Weissova, B. v The Official Trustee in Bankruptcy

[1986] FCA 262

Re: BOHUMILA WEISSOVA
And: THE OFFICIAL TRUSTEE IN BANKRUPTCY; ZDENEK WEISS
No. G229 of 1986
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Evatt J.
Neaves J.
Beaumont J.

CATCHWORDS

Bankruptcy - after-acquired property - property transferred to a nominee of the bankrupt - transfer, inter alia, discharged liability of third party for professional fees owed to bankrupt - whether by reason of transfer of property, bankrupt was "in receipt of income" within Bankruptcy Act l966 (Cth.), s.131(1).

Words and Phrases - "income"

- "in receipt of"

Bankruptcy Act 1966, s.131(1)

Federal Commissioner of Taxation v. Official Receiver (1956) 95 C.L.R. 300

McDermott v. Black (1940) 63 C.L.R. 161

Rimar Pty. Ltd. v. Pappas (1986) 64 A.L.R. 9

Falstein v. Official Receiver (1962) 108 C.L.R. 523

Nette v. Howarth (1935) 53 C.L.R. 55

Thistlethwayte v. Gender Estates Pty. Ltd. (1976) 8 A.L.R. 700

McLaurin v. Federal Commissioner of Taxation (1961) 104 C.L.R. 381

Allsop v. Commissioner of Taxation of the Commonwealth of Australia (1965) 113 C.L.R. 341

HEARING

SYDNEY

#DATE 8:7:1986

Counsel and Solicitors for Applicant: Mr. D. Bennett, Q.C. and Mr. Lewis instructed by Weiss & Co.

Counsel and Solicitors for First Respondent: Mr. C. Darvall, Q.C. and Mr. P. Urquhart instructed by Australian Government Solicitor

The Second Respondent appeard in person.

ORDER

The appeal be dismissed.

The appellant and the second respondent pay the costs of the first respondent.

Note: Settlement and entry of orders is dealt with in

Order 36 of the Federal Court Rules.

JUDGE1

I have had the advantage of reading the reasons for judgment of Beaumont J. I agree with those reasons and the proposed orders.

JUDGE2

This appeal is brought by Bohumila Weissova from a judgment given on 30 July 1985 by a judge of this Court (Lockhart J.) declaring that a certain strata title unit at Bellevue Hill, a suburb of Sydney, is property divisible amongst the creditors of Zdenek Weiss, a bankrupt, as property acquired by him after the commencement of his bankruptcy and before his discharge (Bankruptcy Act 1966 (Cth), sub-s.116(1)). The appeal raises a single issue - whether the bankrupt is entitled, by virtue of sub-s.131(1) of the Act, to retain for his own benefit, as against the Official Trustee in Bankruptcy, the beneficial interest in the property which Lockhart J. held he had acquired, the latter finding not being disputed on the hearing of the appeal.

1. Lockhart J. concluded that the acquisition by the bankrupt of the beneficial interest in the property did not involve the "receipt of income" by the bankrupt within the meaning of sub-s.131(1) of the Act and with that conclusion I respectfully agree.

2. I have had the advantage of reading the reasons for judgment prepared by Beaumont J. and I agree that, for the reasons there given, the appeal should be dismissed. I also agree that the appellant and the bankrupt should pay the costs of the appeal of the Official Trustee in Bankruptcy.

JUDGE3

This is an appeal from orders made by Lockhart J. declaring that certain property is property acquired by the second respondent after the commencement of his bankruptcy and before his discharge and accordingly divisible among his creditors.

1. The second respondent, a solicitor, became bankrupt on 28 April 1978. He continued to practise as a solicitor on his own account. One of his clients was Mr. Peter Leopold Clyne. The second respondent acted for Mr. Clyne in a large number of matters but was paid by Mr. Clyne for only part of this work. Further, Mr. Clyne became indebted to the second respondent on account of monies paid by the second respondent on Mr. Clyne's behalf for rates and other charges owing. In 1981, a transaction was negotiated between the second respondent and Mr. Clyne whereby, in satisfaction of the several claims of the second respondent against Mr. Clyne, Mr. Clyne agreed to cause a company controlled by him, Metropolitan Mortgage Investment Corporation Pty. Limited (Metropolitan), to transfer to the appellant certain property. The second respondent is the son of the appellant. The property was a home unit, being the property comprised in Certificate of Title Volume 13749 Folio 38 and known as 8/157 Victoria Road, Bellevue Hill. This was the property dealt with by the orders made by Lockhart J.

2. The transfer of the property was dated 17 July 1981 and registered on 14 July 1982. The transfer was executed under the common seal of Metropolitan and the affixing of the seal was attested by Mr. Clyne as managing director. The appellant's address was there shown as in Czechoslovakia. In fact, she is a citizen and resident of that country, has never resided in the home unit and has no immediate intention to do so. She had no dealings with Mr. Clyne and was not involved in the negotiations for the acquisition of the property. The transfer was executed on her behalf by the second respondent as her solicitor. She was not called to give evidence in the proceedings before Lockhart J.

3. The consideration expressed in the transfer was the sum of $40,000.00. Lockhart J. said that this amount was not "strictly apportioned" but found that Mr. Clyne and the second respondent attributed between half and three quarters of that sum to the forgiveness of professional fees due to the second respondent, the balance representing moneys paid by the second respondent on behalf of or for the benefit of Mr. Clyne, such as rates and home unit charges. His Honour further found that the second respondent held a beneficial equitable estate in fee simple in the property and that the "role" of the appellant as transferee of the home unit was an "artifice to give colourable authenticity to what otherwise would have been a questionable transaction."
   

The claim by the first respondent for declaratory and

other orders in respect of the property was opposed by the appellant and the second respondent, as respondents to that application, on the ground that the property represented income of the second respondent earned subsequent to his bankruptcy and thus was protected by s.131(1) of the Bankruptcy Act 1966 (the Act). That sub-section provides that, subject to that section, a bankrupt who is in receipt of income is entitled to retain that income for his own benefit. However, Lockhart J. held that s.131(1) had no application here because the rights derived by the second respondent from the transaction with Metropolitan did not constitute "income" for the purposes of s.131(1). His Honour declared that the property was property divisible among the creditors of the bankrupt and granted consequential relief against the appellant and the second respondent.

1. Despite the finding by Lockhart J. that the second respondent held the property beneficially, no appeal was brought by him from the orders made. The appellant alone appealed, nominating the first respondent as the only respondent to the appeal, not even joining the second respondent as a party for this purpose. The second respondent should have been made a party to the appeal (see Federal Commissioner of Taxation v. Official Receiver (1956) 95 CLR 300 at p 307) and during the argument on the appeal, the Court so ordered.

2. No attempt was made by the second respondent to establish that any particular amount was owing to him by Mr. Clyne by way of professional fees. It was not suggested that the second respondent rendered bills of costs to Mr. Clyne and it appears that an estimate only of the amount said to be owing was made. In his evidence before Lockhart J., the second respondent said that his fees represented "probably about three-quarters" of the sum of $40,000.00. It was not claimed that any such apportionment was arrived at between Mr. Clyne and the second respondent at the time of their transaction. Rather, it seems that the reference to "probably about three-quarters" of the sum of $40,000.00 was merely an estimate made, in hindsight, by the second respondent in the course of his evidence before Lockhart J. For completeness, it should be noted that earlier, in his examination under s.69 of the Act, the second respondent had said that Mr. Clyne owed him "about $20,000.00." The appellant, however, objected to the latter evidence as inadmissible against her, even if admissible against the second respondent. It is not necessary for me to resolve the question of the admissibility of this evidence since, on the view I take of the matter as a whole, it is immaterial whether the fees owed to the second respondent were "probably about three-quarters" of $40,000.00 or "about $20,000.00."

3. The arrangement arrived at by Mr. Clyne and the second respondent in July 1981 was an accord executory between them. Upon the registration of the transfer to the appellant, the accord executory became an accord and satisfaction (see McDermott v. Black (1940) 63 CLR 161 per Dixon J. at pp 183-4). It operated to discharge Mr. Clyne's previous liabilities to the second respondent (see Rimar Pty. Ltd. v. Pappas (1986) 64 ALR 9 per Gibbs C.J. at p 13). Thus, any cause of action previously available to the second respondent to sue for his professional fees was then extinguished or discharged.

4. Nonetheless, did the vesting of the property beneficially in the second respondent as the result of the transaction with Metropolitan involve the "receipt of income" by the second respondent for the purposes of s.131(1)?
   
   

Section 131 provides, so far as relevant: "(1) Subject to this section, a bankrupt who is in receipt of income is entitled to retain it for his own benefit.

(2) The Court may, upon the application of the trustee, order that all, or such part as the Court thinks fit, of the income of the bankrupt shall be paid to the trustee for the benefit of the bankrupt's creditors.

(3) For the purposes of sub-section (2) `income' includes income of a married woman that is subject to a restraint on anticipation, but does not include pension or payments in the nature of pension that, by a law of the Commonwealth or of a State or Territory of the Commonwealth, is exempted from attachment or made incapable of being assigned or charged.

...."

1. In the Report of the Committee Appointed by the Attorney-General of the Commonwealth to Review the Bankruptcy Law of the Commonwealth (1962), in recommending the enactment of s.131, the following observations were made on s.101 of the Bankruptcy Act 1924, the precursor of s.131:
   

"198. The meaning of section 101 has been the subject of much judicial consideration and in Federal Commissioner of Taxation v. Official Receiver (1956) 95 CLR 300 the section was considered by the High Court. It appears from the judgment of the Court that it is implicit in the section that, in the absence of an order, none of the pay, &c., to which the section refers vests in the trustee in bankruptcy. At page 319, Fullagar J. said that the section was capable of two alternative constructions. One was that personal earnings vested in the official receiver except to the extent to which they were required for the support of the bankrupt and his family. The other was that the personal earnings did not vest in the official receiver and that his only right in respect thereof was to obtain an order under section 101, which might be expected to give him so much of those personal earnings as were not required for the support of the bankrupt and his family. The learned Judge thought that prima facie, as a matter of construction and on general considerations of convenience, the latter view of the section should be preferred.

199. The Committee considers that the section ought to be recast to give effect to the view of the section preferred by Fullagar J. and that, subject to any order of the Court, a bankrupt who is in receipt of income should be entitled to retain it for his own benefit.

200. The Committee observes that the Courts have long recognized that a bankrupt is entitled to keep such of his personal earnings as are necessary for the support of himself and his family. Thus, in Williams v. Chambers it was held that if the earnings of a bankrupt are no more than sufficient for the support of himself and his family, the bankrupt could sue for and recover them and the Official Assignee had no right of intervention and consequently no right of action."

1. In Federal Commissioner of Taxation v. Official Receiver, supra, the employer of a bankrupt made weekly deductions from his wages on account of income tax under s.221C(1) of the Income Tax and Social Services Contribution Assessment Act 1936-1953. When the bankrupt's income tax for the relevant year was assessed, it was found to be less than the total amount of the deductions made. The High Court rejected a claim by the Official Receiver that he was entitled to the excess, holding that the sums in question were the personal earnings of the bankrupt which did not vest in the Official Receiver in the absence of an order under s.101.

2. In Falstein v. Official Receiver (1962) 108 CLR 523, it was held that a barrister who, in the course of his practice, was earning and receiving fees was, for the purposes of s.lOl, "in receipt of" the resultant income; and that it was of no consequence that such fees were not recoverable by the barrister by action or suit. The bankrupt applied to rescind an order under s.101 that he pay, for distribution among his creditors, a certain amount each month until further order. The ground of his application was that the order was not authorised by s.101. He submitted that, as a barrister, he could not be said to be "in receipt of" his professional income within s.lOl until such time as he actually received it. Dixon C.J., Taylor and Menzies JJ. said (at p.528):
   
   

"The contention is, however, sufficiently answered by the words of Dixon J. (as he then was) in Nette v. Howarth ((1935) 53 CLR 55) where his Honour said: `Whilst these words' (i.e. `in receipt of') `do not connote necessarily a regular periodicity, they do suggest recurrence as an actual or expected characteristic of the things the section proceeds to describe. They raise a presumption that they will be of a revenue nature' (at p.64). It is, we think, of no consequence that, in New South Wales, a barrister has no legal right to sue at law for his fees, for a barrister who, in the course of his practice, is earning and receiving fees is, in the language of the section, just as much `in receipt' of the resultant income as would be a person who, for his services, is, or will in the ordinary course, become entitled to be remunerated by salary or wages or by a share of business or trading profits. `In receipt of' is, we think, descriptive of an existing and continuing state of affairs and, that being so, it is immaterial that the fees of a barrister are not legally recoverable."

1. In Rimar, supra (at p.13), Gibbs C.J. (Mason, Brennan, Deane and Dawson JJ. concurring) doubted whether dividends paid on shares constituted "income" for the purposes of s.131(1). The learned Chief Justice did not need to decide the point but expressed his reservations about some general observations made in Falstein, supra, which might suggest a contrary view.

2. The authorities dealing with the meaning of s.131 and its precursor, s.101 of the 1924 Act, support the following general propositions:
   
   

(1) Professional earnings are "income" for the purposes of the statute (see Falstein, supra);

(2) a sum which "represents" those earnings in a situation of the kind arising in Federal Commissioner of Taxation v. Official Receiver may also be "income" for this purpose (per Fullagar J. at pp 320-2; cf. Kitto J. at pp 326,331; cf. also Taylor J. at p 337).

(3) The bankrupt must be "in receipt of" the income in the sense explained by Dixon J. in Nette v. Howarth (1935) 53 CLR 55 at p 64, that is to say, whilst the words in s.101 do not connote necessarily "a regular periodicity", they do suggest "recurrence as an actual or expected characteristic." They raise a presumption that the subject matter of the provision will be of a revenue nature. A capital payment is not within s.101. (The extract cited from the report of the Bankruptcy Committee indicates that the proposed alteration to the language of s.101 was not intended to bring about a radical change in the operation of the provision in this respect: the new provision, s.131, was not intended to operate on a capital payment.)

(4) The word "income" refers to the character in which money is paid or received and that character is not determined by the source of the funds employed to make the payment (see Nette v. Howarth, supra). In that case, upon his resignation from the State public service after the sequestration of his estate, a bankrupt became entitled under s.38 of the Superannuation Act 1916-1930 (N.S.W.), to a lump sum equal to the contributions paid by him under that Act. It was held that the amount in question fell outside s.101. Dixon J. said (at p.65):

"The words of sec.101 refer to the character in which money is paid or received. The character in which an accumulated fund is received is not determined by the source of the accumulations. The sum now in question is not in truth even an accumulation of income, salary or the like. It is a sum payable pursuant to statute, which is ascertained by a calculation of the amount contributed in the past from income by deductions from salary. It comes into the hands of the retiring contributor simply as money. It is, as it appears to me, a capital receipt."

(5) Although an income component may be found to be involved in a larger amount paid to a bankrupt, it is usually not easy to characterise such a payment as an amount which falls within the scope of s.131 (see Thistlethwayte v. Gender Estates Pty. Ltd. (1976) 8 A.L.R. 700 per Bowen C.J. in Eq. at p.703). It is true that in a proper case a single payment or receipt of a mixed nature may be apportioned amongst the several heads to which it relates and an income or non-income nature attributed to portions of it accordingly; and it may be appropriate to follow such a course where the payment or receipt is in settlement of distinct claims of which some at least are liquidated or are otherwise ascertainable by calculation. (see McLaurin v. Federal Commissioner of Taxation (1961) 104 CLR 381 at p 391). But no such apportionment is permissible where a party receives a lump sum in consideration of his release of a variety of claims he had or might be thought possibly to have, against another party and it does not appear that the sum or any definite part of it was referable to any particular claim (see Allsop v. The Commissioner of Taxation of the Commonwealth of Australia (1965) 113 CLR 341 at p 352).

1. In my opinion, vesting of the property beneficially in the second respondent did not involve the "receipt of income" by him for the purposes of s.131(1).

1. It is common ground that non-revenue items were involved in the transaction. Moreover, at the time of the transaction, no attempt was made to apportion the notional amount of $40,000.00 in any way so as to indicate any specific amount as professional fees due to the second respondent. It is true that, in his evidence, the second respondent attempted to estimate the amount of his fees but it was not suggested that Mr. Clyne ever assented to this late endeavour to arrive at an apportionment. In the absence of any apportionment at the time by the parties to the accord and satisfaction, it is not now open to the appellant to seek to reconstruct the transaction ex post facto, and to attribute to the transaction, artificially, an apportionment which was never made and was never intended to be made. In form and in substance, the accord and satisfaction was intended to operate, and did operate, so as to discharge claims on various accounts - some of a revenue nature, others not of that nature - then held by the second respondent against Mr. Clyne. In return, the home unit was to be vested in the appellant on behalf of the second respondent as beneficial owner. As a consequence, Mr. Clyne's liability to pay whatever fees were owing was extinguished and the appellant on behalf of the second respondent as beneficial owner was given the property. It is wrong, in my view, to say of that transaction that, thereby, the second respondent was in "receipt of income" for the purposes of s.131. If income is at all involved in the transaction - and, in the absence of an apportionment made at the time it is impossible to say that it could be - the bankrupt was not "in receipt of" it. On the contrary, he elected to forgive any entitlement to income he might otherwise have had.

2. It should be noted that no application was made on behalf of the first respondent to claim, in the event that the appellant were right in her contention, that an order should be made under s.131(2). It is not easy to understand how such an order could be made in respect of the property here in question but this serves only to reinforce the difficulty in seeking to characterise the vesting of the property in the appellant, on behalf of the second respondent as beneficial owner, as a receipt of income by the second respondent.

3. It follows, in my opinion, that Lockhart J. correctly held that s.131(1) could not assist the appellant.

4. It is not disputed that, in the absence of the protection of s.131(1) and in the light of his Honour's finding that the second respondent was beneficially entitled to the property, the combined operation of s.58(1)(b) and s.116(1)(a) justified the orders made by him.

5. I would dismiss the appeal. I would also order that the appellant and the second respondent pay the costs of the appeal of the first respondent.