Tiver v The Official Trustee in Bankruptcy
[2010] FCA 620
FEDERAL COURT OF AUSTRALIA
Tiver v The Official Trustee in Bankruptcy [2010] FCA 620
Citation: Tiver v The Official Trustee in Bankruptcy [2010] FCA 620 Parties: JOHN DARCY TIVER, PHYLLIS BLANCHE TIVER, JAMES HAMILTON TIVER, BENJAMIN JOHN TIVER and MARGARET SUSAN TIVER v THE OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE FOR THE BANKRUPT ESTATES OF JOHN DARCY TIVER, PHYLLIS BLANCHE TIVER, JAMES HAMILTON TIVER, BENJAMIN JOHN TIVER AND MARGARET SUSAN TIVER and LANDMARK OPERATIONS LIMITED File number: SAD 21 of 2010 Judge: BESANKO J Date of judgment: 18 June 2010 Catchwords: BANKRUPTCY AND INSOLVENCY – application under s 116(2)(c)(iii) of the Bankruptcy Act 1966 (Cth) in relation to partnership property – where application made by partners or one member of partnership
Held: application dismissed – nature of each partner’s interest in the partnership property is such that no specific item of partnership property can be the subject of an order under s 116(2)(c)(iii).
Legislation: Bankruptcy Act 1966 (Cth) s 116
Bankruptcy Legislation Amendment Act 1996 (Cth)
Bankruptcy Legislation Amendment Bill 1996 (Cth)
Partnership Act 1891 (SA) s 39
Real Property Act 1886 (SA) Pt XVII
Bankruptcy Regulations 1966 (Cth) reg 6.03BCases cited: Canny Gabriel Castle Jackson Advertising Pty Limited v Volume Sales (Finance) Pty Limited (1974) 131 CLR 321 discussed
Federal Commissioner of Taxation v Everett (1980) 143 CLR 440 referred to
Livingston v Commissioner of Stamp Duties (Q.) (1960) 107 CLR 411 discussed
Oshlack v Richmond River Council (1998) 193 CLR 72 cited
Re Belcher; Ex parte The Trustee (1932) 6 ABC 35 discussed
Re Sherman (1915) 32 TLR 231 discussed
Re Vaughan; Vaughan v Official Trustee in Bankruptcy (1996) 66 FCR 121 discussed
Thomson Australian Holdings Proprietary Limited v The Trade Practices Commission (1981) 148 CLR 150 cited
Vaughan v Official Trustee in Bankruptcy (1996) 71 FCR 34 discussedDate of hearing: 14 May 2010 Place: Adelaide Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 58 Counsel for the Applicant: Mr B O’Brien Solicitor for the Applicant: Windevere Bellman Counsel for the First Respondent: Mr G Gretsas Solicitor for the First Respondent: Gretsas & Associates Counsel for the Second Applicant: Mr M Hoffman QC Solicitor for the Second Respondent: Madsen Rowley
IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
SAD 21 of 2010
BETWEEN: JOHN DARCY TIVER
First ApplicantPHYLLIS BLANCHE TIVER
Second ApplicantJAMES HAMILTON TIVER
Third ApplicantBENJAMIN JOHN TIVER
Fourth ApplicantMARGARET SUSAN TIVER
Fifth ApplicantAND: THE OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE FOR THE BANKRUPT ESTATES OF JOHN DARCY TIVER, PHYLLIS BLANCHE TIVER, JAMES HAMILTON TIVER, BENJAMIN JOHN TIVER AND MARGARET SUSAN TIVER
First RespondentLANDMARK OPERATIONS LIMITED
Second Respondent
JUDGE:
BESANKO J
DATE OF ORDER:
18 JUNE 2010
WHERE MADE:
ADELAIDE
THE COURT ORDERS THAT:
1.The proceeding commenced by application dated 19 February 2010 be dismissed.
2.The parties be heard as to any other orders.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
SAD 21 of 2010
BETWEEN: JOHN DARCY TIVER
First ApplicantPHYLLIS BLANCHE TIVER
Second ApplicantJAMES HAMILTON TIVER
Third ApplicantBENJAMIN JOHN TIVER
Fourth ApplicantMARGARET SUSAN TIVER
Fifth ApplicantAND: THE OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE FOR THE BANKRUPT ESTATES OF JOHN DARCY TIVER, PHYLLIS BLANCHE TIVER, JAMES HAMILTON TIVER, BENJAMIN JOHN TIVER AND MARGARET SUSAN TIVER
First RespondentLANDMARK OPERATIONS LIMITED
Second Respondent
JUDGE:
BESANKO J
DATE:
18 JUNE 2010
PLACE:
ADELAIDE
REASONS FOR JUDGMENT
Introduction
This is an application for an order under s 116(2)(c)(iii) of the Bankruptcy Act 1966 (Cth) (“the Act”) identifying items of plant and equipment. The applicants contend that the plant and equipment is property of a bankrupt that is for use by the bankrupt in earning income by personal exertion. The effect of an order under s 116(2)(c)(iii) is that the property is not property divisible amongst the creditors of the bankrupt within s 116(1) and, by virtue of s 116(2B), upon the making of the order the property revests in the bankrupt.
There are five applicants in this proceeding. They are all bankrupt. The details are as follows:
Applicant
Date of Bankruptcy
John Darcy Tiver
6 April 2009
Phyllis Blanche Tiver
13 November 2009
James Hamilton Tiver
8 July 2009
Benjamin John Tiver
8 July 2009
Margaret Susan Tiver
6 April 2009
The five applicants are members of one family and they carried on in partnership a farming business. The property which is the subject of this application comprises seven items of plant and equipment which were partnership property and which were used in the course of the farming business. The principal contention of the applicants is that an order under s 116(2)(c)(iii) should be made because Benjamin Tiver (the fourth applicant) will use the plant and equipment to carry out contract work. In doing so, he will earn well in excess of his actual income threshold (see s 139S of the Act) and the contributions he will be able to make to his estate will result in a greater benefit to creditors than the creditors will receive if the plant and equipment is sold in the ordinary course of the administration of the bankruptcies. On this approach, the “bankrupt(s)” for the purposes of s 116(2)(c)(iii) are all the applicants, including Benjamin Tiver. The applicants accept that the foreshadowed benefit to creditors will only arise if Benjamin Tiver alone uses the plant and equipment and one actual income threshold (that of Benjamin Tiver) is applied to the earnings generated by the use of the plant and equipment.
The alternative characterisation of the application is that in reality it is an application by Benjamin Tiver for an order under s 116(2)(c)(iii) and that he is the “bankrupt” for the purposes of that provision.
The applicants advance the first approach whereas the first respondent submits that, in reality, the application is made by Benjamin Tiver. In my opinion, on either approach, the application must fail and it must fail for substantially the same reasons.
Section 116(1) identifies the property of the bankrupt which is property divisible amongst his or her creditors. Section 116(2)(c) is in the following terms:
“(2) Subsection (1) does not extend to the following property:
(c)the bankrupt’s property that is for use by the bankrupt in earning income by personal exertion and:
(i)does not have a total value greater than the limit prescribed by the regulations; or
(ii) is identified by a resolution passed by the creditors; or
(iii)is identified by an order made by the Court on an application by the bankrupt;”
Regulation 6.03B of the Bankruptcy Regulations 1966 (Cth) prescribes the limit for the purposes of s 116(2)(c)(i). I was told without objection that at the present time the limit is $3,350.
Under s 116(2)(c)(iii), the Court does not have a discretion to determine that property is or is not a bankrupt’s property that is for use by the bankrupt in earning income by personal exertion. That is a matter of fact which must be established before the Court can make an order under s 116(2)(c)(iii).
I have reached the conclusion that the plant and equipment which is the subject of this application is not “the bankrupt’s property that is for use by the bankrupt in earning income by personal exertion” within s 116(2)(c). I have reached that conclusion because I do not think that the nature of a partner’s interest in partnership property falls within the statutory description as a matter of law. That is sufficient to dispose of the application and it must be dismissed. I would add that there may be an alternative ground upon which it may be said that the plant and equipment does not fall within the statutory description.
The applicants’ case included evidence and submissions as to the circumstances in which a Court will identify property in an order under s 116(2)(c)(iii) on the assumption that the property is of a type which falls within the statutory description. Although it is not strictly necessary for me to do so, I will, for completeness, address those arguments.
None of the parties who appeared before me suggested that once the Court decided that the property fell within the statutory description it was required to include it in an order under s 116(2)(c)(iii). The parties no doubt recognised that such an approach would be inconsistent with the fact that, in the first instance at least, Parliament has fixed a monetary limit. Plainly, the Court has a discretion under s 116(2)(c)(iii). The applicants argued that the discretion is a broad one which can be exercised where it is likely that a greater financial return to creditors will follow from an order than will follow if the plant and equipment is sold immediately. The precise details of the argument are set out below. For reasons I will give, I reject that argument.
Before explaining my reasons for reaching the conclusions set out above, it is necessary to set out the facts.
The facts
There are two respondents to the application. The first respondent is the Official Trustee in Bankruptcy, who is the trustee in bankruptcy of each of the respective estates of the applicants. The second respondent is a very significant creditor of the joint estate of Benjamin Tiver and the other four applicants. It was made a respondent on the basis of its interest in the application and without objection from any of the other parties.
The evidence in the case was put before me by way of affidavits. There was some cross-examination of Benjamin Tiver which I will refer to later.
The applicants’ case
Most of the evidence called by the applicants was directed towards establishing that, if Benjamin Tiver is able to use the plant and equipment for contract work, he will be able to generate a substantially greater return to creditors than they will receive if the plant and equipment is sold. That is because, so it was argued, he will be able to make contributions in respect of contribution assessment periods which will substantially exceed the present value of the plant and equipment. The application must fail for reasons which do not require an examination of this evidence. Nevertheless, I will examine the evidence for the sake of completeness.
The applicants relied on an affidavit of Benjamin Tiver sworn on 19 February 2010. He said that he was authorised to swear the affidavit on behalf of each of the applicants. The following is a summary of the evidence he puts forward in his affidavit. On 26 November 2008, a judge of the Supreme Court of South Australia ordered that Benjamin Tiver and the other members of the partnership known as Flagstaff Proprietors vacate eight separate properties covering an area of 3,252 hectares (“the Flagstaff Properties”) on which they conducted a farming business. The farming business consisted of the husbandry of beef cattle and sheep, and the cropping of mainly hay, wheat and barley. The properties were vacated on or about 3 March 2009. Since March 2009, Benjamin Tiver and his brother, the third applicant, have been engaged in contract work. From time to time, they have been assisted by their father, the first applicant, who is in poor health and who needs one of the Toyota utilities in issue to perform his duties.
Benjamin Tiver describes the type of contract work he has performed and the work carried out by his brother. He describes the work history of himself and his brother, including the fact that, between 1990 and March 2009, both worked mainly on the Flagstaff Properties. Neither he nor his brother have any formal qualifications in a trade, craft or discipline.
Benjamin Tiver exhibits to his affidavit two tables and a number of invoices. The table designated “Table A” summarises the invoices he and his brother have issued since March 2009, and the table designated “Table B” summarises the invoices James has issued “in respect of contract work which has been exclusively performed by him”.
Based on past figures, Benjamin Tiver predicts his revenue for 12 months if he is able to use the plant and equipment which is the subject of the application. He estimates a figure of $200,000 for revenue and that his expenses would be approximately $50,000. He identifies the seven items of plant and equipment which he states would be “essential” to generate this revenue.
Benjamin Tiver’s brother is now engaged in full-time employment with Collinsville at Arcoona Station and it is not anticipated that he will be involved in the work requiring the use of the plant and equipment. Benjamin Tiver believes that, with some assistance from his father and with him performing some labouring jobs in addition to the work involving the use of the plant and equipment, he could generate a yearly income after expenses of $146,000.
Benjamin Tiver states that his actual income threshold under the Act will be $51,000 and his case is that, if allowed to use the plant and equipment, he could contribute $47,500 per annum to his trustee in bankruptcy. That figure is reached by subtracting $51,000 from $146,000 and dividing the resulting figure by two (see s 139S of the Act). Without the plant and equipment, Benjamin Tiver believes that he would earn no more than $45,000 to $50,000 per annum. I should say at this point that, in the course of submissions before me, it was said without objection that Benjamin Tiver’s actual income threshold under the Act is $56,120.97.
Benjamin Tiver states that the value of the seven items of plant and equipment lies within a range of between $59,000 and $74,000. He believes it more likely to be in the region of $55,000 and he gives his reasons for that belief.
Benjamin Tiver states that, if he is permitted to use the plant and equipment, his bankrupt estate will receive a good deal more than if the plant and equipment is sold. On that basis, he seeks an order under s 116(2)(c)(iii) of the Act (he states on behalf of all applicants) that the plant and equipment be identified as “property not divisible amongst the creditors of the bankrupts”.
On 16 March 2010, each of the first applicant and the fifth applicant, and, on 17 March 2010, the third applicant, filed an affidavit deposing to the fact that they had read Benjamin Tiver’s affidavit of 19 February 2010 and that they agreed with it. Each of them said that they consented to his application “to have the plant and equipment the subject of this application delivered into his possession so that he may earn an income through their use”.
The applicants relied on a second affidavit of Benjamin Tiver sworn on 16 March 2010. In that affidavit he sets out the expenses he, his brother and the first applicant have incurred in carrying out the contract work referred to in his first affidavit. Those expenses include fuel costs and repairs and maintenance. His reconciliation of his expenses results in a reduction of the figure for expenses from $50,000 per annum (referred to in his first affidavit) to $20,000 per annum. He then proffers the following:
“9.If the property, the subject of the within Application, is returned into my possession, I undertake to do the following throughout the term of my Bankruptcy:
9.1Keep the plant and equipment in good repair;
9.2Provide monthly accounts to my Trustee in Bankruptcy setting out my income and expenses;
9.3I will not pay to my father, John Tiver, any more than $10,000 per annum for any work he assists me with; and
9.4If my brother, James, ceases his employment at Arcoona and returns to Burra and proceeds to use the plant and equipment to earn income, then I will inform my Trustee in Bankruptcy immediately and provide details of the extent of James’ use of the plant and equipment.”
As I have said, Benjamin Tiver was cross-examined on his affidavits. I will summarise what emerged from his cross-examination after I have finished summarising the affidavit evidence.
The applicants relied on an affidavit of Mr Trevor Wayne Willis sworn on 23 March 2010. Mr Willis is an accountant and for a number of years he has been the accountant for each of the applicants and Flagstaff Proprietors. He sets out the carried forward tax losses for those persons as at 30 June 2006. He states that he is unable to update the figures to the year ended 30 June 2009 because the information required to do so was in the possession of the second respondent and had not been provided to him. He expects that the figures would have increased substantially. Mr Willis states that he is unable to say whether the carried forward tax losses could be deducted in light of the fact that each of the applicants is a bankrupt.
The applicants also tendered a letter dated 1 September 2009 from the second respondent’s solicitors to the solicitors acting for the applicants. The tables attached to the letter contain an accounting of the applicants’ liability to the second respondent.
The first respondent’s case
The first respondent relied on an affidavit of Ms Erica Verrusio sworn on 14 April 2010. Ms Verrusio is a Business Manager, Trustee Services, in the Office of the Insolvency Trustee Service Australia, and she is responsible for the administration of each of the bankrupt estates of the applicants on behalf of the Official Trustee. She refers to Part B of the Statement of Affairs (“SOA”) completed by each of the applicants and exhibited to an affidavit she swore in an earlier proceeding in this Court (SAD 6 of 2010). She states that the second respondent is “by far the most significant unsecured creditor in each of the estates of the bankrupts”. She states that the first respondent opposes the application made by the applicants.
The first respondent relied on a second affidavit of Ms Verrusio sworn on 12 May 2010. Ms Verrusio exhibits to her second affidavit a copy of Part A of the SOA completed by Benjamin Tiver and signed by him on 5 February 2010. In that document, Benjamin Tiver states that his income in the previous twelve months was $28,000, comprised of drought relief of $3,000, income from self-employment of $20,000 and income from the business of Flagstaff Proprietors of $5,000. He provides an estimate of his income for the 12 months following 5 February 2010 of $30,000, which he describes as income from self-employment. In his SOA, Benjamin Tiver states that his occupation when last employed was “contract labour” and that his current employment was as a labourer for 20 hours per week for a company involved in the mining industry.
Ms Verrusio states that Benjamin Tiver telephoned the National Call Centre (a facility operated by the Insolvency Trustee Service Australia) on 21 July 2009. He was transferred to Ms Mary Petrie who is the case officer conducting the day-to-day bankrupt estates of the applicants.
The first respondent relied on an affidavit of Ms Mary Petrie sworn on 12 May 2010. In her affidavit, Ms Petrie states that in her dealings with the bankrupt at no time prior to him filing his SOA did he have a discussion with her concerning the income details required to be provided in his SOA.
The second respondent’s case
The second respondent relied on an affidavit of Mr Luke Rowley sworn on 14 April 2010. Mr Rowley is a legal practitioner and he acts for the firm which represents the second respondent. He states that the second respondent opposes the orders sought by the applicants. Mr Rowley states that the second respondent instituted proceedings in the Supreme Court of South Australia on 27 July 2005 against J Tiver Nominees Pty Ltd and the applicants pursuant to Part XVII of the Real Property Act 1886 (SA). On 21 November 2008, judgment was delivered in favour of the second respondent against the defendants.
On 17 February 2009 and 16 June 2009, the Supreme Court ordered that various items of plant and equipment owned by Flagstaff Proprietors be charged with the judgment. Mr Rowley states that each of the seven items of plant and equipment was the subject of one or other of the charging orders and that one or other of the applicants to this proceeding has sworn that each item of plant and equipment is owned by the partnership known as Flagstaff Proprietors.
The cross-examination of Benjamin Tiver
Benjamin Tiver was cross-examined by counsel for the second respondent and then by counsel for the first respondent. What emerged, I think, was that no firm finding could be made about the income which Benjamin Tiver was likely to earn if he were to use the plant and equipment for the duration of his bankruptcy. The evidence about his earnings or income for the period from March 2009 to February 2010 is not particularly clear. No taxation returns or financial statements were put before me. Some of the invoices dealing with revenue received in the period from March 2009 to February 2010 do not relate to amounts earned through the use of the plant and equipment. Goods and services tax has been charged, but Benjamin Tiver has not paid goods and services tax. The banking records are incomplete and the operation of a partnership in which Benjamin Tiver was involved and called Broadview Station is unclear.
In addition to these difficulties, it is quite unclear whether Benjamin Tiver would be liable to pay income tax on income earned by him or whether he could take advantage of carried forward tax losses.
The issues on the application
Before the Court can consider making an order under s 116(2)(c)(iii) of the Act, the Court must be satisfied that the property is “the bankrupt’s property that is for use by the bankrupt in earning income by personal exertion”. The word “property” is defined in s 5 of the Act. The phrase “the property of the bankrupt” is also defined in s 5 of the Act and, for present purposes, is the property divisible amongst the bankrupt’s creditors. That definition directs attention to s 116(1) which identifies the property which is divisible amongst the bankrupt’s creditors. It is that property which vests in the trustee in bankruptcy by operation of s 58(1) of the Act.
For present purposes, the relevant part of s 116(1) is that which identifies all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy (s 116(1)(a)).
The property in question in this case is partnership property. A partner has an interest of a proprietary nature in partnership property but the interest is of a peculiar character. A partner has a beneficial interest in every piece of property which belongs to the partnership; the nature of the interest is peculiar in that it consists not of title to specific property but a right to a proportion of the surplus after the realisation of the assets and payment of the debts and liabilities of the partnership. As Kitto J said in Livingston v Commissioner of Stamp Duties (Q.) (1960) 107 CLR 411 at 453:
“…that is to say, not a ‘definite’ share or interest in a particular asset, no ‘right to any part’ of it, but an interest which ‘can be finally ascertained only when the liquidation has been completed, and ... consists of his share of the surplus’: Rodriguez v. Speyer Brothers.”
(Citation omitted.)
The High Court referred to the peculiar character of a partner’s beneficial interest in partnership assets in Canny Gabriel Castle Jackson Advertising Pty Limited v Volume Sales (Finance) Pty Limited (1974) 131 CLR 321 (at 327-328):
“The nature of a partner’s interest in the partnership property has often been explained. The partner's share in the partnership is not a title to specific property but a right to his proportion of the surplus after the realization of assets and the payment of debts and liabilities. However, it has always been accepted that a partner has an interest in every asset of the partnership and this interest has been universally described as a ‘beneficial interest’, notwithstanding its peculiar character. The assets of a partnership, individually and collectively, are described as partnership property (Partnership Act, 1892, as amended (N.S.W.), s. 20). This description acknowledges that they belong to the partnership, that is, to the members of the partnership.
In In re Fuller's Contract, Luxmore J. (as he then was) said:
‘ ... as between the partners, the partnership property must be dealt with in a particular way, but so far as all the rest of the world is concerned, there is no limitation on the interests of the partners; the partners have the beneficial interest in the partnership assets, which are held together as an undivided whole, but they respectively have undivided interests in them’ .”
(Citation omitted.)
The High Court affirmed these principles as to the nature of a partner’s interest in partnership property in Federal Commissioner of Taxation v Everett (1980) 143 CLR 440 (“Everett”) at 446.
None of the applicants, including Benjamin Tiver, have title to the plant and equipment; each of them has a right to a proportion of the surplus after the realisation of the assets, including the plant and equipment, and the payment of the debts and liabilities of the partnership (see also s 39 of the Partnership Act 1891 (SA)). It follows that, in this case, the plant and equipment cannot be characterised as the applicants’ or Benjamin Tiver’s property that is for use by them or him in earning income by personal exertion for the purpose of s 116(2)(c) of the Act.
As I have said, this conclusion is sufficient to dispose of the application. There may be a related ground upon which the application must fail and that is that the plant and equipment is not property that has been used by any of the applicants in earning income by personal exertion. In other words, each of the applicants has earned income from the partnership business, not by personal exertion involving the use of the plant and equipment (see Everett at 454).
I now turn to deal with arguments advanced by the parties on the assumption (contrary to my principal conclusion) that the plant and equipment is the applicants’ or Benjamin Tiver’s property that is for use by them or him in earning income by personal exertion.
Before the Bankruptcy Legislation Amendment Act 1996 (Cth) introduced s 116(2)(a)–(c) in their current form, s 116(2)(a), (b) and (c) were as follows:
“(2) Subsection (1) does not extend to the following property:
(a) property held by the bankrupt in trust for another person;
(b)necessary wearing apparel, necessary household property of the bankrupt (including any sewing machine used for domestic purposes) and such other household property of the bankrupt, if any, as the creditors by resolution determine at any time before the trustee realises that other household property;
(c)ordinary tools of trade, plant and equipment, professional instruments, and reference books, of the bankrupt whose aggregate value does not exceed the prescribed amount, and such other property, if any, being such tools, plant and equipment, professional instruments or reference books, as:
(i)the creditors determine by resolution; or
(ii)the Court, on application by the bankrupt, determines;
at any time before the trustee realises that other property;”
The ordinary tools of trade exception in s 116(2)(c) has a long history, but, so far as I can see, has only been considered in a handful of cases.
The object of the ordinary tools of trade exception was stated by Horridge J in Re Sherman (1915) 32 TLR 231 (“Re Sherman”) in terms which have been accepted ever since. His Lordship said:
“That exception was intended for the protection of workmen so that they might not be prevented from earning a livelihood with the implements of their trade.”
In Re Belcher; Ex parte The Trustee (1932) 6 ABC 35, Paine J considered the proper construction of “tools, implements and instruments of trade of the bankrupt” within the meaning of s 91(d) of the Bankruptcy Act, 1924-1932. His Honour considered that the words, “of the bankrupt” qualified the word, “trade”. Tools, implements and instruments of a paintworks owned by the bankrupt did not fall within the statutory description because the bankrupt had no technical knowledge which would enable him to carry on the trade of a manufacturer or mixer of paints. In those circumstances, it was not his trade. In reaching his conclusion, Paine J referred to the object of the exception as stated by Horridge J in Re Sherman.
The subsection in its pre-1996 form was considered by Heerey J in Re Vaughan; Vaughan v Official Trustee in Bankruptcy (1996) 66 FCR 121 and then, on appeal from his Honour’s decision, by the Full Court of this Court (Burchett, Carr and Kiefel JJ) in Vaughan v Official Trustee in Bankruptcy (1996) 71 FCR 34.
In that case, the bankrupt claimed as ordinary tools of trade wines he used and which were consumed in the course of wine appreciation classes conducted by him. That claim was rejected for reasons which are not presently material. However, Heerey J did not reject the argument on the ground that the bankrupt only conducted wine appreciation courses in a small way and as a hobby. His Honour said (at 123-124):
“But in any case it is not permissible in my opinion to read into the plain words of s 116(2)(c) a qualification that the tools of trade must have in fact been used by the bankrupt at the date of sequestration or at any other particular time and must have been used to generate some particular level of income. Section 116(2)(c) looks at the nature of the items themselves and whether they can be characterised as ‘ordinary tools of trade ... of the bankrupt’. Doubtless this connotes some connection between the tools and a trade, actual or prospective, of the particular bankrupt. But one of the underlying purposes of the Act is to give bankrupts the opportunity of a fresh start after surrendering virtually all their property for the benefit of their creditors. To allow a bankrupt to retain tools of modest value for the purposes of a trade that he or she can carry on, even one that had only been conducted in a minor way prior to bankruptcy, or perhaps not at all, is consistent with that purpose: see Re Sherman (1915) 32 TLR 231.”
The appeal concerned the other point in the case, but in the course of their reasons the Full Court referred to the remarks of Horridge J in Re Sherman and said (at 35):
“Although, at one time, the Australian exception was limited to ‘hand tools’ (see s 91(d), Bankruptcy Act 1924 (Cth), as amended in 1932; Re Gurr; Ex parte Official Receiver (1947) 14 ABC 53; Re Schiller (1961) 19 ABC 271; and cf Re Van Houwelingen; Toledo-Berkel Pty Ltd v Official Receiver in Bankruptcy (1953) 56 WALR 21), courts have, on the whole, given the provision, where it is not so limited, a generous interpretation. A pianoforte was held a tool or implement of a music teacher’s trade in Boyd Ltd v Bilham [1909] 1 KB 14; a sewing machine, it was said in Gonsky v Durrell [1918] 2 KB 71 at 75 per Scrutton LJ, ‘may be a tool or implement of a man’s trade’ (see also Masters v Fraser (1901) 85 LT 611); and a cab, in a case where a distress had been levied on a stable, was held an implement of its driver’s trade: Lavell v Richings [1906] 1 KB 480, a unanimous decision of Lord Alverstone CJ, Ridley and Darling JJ.”
The applicants referred me to the Explanatory Memorandum for the Bankruptcy Legislation Amendment Bill 1996 (Cth). The following passages suggest to me that the object of s 116(2)(c) is similar to the previous ordinary tools of trade exception:
“Under proposed new paragraph 116(2)(c), a bankrupt will be able to retain property that is used by him or her to earn income from personal exertion, where the property does not exceed the value prescribed by the regulations. The creditors will also be able to resolve to permit the bankrupt to retain property to a greater value than that prescribed in the regulations and which is used by him or her to earn income. The bankrupt will also be able to apply to the Court for an order that he or she be permitted to retain property for income earning purposes over and above that which he or she is entitled under the Act to retain.
…
The property the bankrupt is able to retain must have a readily identifiable connection with the income producing activities carried out by the bankrupt. For example, in the case of a legal practitioner, law text books relevant to his or her practice have a clearly identifiable connection with the lawyer’s income producing activities. A bankrupt lawyer would be permitted to retain some of his or her library, up to the value prescribed in the regulations. Similarly a tree surgeon would probably have a number of chain saws, bush saws, ropes and climbing equipment necessary to carry out the activities of pruning and felling trees. If the tree surgeon became a bankrupt, he or she would be able to retain such equipment up to the value prescribed in the regulations, as it has a readily identifiable connection with his or her income producing activities.”
The language in s 116(2)(c) reflects a modern context and the word “trade” has been removed. The use of the present tense suggests that that part of the principle enunciated by Heerey J in the passage set out above (at [50]) to the effect that there is no need to show use at a particular time or use generating a particular level of income probably applies to s 116(2)(c) in its present form. It should not be forgotten, however, that Heerey J was addressing the section in its previous form and the section in its previous form did not expressly refer to the use of the property. The section in its present form does refer to the use of the property. Whatever may be said of these matters, it seems to me that the object of the exception remains the same. The Act enables a bankrupt to make a fresh start and retention by the bankrupt of property of a modest value is seen as a desirable exception to the general rule that all the bankrupt’s property is divisible amongst his or her creditors. It seems to me that that object informs the scope of the Court’s discretion under s 116(2)(c)(iii) and that the principal object of the power given to the Court in s 116(2)(c)(iii) is to overcome what might, in a particular case, be the arbitrary nature of the monetary limit prescribed under s 116(2)(c)(i) of the Act. It is not to mandate a close analysis of whether, by reason of the income contribution provisions of the Act, the creditors are likely to be better off if the property is retained by the bankrupt than if it is sold. In my opinion, this conclusion is reinforced by the provisions of s 116(2B) which provide that, upon an order being made under s 116(2)(c)(iii), the property revests in the bankrupt. On the face of it, the effect of an order and this subsection would be that in a case such as the present the applicants (or Benjamin Tiver) could sell the property shortly after an order has been made. Initially, the applicants contended that the effect of an order under s 116(2)(c)(iii) would be to confer on them no more than what their counsel called a possessory interest, or an interest in the nature of a licence, over the plant and equipment. By the conclusion of submissions, they accepted that this was not so in light of s 116(2B).
The applicants sought to avoid the consequences to their argument of s 116(2B) in other ways. They submitted that the Court can make an interim order under s 116(2)(c)(iii) giving Benjamin Tiver the right to use the plant and equipment to generate the foreshadowed income. The short answer to this submission is that there is no power in the Act to make an interim order. Alternatively, they submitted that the Court can make an order under s 116(2)(c)(iii) upon the undertaking of Benjamin Tiver to retain the plant and equipment and to use it to generate the foreshadowed income. The short answer to that submission is that s 116(2B) of the Act provides for the consequences of an order under s 116(2)(c)(iii) and the Court has no power to make an order in the terms suggested by the applicants which seems to be an order in the nature of a mandatory injunction. The Court has no power to make an order in those terms and it follows that it has no power to accept an undertaking in those terms (Thomson Australian Holdings Proprietary Limited v The Trade Practices Commission (1981) 148 CLR 150 at 164-165 per Gibbs CJ, Stephen, Mason and Wilson JJ; Oshlack v Richmond River Council (1998) 193 CLR 72 at 89 per Gaudron and Gummow JJ).
It follows that I do not accept the applicants’ submission that there is a “presumption” in favour of an order under s 116(2)(c)(iii) where both a bankrupt and his or her creditors will benefit if such an order is made.
On the evidence before me, the plant and equipment is worth between $59,000 and $74,000. That is substantially in excess of the limit of $3,350. There is no good reason to identify the plant and equipment in an order of the Court under s 116(2)(c)(iii) even if my earlier conclusion that it is not the applicants’ or Benjamin Tiver’s property that is for use by them or him in earning income by personal exertion is incorrect.
In view of these conclusions, it is not necessary for me to consider other arguments advanced by the respondents against the making of an order under s 116(2)(c)(iii) of the Act. I do not need to consider whether Benjamin Tiver may go to prison as a result of contempt proceedings against him which are pending in the Supreme Court of South Australia. Nor do I need to consider which creditors would receive the benefit of income earned by Benjamin Tiver compared with the creditors of the joint estate who will receive the proceeds of sale of the plant and equipment and the effect the answer to that question may have on the exercise of the discretion under s 116(2)(c)(iii) of the Act.
Conclusion
For the reasons I have given, the proceeding commenced by application dated 19 February 2010 must be dismissed. I will hear the parties as to any other orders.
I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko. Associate:
Dated: 18 June 2010
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