICHOLAS GUY BIRDSEYE

Respondent:

NICHOLAS GUY BIRDSEYE AS TRUSTEE OF THE NICHOLAS BIRDSEYE FAMILY TRUST

File No:

AZ 215 of 2001

Delivered on:

22 March 2002

Delivered at:

Adelaide

Hearing Date:

6 February 2002

Judgment of:

Raphael FM

REPRESENTATION

Counsel for the Applicant:

Dr R J Baxter

Solicitors for the Applicant:

Johnson Winter & Slattery

Counsel for the Respondent:

Mr M Keith

Solicitors for the Respondent:

Jonathon Sims

ORDERS

I declare that the estate of the respondent in any and all causes of action against Teresa Mary Birdseye in respect of moneys owed by Teresa Mary Birdseye to the respondent in respect of advances made to her on or after 10 November 1994 be vested in the applicant as trustee of the estate of the bankrupt, Nicholas Guy Birdseye.
I declare that the applicant has a charge or right of lien over the property of the Nicholas Birdseye Family Trust in respect of trust debts as at the date of bankruptcy, including a debt due to the Commissioner of Taxation in the sum of $47,557.03.
I order that the respondent pay the applicant’s costs pursuant to Rule 21.10 of the Federal Magistrates Court Rules.
I certify that the applicant is entitled to a certificate for an advocate pursuant to Rule 21.15.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
ADELAIDE

AZ 215 of 2001

JOHN SHEAHAN AS TRUSTEE IN BANKRUPTCY OF THE ESTATE OF NICHOLAS GUY BIRDSEYE

Applicant

And

NICHOLAS GUY BIRDSEYE AS TRUSTEE OF THE NICHOLAS BIRDSEYE FAMILY TRUST

Respondent

REASONS FOR JUDGMENT

NICHOLAS GUY BIRDSEYE (“Mr Birdseye”) is an accountant. On 9 November 1998 a sequestration order was made against him upon the petition of the Deputy Commissioner for Taxation.
At all material times Mr Birdseye ran his accounting practice, known as Nicholas Birdseye & Associates (“the practice”) through the medium of a discretionary family trust known as the Nicholas Birdseye Family Trust (“the trust”).
The Trust was settled on 1 July 1986 by Mr Birdseye’s father and has two beneficiaries, Mr Birdseye and his wife Teresa. There are two specified additional powers of the trust. These are:
(a)To carry on the profession and activities of accountants, auditors and tax agents.
(b)To render management, commercial, financial, secretarial and related services to any person, firm or corporation.
Mr Birdseye continues to operate the practice. He is the principal. The practice employs four persons. The income of the practice is received by Mr Birdseye in his capacity as trustee of the trust. The fact of the bankruptcy does not appear to affect Mr Birdseye’s ability to practice as an accountant nor to act as trustee of the trust.
The applicant JOHN SHEAHAN is the trustee in bankruptcy of Mr Birdseye’s estate. These proceedings are an application under s.139A of the Bankruptcy Act:
139A “The Trustee of the bankrupt’s estate may, at any time within six years after the date of the bankruptcy, apply to the court for an order under this Division in relation to an entity (in this Division called “the respondent entity).”
The section under which Mr Sheahan is applying is s.139D:
139“(1) Where, on an application under section 139A, the Court is satisfied that:
(a)the bankrupt supplied personal services to, or for or on behalf of, the respondent entity at a time or times, during the examinable period and before the end of the bankruptcy, when the bankrupt controlled the entity in relation to the supply of those services;
(b)either:
(i) the bankrupt received for those services no remuneration in money or other property; or
(ii) the remuneration in money or other property that the bankrupt received for those services was substantially less in amount or value than a person supplying those services in similar circumstances might reasonably be expected to have received if the person had dealt with the entity at arm’s length in relation to the supply of those services;
(c)during the examinable period, the entity acquired an estate in particular property as a direct or indirect result of, or of matters including, the supply by the bankrupt of those services;
(d)the bankrupt used, or derived a benefit from, the property at a time or times during the examinable period when the bankrupt controlled the entity in relation to the property; and
(e)the entity still has an estate in the property;
subsections (2) and (3) have effect, whether or not the bankrupt has ever had an estate in the property.
(2)The Court may, by order, vest in the applicant:
(a)The entity’s estate in the whole, or in a specified part, of the property; or
(b)A specified estate in the whole, or in a specified part, of the property, being an estate that could, by virtue of the entity’s estate in the property, be so vested by or on behalf of the entity.
(3)The Court may make an order directing:
(a)the execution of an instrument;
(b)the production of documents of title; or
(c)the doing of any other act or thing;
in order to give effect to an order under this section made on the application.”
The orders which Mr Sheahan seeks are:
(i)An order that the estate of the respondent in any and all causes of action against Teresa Mary Birdseye in respect of moneys owed by Teresa Mary Birdseye to the respondent in respect of advances made to her on or after 10 November 1994 be vested in the applicant on trust for himself as trustee of the estate of the bankrupt, Nicholas Guy Birdseye.
(ii)An order that the sum of $47,557.03 (Forty Seven Thousand Five Hundred and Fifty Seven Dollars and Three Cents) from the assets held in trust between the applicant and the respondent be disbursed to and in respect of debts owing to the Deputy Commissioner of Taxation.
The claim under paragraph 1 is to transfer to Mr Sheahan the ownership of a purported chose in action currently vested in Mr Birdseye as the trustee against his wife Teresa. The claim in paragraph 2 is to enforce a right alleged to be held by the trustee for exoneration out of the assets of the trust in respect of a debt to the Deputy Commissioner which the trustee owed to the Commissioner at the time he became bankrupt.
The applicant, Mr Sheahan, called one witness in support of his claim, Mr Ian Lock, a partner of Mr Sheahan in the firm of Sheahan Coope Lock. Mr Lock swore an affidavit to which was annexed a large bundle of documents including ledgers and the transcript of evidence in an examination conducted before Deputy Registrar Fisher of Mr Birdseye and an examination conducted before Deputy Registrar Connard of Mrs Birdseye. No objection to these transcripts was raised by the respondent.
There are a number of matters which the applicant must prove in order to establish a claim under s.139D. The first matter is the identity of the entity referred to in sub-paragraph 1(a). There does not appear to be any dispute that the entity for the purposes of this case is the trust. The second matter is the length of the examinable period referred to in sub-paragraph 1(a).
Examinable period is defined in s.5 of the Bankruptcy Act.
“Examinable period”, in relation to an application under s.139A by the trustee of a bankrupt’s estate means the period beginning:
(a)If, at a time or times during the period beginning four years before, and ending two years before, the commencement of the bankruptcy, the bankrupt became unable to pay his or her debts, as they became due, from his or her own money – at that time, or at the first of those times, as the case may be; or
(b)In any other case - two years before the commencement of the bankruptcy;
and ending on the day on which the application is made.”
The applicant submits that the date of bankruptcy being 9 November 1998 he is entitled to go back to 10 November 1994 because, he argues, the bankrupt in his statement of affairs made the following statement in response to question 17 “details of bankruptcies or arrangements with creditors in last ten years.”
“In 1994 tried to do Part X – details attached, was in “adjourned” Part X status for two and a half years – the law changed 8 January 1997 whereby you could only be in “adjourned” status for four months and then when came out, Part X was not voted on.”
Unfortunately “the details attached” were not attached but in response to the question 21 “list what you believe to be the causes of your bankruptcy or insolvency” the bankrupt has responded:
“Fraud done to me in 1990 by Mr Andreas Yohannsen.”
And in response to the question 22 “when did you begin having difficulties meeting your debts” he states “1990”.
The wording in the definition of examinable period in s.5 of the Bankruptcy Act uses a phrase which has long been the definer of insolvency. It does not use the phrase “commit an act of bankruptcy” and the reason for this is presumably so that the net could be drawn much wider than it would be if the ability to utilise sub-paragraph (a) was restricted to those matters set out in s.40(1) of the Bankruptcy Act. In my view the commission of an act of bankruptcy and the admissions made by the debtor would indicate the inability to pay his debts as and when they fall due from his own money. This assumption is supported by the wording of s.52 of the Bankruptcy Act which requires proof of an act of bankruptcy but in s.52(2) allows the dismissal of a petition if the debtor can prove that he or she is able to pay his or her debts.
One act of bankruptcy is the signing of an authority under s.188. A Part X arrangement can only commence after a debtor has signed such an authority. On the basis of the debtor's admission that he went into Part X in 1994 I would find that at a period beginning four years before and ending two years before the commencement of the bankruptcy the bankrupt became unable to pay his debts. I do not accept the respondent’s argument that “during the period…became unable” excludes a situation in which the debtor was unable to pay his debts at the commencement of the period.
I would therefore find that the examinable period for the purposes of this application commenced on 10 November 1994.
The third matter which must be established in order to enliven s.139D is the requirement under sub-section (b)(ii). It is not disputed in this case that the bankrupt received some remuneration for the services he provided to the trust.
The applicant argues that what was received was “substantially less in amount or value than a person supplying those services in similar circumstances might reasonably expected to have received if the person had dealt with the entity at arms length.”
The respondent’s case is that the drawings taken by the bankrupt are material remuneration for the purposes of sub-clause (b) and in addition to that the definition of remuneration should include the ability to have personal expenses paid from the trust including the payments made from the trust in repayment of the loan account to the State Bank. Finally, it is the respondent’s case that the entry in the monthly summary for Teresa’s expenditure is properly regarded as remuneration of the bankrupt because it is on the general ledger drawn against his loan account and not against Mrs Birdseye’s loan account. The respondent submits that all these things together add up to sufficient remuneration and then comments that the applicant has not sought to prove what sufficient remuneration on an arms length basis would be. As an incidental point the respondent submits that as not all of the income generated by the accountancy practice is derived from the personal services of the bankrupt, the profit from the personal services of the employees should be excluded.
As against this the applicant submits that in his statement of affairs Mr Birdseye stated that his income in the last twelve months was $5,000.00 and the income expected in the next twelve months was also $5,000.00. In response to question 30 which relates to sources of income he includes that $5,000.00 as distribution from family trust and then adds “drawings from business” as $10,000.00 making a total of $15,000.00 each for the two periods.
In his public examination the debtor was question about his earnings:
“He said before that the practice does not pay you a wage?
Correct.
Does the practice pay you a contracting fee or consulting fee?
No.
How do you derive remuneration from the accountancy practice?
I receive a remuneration based on the taxable income of the trust after expenses.
So you received a net profit of the accountancy practice?
Yes, not all of the net profit. It is varied – it is given partly to my wife, partly to my children, depending on allocations.”
Further on in the transcript at page 18 Mr Birdseye agrees that the profit from what is described as “the business division” for the accountancy practice was approximately $150,000.00. per annum. This figure appeared to be generally accepted as the profits of the business at the hearing. The amount suggested by Mr Birdseye as his remuneration in his statement of affairs was therefore a mere 10% of that figure.
In arguendo I raised the suggestion that if it was not for the imposition of the entity Mr Birdseye would be entitled to 100% of the income of the business. The existence of the entity allowed him to manipulate the remuneration he would otherwise receive from it. The respondent argued that the trust was settled well before the examinable period and the court cannot undo the vesting of the accountancy practice in the trust. The accountancy practice is an asset of the trust and it is the remuneration from the trust which is in issue. I think this argument is correct. Section 139 seeks to deal with moneys received from an entity controlled by the debtor. It does not seek to remove the entity from the equation.
I also accept that moneys paid on behalf of the debtor from the entity can constitute remuneration. The vice which s.139D is seeking to correct is where money that would otherwise be income in the hands of the debtor and therefore liable to be included in any calculation of his obligation to contribute under Part VI Division 4B of the Bankruptcy Act is diverted into asset purchase.
The difficulty in this case is that Mr Birdseye as trustee of the trust is not recording these payments as distributions to himself but as loans. A loan is a chose in action. It seems to me that by turning what would otherwise be considered “remuneration” into a loan the entity has:
“Acquired an estate in particular property as the direct or indirect result of the supply by the bankrupt of the services.”
The diversion of what would normally have been considered income into an estate has occurred.
On this basis the only remuneration received by Mr Birdseye is the small amount of $15,000.00 previously referred to. In Horne v Concore Australia Pty Limited & Anor (1997) 503 FCA North J was prepared to grant an injunction protecting assets that might be the subject of an application under s.139D on the basis of evidence which indicated that the debtor was paid project management fees of $7,000.00 per annum by a company that was engaged in property developments involving millions of dollars and produced a profit of at least $1,100,000.00 in the relevant period. His Honour said there was a serious issue to be tried as to whether remuneration of $7,000.00 was less than would have been received in an arms length transaction.
I would be prepared to find that a remuneration of $15,000.00 was less than a person supplying the services which Mr Birdseye supplied to the accountancy practice would have received on the basis of an arm’s length transaction. But I do not need to do this. The respondent himself has submitted that his remuneration should be calculated at a much higher figure based upon the value of moneys paid on his behalf and loaned to him. That is sufficient proof that the money which was actually paid as remuneration was inadequate. The respondent cannot approbate and reprobate.
I have found that the moneys paid on Mr Birdseye’s behalf have become a debt owed by him to the entity. The applicant argues that money paid by the entity notionally on Mr Birdseye’s behalf but in fact on behalf of Mrs Birdseye becomes a debt owed by Mrs Birdseye to the entity which can be the subject of an order under s.139A.
The evidence reveals that Mrs Birdseye was a beneficiary of payments to the bank which held a mortgage over her property to secure a joint loan to herself and Mr Birdseye. She also held a cheque book of the trust and utilised that cheque book to pay for her personal expenses. There is an account in the general ledger of the trust entitled “Teresa’s expenditure”. Although the money is referred to in this way and there does not seem to be any dispute that the evidence points to it being used in this way, it was treated in the accounts as a loan to Mr Birdseye. It formed part of Mr Birdseye’s ever increasing loan account. On the other hand Mrs Birdseye had a loan account with the trust which is currently in credit. Properly speaking Mr Birdseye’s loan account is in credit and Mrs Birdseye’s loan account is in debit because they are the accounts of the trust to whom money is owed and is owed by.
During the course of the hearing there was some discussion between myself and Counsel as to the tax effect of these loans. In case it should be thought that anything in this judgment is influenced by my believing that the loans were taxable in the hands of the beneficiaries I should say that is not correct. Certain loans made by private companies to individuals are taxable pursuant to Part 3 Division 7A of the Income Tax Assessment Act by virtue of being treated as “deemed dividends” which are unfrankable. These provisions do not apply to loans from trusts.
The applicant wishes me to find that notwithstanding the treatment given to these moneys in the accounts they are in fact a loan to Mrs Birdseye. The loan is another chose in action acquired by the entity which arose directly or indirectly out of the supply of Mr Birdseye’s services.

Before I deal with this submission I must deal with the submission made by the respondent that because of the fact that part of the profit of the business arises out of the provision of services of the employees “the court cannot conclude to what extent the entity is acquired an estate in a particular property, within the terms of s.139D.”
In re John Lesley Crawford; ex-parte Robert Thomas Adcock v Tanalaw Pty Limited FCA (unreported) 10 December 1992 Drummond J made a calculation of the extent of the trustee’s interest in the property acquired by the entity by taking an amount from the total received and holding that that was the part which was used to acquire the asset. His Honour was unable to find that any other part of the money had been used to purchase the asset. That is not the problem in this case. The problem in this case is to calculate how much of the asset came from the debtor’s personal services.
With the exception of the two cases cited herein there is no authority on s.139D that can assist. However, I have already found that remuneration is something that should not be narrowly construed. I believe that it should include payment for management skill. In this case the management skill relates to the work of the four employees. I would class as part of the remuneration of a sole principal in a firm of accountants the profit which he obtains from the services of his employees who he is responsible to manage and in respect of whom he takes an entrepreneurial risk.
I conclude that the whole of the money constituted by Mr Birdseye’s loan account is an asset derived from the underpayment for his services by the entity.
If part of Mr Birdseye’s loan account should properly be considered a loan to Mrs Birdseye then that amount is similarly capable of being fully utilised for the purposes of s.139D.
It is axiomatic that a court charged with doing justice between parties must look at the substance of their transactions rather than the form. It is well settled that entries in accounts are no more than evidence. In Albion Hotel Pty Limited v Federal Commissioner of Taxation (1965) 115 CLR 78 Windeyer J said:
“But entries in books of account should evidence real transactions. They are evidence only. Their proper purpose is to record transactions having legal consequences. Making entries does not make such transactions.”
See also Richard Walter Pty Limited v Federal Commissioner of Taxation (1995) 95 ATC 440 and Richard Walter Pty Limited v Commissioner of Taxation (1996) 67 FCR 243; Richardson v Commissioner of Taxation 2001 ATC 4058.
It seems to me that the evidence in this case is all one way. There is no challenge to the fact that substantial sums of money were utilised to pay obligations of Mrs Birdseye. In normal circumstances these would either constitute a distribution of trust income to Mrs Birdseye or a loan to her. In this case purely by virtue of entries in the accounts, the evidence is that the trustee decided that the moneys were to be classed as a loan and that the obligations of that loan were to be borne by Mr Birdseye. In the absence of any evidence from either Mr or Mrs Birdseye as to the nature of this arrangement I am not able to accept it as genuine. I am prepared to accept that the trustee deemed it appropriate for moneys to be loaned from the trust. However, in the absence of any evidence I am not satisfied upon the balance of probabilities that Mr Birdseye, as a beneficiary, intended to accept responsibility for these loans or that Mr Birdseye, as trustee, in exercising the obligations put upon him as a trustee, intended to burden the trust with a loan to an undischarged bankrupt who already had a substantial obligation to the trust on his loan account. On the other hand Mrs Birdseye was owed money by the trust and was the sole proprietor of a property in North Adelaide. A substantial portion of the loan moneys were used to reduce the mortgage on that property. Both Mr and Mrs Birdseye could have given evidence about these matters. They chose not to do so. I am entitled to draw an inference that nothing they might have said would have assisted their case (Jones v Dunkel (1959) 101 CLR 298; Brandi v Mingot (1976) 12 ALR 551).
The next requirement that must be satisfied is that under s.139D(1)(d) that:
“The bankrupt used, or derived a benefit from, the property…”
I have found that there are two properties which the entity owns that were created directly or indirectly from the underpaid services of the bankrupt. These are the loan to the bankrupt himself and the loan which I have now found to have been made, not to the bankrupt, but to Mrs Birdseye.
The applicant’s argument in respect of the requirements of s.139D(1)(d) is that by using the words “derived benefit from” an indirect use of the funds is permitted. The submission continues:
“You see, what has happened in this case is that the entity has earned fees as a result of the provision of services by Mr Birdseye to it. The money, the relevant money, has been used in two directions as far as the assets that we’re concerned about. It has been used by Mrs Birdseye for her own benefit and, apparently, for household expenses, and it has also been used by Mrs Birdseye to increase her equity in the family home. At the very least it has been used by Mrs Birdseye to keep the family home, and it is in that sense we say Mr Birdseye has derived a benefit from that property. The case, the money which the trust received, the fees which it received were converted indirectly into property which he enjoyed.
It would be far too easy to escape the consequences if it had to be a direct conversion of money into assets. No bankrupt, at any rate with his eyes open, would ever be caught by the section. He would simply get somebody to stand outside the trust, lend the money and away you go.”
The respondent accepts that the section talks in language that would accommodate some indirect acquisition of the asset. The respondent states that:
“The property on the applicant’s case is this alleged chose in action. The blurring of how Mr Birdseye might have a benefit from that chose in action in my submission goes beyond the terms of sub-clause (d). The fact that Mr Birdseye lives in the family house is not a benefit from that chose in action. He was living in the house long before the chose in action, on the applicant’s case, existed. So he’s been living in the house. He is not living in the house as a benefit from this alleged chose in action…Mr Birdseye must be shown to have received a benefit from the alleged loan account standing to the credit of the trust against Mrs Birdseye.”
I think there is much force in Dr Baxter’s argument that the whole purpose of the sub-section would be negated if a potential bankrupt utilised the services of a straw man to purchase an asset with the proceeds of funds derived from the underpayment to the bankrupt. Deriving a benefit from the ‘property’ must include deriving a benefit from any other property which was created therefrom.
However, in this case the chose in action did not purchase the house in which Mrs Birdseye lived, it was already hers. But it was hers subject to a mortgage. Her interest in the property increased by virtue of the capital repayments made under that mortgage. Her continuing right to occupy the premises was contingent upon her paying the interest under the mortgage. The chose in action was used to effect both of those payments. Mr Birdseye enjoyed the benefit of those payments by continuing to reside in the premises. He also enjoyed the benefit of some of the moneys used for Mrs Birdseye’s personal expenditure. He would have enjoyed the flowers at their home. He would have enjoyed the meat that was put on their table. I am satisfied that the requirements of s.139D(1)(d) are satisfied in this case.
That disposes of the claim under s.139D. The other claim being pursued by the applicant is to recover from the trust the amount of group tax owed by the trustee to the Deputy Commissioner of Taxation in respect of which the bankrupt has a right of exoneration out of the assets of the trust. The trustee’s right to indemnity out of the trust property for expenses properly incurred in the execution of the trust has been recognised in the Trustee Acts of the various states. It is found at s.35(2) of the Trustee Act (1936) SA.
“A trustee may reimburse himself, or pay or discharge out of the trust premises, all expenses incurred in or about the execution of his trusts or powers.”
The equitable and statutory rights of indemnity come into existence as soon as the trustee incurs a liability in the proper administration of the trust (Holli Managed Investments Pty Limited v ASC (1998) 160 ALR 409). The trustee’s right of exoneration is described as an equitable “charge or right of lien” (Octavo Investments Pty Limited v Knight (1979) 144 CLR 360). The trustee’s equitable right of charge or lien is a beneficial interest which in the case of individual trustees, would pass to a trustee in bankruptcy (Octavo v Knight, supra, see also Official Assignee v O’Neill (1898) 16 NZLR 628; Jennings v Mather (1901)

1 QB 108 at 117.
The applicant has established from the affidavit of Mr Lock that an amount of $47,557.00 was owed by the trustee to the Deputy Commissioner in respect of group tax at the time the trustee became bankrupt. The trustee’s obligation in respect of that group tax is now the obligation to pay a dividend in accordance with the proof of debt submitted by the Deputy Commissioner. The right of exoneration is not extinguished. The trustee can look to the assets of the trust provided that he does not destroy the trust, Darke v Williamson (1858 53 ER 774), I would agree with the submission made by the respondent that the right cannot extend to the sale of the accountancy business itself.
However, it seems to me that there may well be other assets in this trust apart from the business. The business earned profits from the labour of Mr Birdseye and his staff. These profits are approximately $150,000 per year (p18 record of examination attached to Mr Lock’s affidavit). The profits were accumulated for the benefit of the beneficiaries but it is settled law that in these circumstances the rights of the trustee are ahead of those of cestui qui trust (Re Suco Gold Pty Limited (1983) 33 SASR 99).
It was suggested by the respondent that the rule in Cherry and Boultbee may prevent the trustee in bankruptcy from recovering in this matter. This rule which requires a trustee to deduct from any distribution to a beneficiary the amount of that beneficiary’s liability to the trust, does not have effect where the trustee and beneficiary are the same person but where the right of exoneration is owned qua a trustee and the obligation qua beneficiary. Thus the trustee cannot set up against the right of exoneration against trust assets his own debt to the trust (itself an asset).
The order sought by the applicant is in the following form:
An order that the sum of Forty Seven Thousand Five Hundred and Fifty Seven Dollars and Three Cents (47,557.03) from the assets held in trust between the Applicant and the Respondent be disbursed to and in respect of debts owing to the Deputy Commissioner of Taxation.
I do not think that order would respond to the rights of the applicant as the trustee in bankruptcy of the trustee. It is not clear from the papers before me whether or not there are more creditors than just the Deputy Commissioner. The applicant must take into account the decision of Spender J in re Matheson; ex-parte Worrell v Matheson (1994) 49 FCR 454.
This case was very similar to that which is presently before me. There was an individual trustee of a family trading trust who was declared bankrupt. He continued as the trustee of the trust. He owed debts as both trustee of the trust and as an individual. His Honour examined all the relevant cases in some detail including particularly re Suco Gold Pty Limited (supra) and Octavo v Knight (supra). Spender J confirmed that the trustee in bankruptcy had a charge or lien over the trust property in respect of the trust debts as at the date of bankruptcy although the legal title to the trust property did not pass to the trustee in bankruptcy. He went on to make orders disbursing money to a number of trust creditors from a fund that had already been identified. As such a fund is not presently identifiable I believe that the most appropriate order which I can make is in the form of a declaration. The trustee in bankruptcy can then take the necessary proceedings to collect the money which is represented by the property I have declared that he has rights over.

Orders

(1)I declare that the estate of the respondent in any and all causes of action against Teresa Mary Birdseye in respect of moneys owed by Teresa Mary Birdseye to the respondent in respect of advances made to her on or after 10 November 1994 be vested in the applicant as trustee of the estate of the bankrupt, Nicholas Guy Birdseye.
(2)I declare that the applicant has a charge or right of lien over the property of the Nicholas Birdseye Family Trust in respect of trust debts as at the date of bankruptcy including a debt due to the Deputy Commissioner of Taxation in the sum of $47,557.03.
(3)I order that the respondent pay the applicant’s costs pursuant to Rule 21.10 of the Federal Magistrates Court Rules.
(4)I certify that the applicant is entitled to a certificate for an advocate pursuant to Rule 21.15.

I certify that the preceding fifty-two (52) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate:

Date: