Wald, Re M. Lyford, Ex Parte M.H.
[1986] FCA 81
•19 MARCH 1986
Re: MARX WALD
Ex Parte: MAURICE HODGSON LYFORD and RODNEY MICHAEL EVANS
No. 119 of 1984
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
Toohey J.
CATCHWORDS
Bankruptcy - Income of bankrupt - application for payment of part of income to trustees for benefit of creditors - bankrupt a general surgeon - contributor to superannuation fund - whether contributions reasonable - consideration of income reasonably necessary for maintenance of bankrupt and his family having regard to occupation and station in life - whether account should be taken of wife's income
Bankruptcy Act 1966 s.131
HEARING
PERTH
#DATE 19:3:1986
Counsel for the bankrupt - Mr. M. McCusker Q.C. and Mrs. G.M. Williams instructed by Messrs. Paterson & Dowding.
Counsel for the applicants - Mr. H. McLernon instructed by Messrs. McPhee & Meyer.
ORDER
1. The bankrupt pay to the applicants for the benefit of the bankrupt's creditors the sum of $1,000 each month.
2. The parties have liberty to apply on the question of costs and as to the date from which payments begin.
Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.
JUDGE1
Dr. Wald, a general surgeon, was made bankrupt on his own petition on 8 March 1984.
Claims by unsecured creditors amount to $941,201, the major creditor being the Australian Taxation Office in the sum of $854,019 for outstanding income tax and penalties. At the time of his bankruptcy Dr. Wald had no assets of any real value apart from shares in a medical practice company and shares in a family trust company. Since his bankruptcy, Dr. Wald has made voluntary contributions to his trustees, initially at the rate of $500 a month and since July 1985 at the rate of $834 a month. The Court was not told of the actual amount paid to date under this arrangement but I assume it to be in the order of $14,000. Whatever the figure, it is a drop in the ocean of debts.
On 24 October 1985 the trustees of Dr. Wald's bankrupt estate entered an objection to his discharge, pursuant to para.149(3)(c) of the Bankruptcy Act 1966. In consequence, Dr. Wald will not be discharged from bankruptcy by force of the Act until March 1989, subject to the power of the Court to grant an earlier discharge under s.150.
The application now before the Court is made by the trustees pursuant to s.131 of the Act. By it the trustees seek an order that part of the income of the bankrupt be paid to them for the benefit of creditors. In presenting their case, the trustees did not specify a precise amount which it is said Dr. Wald can pay in accordance with s.131 though their counsel suggested an annual figure in the region of $15,000. At the outset of his case, the bankrupt made a formal offer through counsel to pay $750 a month i.e. $9,000 a year. Thus there is a clear recognition by the bankrupt of his capacity to pay a substantial sum from income; the question for the Court is what sum is appropriate in the light of the principles applicable to s.131 as they have been expounded in judicial decisions.
The facts relating to Dr. Wald's income and expenditure are not much in dispute. The issues between the parties focus to a large extent upon Mrs. Wald's financial position and to a lesser extent that of their children.
Dr. Wald is 54 years of age. He lives with his wife and their three children Rebecca, Claudia and Julian, aged respectively about 20, 18 and 16. The family lives at 18 Riverview Street, South Perth, a home which is described in an affidavit sworn in support of the application as "an extremely comfortable one". The description of the house in a letter written to Dr. Wald by real estate agents, Colliers, suggests that the description is far from extravagant. The house is estimated to have a rental value of about $500 a week. Originally Dr. Wald and Mrs. Wald were the registered proprietors as joint tenants of the house; on 15 April 1980 Dr. Wald transferred his interest to his wife. There is no attack on the transfer. The house is mortgaged to Legal & General Assurance Society Limited.
Mrs. Wald owns three motor vehicles, two Mercedes Benz and one Mazda 323. One of the Mercedes, a 1982 380 SL, is leased by her to Carsville Pty. Ltd. Rental for the year ended 30 June 1985 amounted to $18,682. Carsville is a medical practice company, following the usual pattern of such companies. It rents premises at 35 Colin Street, West Perth at which Dr. Wald carries on practice. The premises are owned by a family trustee company Carj Pty. Ltd. Carsville hires the Mercedes which it makes available to Dr. Wald, pays all expenses relating to the medical practice, makes contributions to a superannuation fund for Dr. Wald's benefit and pays him a salary of $60,000 a year plus a bonus. Whatever the precise legal position regarding the bonus, the fact is that any surplus income each year is paid to Dr. Wald. Mrs. Wald has income of her own. For the year ended 30 June 1985 she received $2,288 by way of salary which I take to be an amount paid to her by Carsville for work done in the medical practice. She earned a further amount of $17,609, described as "Interest and Dividends". There was no evidence as to how this amount was made up or as to its source.
Carj Pty. Ltd. appears to have no assets of any real value but, as trustee of the Wald Family Trust No. 2, it owns the premises at 35 Colin Street. From this it derives income in the form of rent paid by Carsville. For the year ended 30 June 1985 the rent was $10,842; the net income of Carj was $2,468. The major item of expense was mortgage interest.
The Court had before it a schedule of family income and expenses prepared by a chartered accountant, Mr. Walker. It is unnecessary to refer to this document in its entirety but portion of it provides a useful starting point for an inquiry under s.131.
M. Wald D.J. Wald Trust Total
Net Income Before Income Tax 71,281 35,069 2,468 108,818
Less: Income Tax and
Medicare Levy 33,386 11,820 - 45,206
37,895 23,249 2,468 63,612
Less: Living Expenses 29,162 5,275 - 34,437
(See Schedule)
8,733 17,974 2,468 29,175
Less: Payments to
Trustee 8,000 - - 8,000
$ 733 $17,974 $2,468 $21,175 =====================================
There is also before the Court a schedule showing how the living expenses of $29,162 are made up. $6,455 relate to payments on the South Perth home, comprising interest, rates and taxes, insurance, electricity and heating and repairs. The balance relates to housekeeping, clothing, school fees, medical and dental expenses and sundry items. There was no challenge to any of the figures. The components of the $5,275 attributed to Mrs. Wald are to be found elsewhere. The major items are $2,100 for life assurance premiums and $1,065 for insurance of the South Perth home. The other items relate to school fees and books, private motor vehicle expenses and sundry items. Again there was no attack on any particular item. There were small discrepancies between some amounts in the schedule and their counterparts referred to in Dr. Wald's affidavit of 6 December 1985. But counsel did not suggest anything turned on this.
One matter about which there was considerable debate was the existence of a superannuation fund and the contributions made to it. In 1982 Dr. Wald's employer and medical practice company M. Wald Pty. Ltd. established an employee superannuation fund with Legal & General Life of Australia Limited. Dr. Wald was trustee of the fund. In December 1984 M. Wald Pty. Ltd. ceased to carry on business and Carsville Pty. Ltd. became Dr. Wald's employer and medical practice company. A new superannuation fund was established, again with Legal & General. The relevant insurance policies were endorsed to show that they had ceased to be subject to the trusts of the M. Wald Pty. Ltd. Superannuation Fund and were subject to the trusts of the Carsville Pty. Ltd. Superannuation Fund. The current superannuation fund identifies Carsville as both employer and trustee. The two superannuation fund deeds are identical.
Clause 10.5 of the deed provides that in certain circumstances, including bankruptcy or insolvency of a member or beneficiary, the member or beneficiary "shall forfeit all his Benefits". Clause 10.5(b) requires the trustee to hold forfeited benefits for the benefit of any member or beneficiary and his dependants "in such proportions between them and on such terms as the Trustee may determine in his absolute discretion from time to time, provided that no payment shall be made whilst the Member remains in the service of the Employer or Associated Employer except to the extent necessary for the maintenance and support of the Member or a Dependant to relieve hardship". Monies not so applied are to be transferred to the Supplementary Benefits Account (cl.10.6). Rather circuitously, monies in this account may be appropriated and paid to the employer or transferred to a member's account (cl.6.8).
The applicants argue that on Dr. Wald's bankruptcy, indeed on his insolvency which they say dates from August 1981 when he was unable to meet his tax assessment, he forfeited any benefits under the superannuation deed. They say further that any contributions thereafter to the original superannuation fund and to the current fund "could not and should not have been made" by either employer company and that any contributions so made "would otherwise properly form part of Dr. Wald's income by virtue of the nature of his medical practice company arrangement".
A question immediately arises as to the functions and powers of the Court on an application under s.131 of the Bankruptcy Act. The applicants do not seek a declaration of invalidity in the case of either superannuation deed nor do they seek orders for repayment of any contributions made to the superannuation funds. Clearly those matters are not within the scope of an application under s.131. Rather, as I understand the applicants' case, it is twofold. First they say that Dr. Wald ought not be able to set aside, through a superannuation arrangement, an annual amount of $14,000 or thereabouts which would otherwise be available for creditors. Next they say (and this is perhaps only a variation of the first contention) that payments ought not to be made to a fund from which other persons as well as Dr. Wald may benefit.
I do not accept the proposition that it is unreasonable for Dr. Wald to make provision by way of superannuation. In practical terms he is self-employed; he is 54 years of age with a family; he is engaged in a demanding profession and a superannuation fund seems to me to be entirely reasonable. An integral part of the superannuation fund are retirement investment plan policies with Legal & General and, as I understand the position, Dr. Wald's accumulated benefits now amount to $70,000. Benefits are payable on retirement or death. Annual contributions to the fund amount to $13,929.10. In my view the contributions made and the benefits accruing are in no way unreasonable.
Counsel made submissions as to the impact of bankruptcy or insolvency on the superannuation deeds. Counsel for Dr. Wald submitted that, in any event, cl.10.5 had no operation where a member was already bankrupt or insolvent at the time a fund was established. Counsel for the applicants drew attention to s.58 of the Bankruptcy Act whereby after acquired property of the bankrupt vests in the trustee. It was suggested that this section might operate to vest any benefits payable under the superannuation deed in the applicants rather than Dr. Wald. I do not find it necessary or desirable to resolve any of these questions. If there has been a forfeiture of benefits under the deed, the trustee of the deed may apply any sums involved for the benefit of Dr. Wald, Mrs. Wald (who is also a member) and their children as dependants. In any event the situation is one of benefits payable under insurance policies on the happening of certain events, not a fund of money available for distribution. Furthermore there is little doubt that the terms of the trust deed could be amended or a new deed entered into so that Dr. Wald's bankruptcy would have no consequences.
There is one other factual matter to which I should refer before turning to the principles to be applied in determining this application. The financial statements for the year ended 30 June 1985 in respect of Carj as trustee for the Wald Family Trust No. 2 shows outstanding loans of some $70,000 to beneficiaries including the Wald children. In practical terms this does not represent a fund from which monies may be paid to the children or for their benefit. The only way these loans could be repaid would be from a sale of the premises. This would simply mean that Dr. Wald would have to make other arrangements to conduct his practice, with adverse financial consequences so far as he is concerned.
Section 131 of the Act begins with the assertion that, subject to the section, "a bankrupt who is in receipt of income is entitled to retain it for his own benefit". It is for a trustee applicant to satisfy the Court that an order under s.131 should be made and to satisfy the Court as to the quantum of that order. Lyford v. Levit (1984) 2 FCR 264. In Lyford v. Levit at p 270 the issue before the Court on an application under s.131 was put this way:
"The question is one of ascertaining what is reasonably necessary for the maintenance of the bankrupt and his family, regard being had to the bankrupt's occupation and station in life ... In making that assessment, the court may bring into account not only the income in the hands of the bankrupt but also income or other funds which are reasonably available to him".
In Lyford v. Levit there was income or other funds reasonably available to the bankrupt through a trust of which he was a potential beneficiary. The Court accepted that the trust may well have been a perfectly legitimate means of redistributing the bankrupt's capital and income, for income tax as well as other purposes, but concluded that the distribution could not be ignored in considering what monies were available to the bankrupt. The Court thought it also relevant that the outgoings of the bankrupt included items to which some contribution might reasonably be expected from his children who were beneficiaries under the family trust.
For the year ended 30 June 1985 Dr. Wald had an income after tax and medicare levy of $37,895. This may be taken as a reasonable guide to his current situation though Dr. Wald anticipates some fall in real earnings from the practice in the current financial year. His living expenses amounted to $29,162 leaving a balance of $8,733, the bulk of which went in payments to the trustees. The living expenses included a component of $6,455 referable to the South Perth home. Dr. Wald pays no rent and his counsel submitted that the rental value of the house was a relevant consideration. But the house constitutes the family home and it would be artificial to seek to attribute some proportion of the rental value to Dr. Wald's occupancy. In any event, the $6,455 he contributed is reasonably proportionate if that exercise were carried out.
In my view the Court cannot ignore Mrs. Wald's income. I do not find it helpful to look to questions that may arise under the Family Law Act 1975 regarding maintenance obligations between husband and wife and parents and children. But if one asks the question - what is reasonably necessary for the maintenance of Dr. Wald and his family having regard to his occupation and station in life - one cannot ignore Mrs. Wald's position. Equally one cannot ignore the position of the family trust though the income available from the trust is minimal. Dr. Wald contributed $22,707 towards the living expenses of himself, his wife and family. I put to one side the $6,455 paid in respect of the house. It seems to me not unreasonable that Mrs. Wald should contribute an amount of $5,000 from her income towards the living expenses of the family. Of course I cannot order that she do so; all I am doing is approaching the matter on the basis that in considering what is reasonably necessary for the maintenance of Dr. Wald and his family, Mrs. Wald's income cannot be ignored. I do not accept the trustees' submission that the living expenses should be apportioned more or less equally between Dr. Wald and Mrs. Wald.
If the figure of $5,000 is added to the $8,000 shown in the schedule, the result is an amount of $13,000 annually. However I do not think the Court should approach the matter in such precise terms for there may be adverse contingencies that the family has to meet. It is true that any order made by the Court may be varied from time to time but it is undesirable that the Court should be called upon to make adjustments each time a contingency, adverse or favourable, occurs.
In my view an appropriate order under s.131 in all the circumstances is that Dr. Wald pay to the trustees Maurice Hodgson Lyford and Rodney Michael Evans the sum of $1,000 a month. I shall hear from counsel on the question of costs and on the precise terms of the order, including the date from which payments should begin.
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