Young and Young and Anor
[2002] FMCAfam 352
•24 October 2002
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| YOUNG & YOUNG and ANOR | [2002] FMCAfam 352 |
| BANKRUPTCY – Application for annulment of bankruptcy – husband presented his own petition – whether abuse of process being an attempt to frustrate the applicant’s claim to property – finding that the bankrupt is insolvent – discretion exercised not to annul bankruptcy. FAMILY LAW – Effect of s.79 orders – whether orders created a charge over the bankrupt’s interest in the properties such as to make the applicant a secured creditor in the first respondent’s bankruptcy – trust for sale order pursuant to Part XIV of the Family Law Act does not create a charge in favour of the Trustee – creation of charges limited to Part VIII of the Family Law Act – whether orders created an immediate estate or interest in money ordered to be paid so that the sum did not form part of the bankrupt’s assets for the purposes of the Bankruptcy Act. |
Family Law Act 1975 (Cth) ss.79, 80
Bankruptcy Act 1966 (Cth) ss.153B, 303
Re Mottee; Ex-parte Mottee v Official Reciever (1977) 29 FLR 406
Re Moncada; Ex-parte Moncada and Official Trustee in Bankruptcy (1986) 11 FCR 205
McDonald v Official Trustee [1999] FCA 1303
Layton v Westpac Banking Corporation (2000) 181 ALR 603
Irani Finance Limited v Singh (1971) 1 Ch 59
Federal Commissioner of Taxation v Clarke (1927) 40 CLR 246
Henry v Hammond [1913] 2 KB 515
Cohen v Cohen (1929) 42 CLR 91
Walsh Bay Developments Pty Limited & Anor v Commissioner of Taxation (1994) 94 ATC 4682, (1994) 29 ATR 311
Calabrese v Miuccio & Muccio (1984) FLC 91-548
Corry v Corry (1983) FLC 91-343
Pertsoulis v Pertsoulis (1979) FLC 90-613
Bourke v Bourke (No 2) (1994) FLC 92-479
Clyne v DCT [1984] 154 CLR 589
Turner v Turner & Official Trustee in Bankruptcy [2001] FMCA 9
Audet v Audet; Official Trustee in Bankruptcy (1995) FLC 92-607
| Applicant: | KIM IRENE YOUNG |
| First Respondent: | RAYMOND CHARLES YOUNG |
| Second Respondent: | OFFICIAL TRUSTEE IN BANKRUPTCY |
| File No: | CAM 2578 of 2002 |
| Delivered on: | 24 October 2002 |
| Delivered at: | Canberra |
| Hearing Date: | 1 August 2002 (last submissions received 11 September 2002) |
| Judgment of: | Raphael FM |
REPRESENTATION
| Counsel for the Applicant: | Mr G Brzostowski |
| Solicitors for the Applicant: | Elrington Boardman Allport |
| For the First Respondent: | No Appearance |
| Counsel for the Second Respondent: | Mr C M Simpson |
| Solicitor for the Second Respondent | Freidman Reeves |
ORDERS
Application dismissed.
Applicant pay the Second Respondent’s costs.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT CANBERRA |
CAM 2578 of 2002
| KIM IRENE YOUNG |
Applicant
And
| RAYMOND CHARLES YOUNG |
First Respondent
| OFFICIAL TRUSTEE IN BANKRUPTCY |
Second Respondent
REASONS FOR JUDGMENT
Introduction
The applicant is the former wife of the first respondent. The second respondent is Mr Young’s Trustee in Bankruptcy pursuant to the acceptance of a debtor’s petition presented on 12 February 2001. In February 1998 the parties entered into consent orders in the Family Court of Australia for the division of their joint property. These orders were made pursuant to s.79 of the Family Law Act 1975 (Cth).
Mr Young did not comply with the consent orders and enforcement proceedings were brought. The nature and extent of the orders made by the Family Court are discussed in detail in these reasons. The applicant is seeking in these proceedings the annulment of the bankruptcy pursuant to s.153B of the Bankruptcy Act 1966 (Cth) on the basis that the petition ought not to have been presented, alternatively the applicant claims that the effect of the s.79 orders and the orders made consequent thereon is to give her a secured interest over certain of the matrimonial property now vested in the Trustee.
History
The following history is taken from the submissions made on behalf of the applicant with which the respondents did not cavil.
i)The husband and wife signed consent orders in the Family Court on 16 February 1998 in proceedings before Faulks J. Order 7 of those orders provided, inter alia, that the husband pay the wife $34,000.00 by 16 May 1998.
ii)On 2 August 2000 the applicant made an application for enforcement of the consent orders by sale of two properties which were the subject of order 15 of the original orders of Faulks J upon which she had previously lodged a caveat which had been withdrawn. The wife sought orders that she be appointed the trustee for sale of the properties.
iii)On 14 August 2000 Justice Faulks made orders restraining the husband from dealing with the properties otherwise in accordance with a proposed sub-division.
iv)On 5 December 2000 Justice Faulks made orders appointing the wife trustee for the sale of the properties unless the husband paid $34,000.00 on or before 30 January 2001. The husband was provided with time to make an application pursuant to s.79A of the Family Law Act to set aside the original orders made under s.79. This was not done.
v)On 31 January 2001 the applicant’s lawyers wrote to the second respondent who had not paid the $34,000.00 advising him that his wife was now trustee for sale of the properties and she intended to exercise that power.
vi)On 9 February 2001 the first respondent prepared a statement of affairs which he annexed to a debtor’s petition which he presented to ITSA on 12 February 2001.
vii)On 16 April 2002 Justice Faulks made orders in the enforcement proceedings. Orders 1 and 2 related to the transfer of a property known as 30 Bass Street Eden from Mr Young to Mrs Young. Order No 3 is irrelevant. Order No 4 is in the following terms:
“The proceedings about enforcement or relating to the imposition of a charge (depending upon which party’s position is upheld) are transferred to the Federal Magistrate for determination following upon the resolution of the wife’s foreshadowed application for annulment of the husband’s bankruptcy.”
viii)Order 6 is in the following terms:
“The costs of the husband’s trustee in bankruptcy in relation to the proceedings this day, based on the fact particularly that it is asserted on his behalf that this court has no jurisdiction to make the orders sought, I reserve for determination by the Magistrate in making the decisions referred to above.”
ix)Order 7 is in the following terms:
“The wife’s costs of today are also reserved for determination by the same judicial officer.”
Application to Annul
Section 153B of the Bankruptcy Act is in the following form:
“153B If the court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor’s petition, that the petition ought not to have been presented or ought not to have been accepted by the official receiver, the court may make an order annulling the bankruptcy.”
The applicant has standing to bring the proceedings under s.303 of the Bankruptcy Act (re Mottee; ex-parte Mottee v Official Receiver (1977) 29 FLR 406). The basis of the application is that the first respondent’s action in presenting his own petition was not made bona fide but was an abuse of process, being at all times an attempt to frustrate the applicant’s claim to property (the $34,000.00 plus interest) to which she was entitled pursuant to the s.79 orders.
There is not doubt that this is an appropriate application (reMoncada; ex-parte Moncada and Official Trustee in Bankruptcy (1986) 11 FCR 205) provided that the applicant can establish the wrongful intention on the part of the bankrupt. However, even if she is able to do this the court has a discretion as to whether or not to set aside the sequestration order particularly where there is a suggestion that the bankrupt may not be solvent (McDonald v Official Trustee [1999] FCA 1303; Layton v Westpac Banking Corporation (2000) 181 ALR 603).
As evidence of the first respondent’s intentions the applicant referred to an affidavit which she filed on 2 August 2000 in the Family Court proceedings. On two occasions in 1998 the husband indicated that he did not intend to make any payment to her. She also referred to the fact that the husband had not taken any steps voluntarily to put into effect the consent orders that he had signed and the fact that he filed his petition almost immediately after the time granted by Justice Faulks for him to pay her the money owing had expired and she was appointed trustee for sale of the properties. I am prepared to accept the cumulative affect of all these matters as indicating that the first respondent’s motive for filing his own petition was, in large part, to frustrate his wife in her attempts to recover that which he had promised to give her.
The trustee in bankruptcy is the second respondent to these proceedings. He appeared and in accordance with the usual practice provided the court with an affidavit setting out the financial position of the bankrupt.
The applicant’s submissions (pp 7-10) set out in a step by step form calculations which concluded with a submission that the husband’s assets would exceed his liabilities by between $29,157.43 and $69,157.43. It was argued that this excess indicated solvency and that combined with a finding of improper purpose I should annul the bankruptcy.
I took the parties’ representatives through the submissions working from the basis that the two sub-divided properties in respect of which the applicant had been made trustee for sale were worth, not the $85,000.00 suggested by the bankrupt, but approximately $110,000.00 being a figure arrived at on the basis of appraisals which ranged from $100,000.00 to $140,000.00 and were in evidence. The bankrupt had filed a statement of affairs that was significantly at odds with the actual position as evidenced by the proofs of debt which had been filed. The most serious item was a debt allegedly due to the Rural Lands Protection Board in the sum of $51,826.00 which was in fact only $518.28. However, the statement of affairs did not include the $34,000.00 plus interest owed to the applicant. Other debts contained in the statement of affairs were also overstated, although not by any significant amounts. At the end of this exercise it appeared to me that the approximate amount owed by the bankrupt including the amount owed to the applicant and interest was $115,000.00. To this sum would have to be added costs, including the costs of the bankruptcy trustee. The bankrupt’s assets appeared to be only the land in question and there was therefore a deficiency. This exercise was done on an asset/liabilities basis. It is not really an appropriate basis for looking at solvency. Solvency is defined as the ability to pay one’s debts as and when they fall due from one’s own moneys or from moneys readily available to one. The bankrupt has no source of income. The debt to the applicant is pressing and is severely in arrears. I would find that the bankrupt is insolvent.
Although I have found that the bankrupt filed his own petition for reasons which were effectively an abuse of process I would not be prepared to annul this bankruptcy under s.153B. I would exercise my discretion against annulling the bankruptcy on the grounds that the bankrupt is insolvent. It is appropriate that his affairs continue to be controlled by his trustee. The applicant’s purpose in seeking to annul the bankruptcy is to ensure that she could sell the land and recover 100¢ in the dollar on her debt. If I am wrong in my calculations about the bankrupt’s financial affairs and there is a surplus of assets over liabilities then the applicant will still make her full recovery. It is not being suggested that the applicant’s duties as trustee for sale should be handed over to the official receiver. She is therefore in control of the sale and can ensure that this is effected speedily and at the best price. I took all these matters into account when considering the exercise of my discretion.
Is there a charge over the bankrupt’s interest in the properties?
The second leg of the application was for orders:
“That the applicant be declared to have a secured charge and/or equitable charge and/or constructive trust over the property known as Lots 1 and 2 in DP 1017989 (“the real property”).”
In the course of the hearing Counsel for the applicant made submissions which, if accepted, would constitute an additional ground of application. The submission was, in essence, that the s.79 orders constituted a redistribution of the matrimonial property which effectively declared that $34,000.00 of that property belonged to the wife. This “distributive order” merely gave legal effect to an already existing situation so that the $34,000.00 (and presumably any interest upon it) became the property of the wife and did not form part of the bankrupt’s estate. As the claim was only put forward at the hearing I gave both legal representatives leave to provide me with written submissions. I will deal first with the application as originally formulated and consider whether or not the s.79 agreement and/or the orders of Faulks J created an equity over the properties to secure payment of the agreed sum of $34,000.00.
Section 79 of the Family Law Act falls within Part VIII of that Act dealing with “property, spousal maintenance and maintenance agreements.” Section 78 of the Act gives the court power to declare title or rights which parties hold in respect of a property which is the subject of proceedings and to make consequential orders where a declaration has been made. Section 79 is the operative provision:
“79(1) [Orders] In proceedings with respect to the property of the parties to a marriage or either of them, the court may make such order as it considers appropriate altering the interests of the parties in the property, including an order for a settlement of property in substitution for any interest in the property and including an order requiring either or both of the parties to make, for the benefit of either or both of the parties or a child of the marriage, such settlement or transfer of property as the court determines.”
The other relevant section is s.80:
“80(1) [Orders which court may make] The court, in exercising its powers under this part, may do any or all of the following:
b) …
c) …
ba)…
c)order that payment of any sum ordered to be paid be wholly or partly secured in such manner as the court directs.”
The orders which were made on 16 February 1998 were made by consent. They purported to be made pursuant to s.79 and were thus made pursuant to Part VIII of the Family Law Act. No order securing payment of the money under s.80(1)(c) was made, although it could have been. It is not possible to class the s.79 order as constituting a charge over the properties.
The next time the matter came before the Family Court on 14 August 2000 further orders were made restraining the husband from doing anything to transfer, encumber, dispose of or otherwise diminish the value of certain properties including properties which became the sub-divided properties over which the applicant is now trustee for sale. The orders, which were made on 14 August were made in exercise of the court’s injunctive powers under Part XIV of the Family Law Act. They were not alleged to be made under s.80(1)(k) of the Family Law Act which gives power to make “any other order the court thinks necessary to do justice.”
On 5 December 2000 the court made further orders in the following terms:
“THAT the Wife’s proceedings for enforcement of Order 7 made in this Court by consent on the 16th February 1998 are granted to the extent that if the sum due to the Wife pursuant to that order and under the regulations as far as interest is concerned is not discharged on or before the 30th January 2001, then the Wife be and is hereby appointed trustee for sale of Lot 1 in deposited plan 1017989 at Narrabarba in Folio 1/1017989 and Lot 2 in deposited plan 1017989 being Folio 2/1017989 in the Land Title’s Registry at Sydney in New South Wales;
THAT if it becomes necessary to exercise the power of sale, the applicant will have such powers as may reasonably devolve upon a trustee for sale in such circumstances but has liberty to apply for further directions or for further orders of this Court to complete such powers and further that she has liberty to apply in relation to the potential creation of a further trusteeship for sale in relation to Lot 6 in deposited plan 1017989 insofar as the respondent has any entitlement there to.”
The use of the words “the wife’s proceedings for enforcement of order 7 made in this court by consent on 16 February 1988” are important. Enforcement proceedings under the Family Law Act are found in Part XIII ss.105 to 109B. There is no power in that part of the Act to create a charge over property although there is power to make orders for the sale of property as found in the orders recited above. There is likewise no power to create a charge in Part XIV of the Act.
The trust for sale is an ancient use. Those created by will can be traced back for some 500 years when they were created for the purpose of raising money for the payment of debts of the deceased as opposed to providing for succession. They became more common as inter vivos settlements in the 19th century. Generally speaking, property is vested in trustees with a requirement that they sell it, but with a power to postpone that sale. The beneficiaries of a trust for sale may be the trustees themselves or independent trustees may be appointed. The former case pertained when parties purchased land as tenants in common, because in England this was not a legal estate. Joint owners would therefore hold land as joint tenants on trusts for sale for themselves as tenants in common in equal or unequal shares. The doctrine of conversion applied to a trust for sale so that a beneficiary under such a trust did not hold an interest in land. This has relevance to the present case because it meant that a party’s interest in the proceeds of sale could not be the subject of a charge (Irani Finance Limited v Singh (1971) 1 CH 59 at 69 and 80 per CA). In my view the affect of the order of Faulks J was to permit the applicant to have the properties vested in herself on trust for sale. I do not think the orders went so far as to declare her a beneficiary of that trust, but even if she was her interest was not an interest in land and therefore the orders could not have constituted a charge on the property. This is the situation in the general law. There is nothing in the Family Law Act which would have allowed His Honour to create a charge at the time he made the order constituting the applicant a trustee for sale because the power to create a charge is restricted to Part VIII of the Act.
In order to avoid any doubt, I would add that I am of the view that the order of Faulks J in December 2000 could not have impliedly made the applicant a beneficiary of the trust for sale. To do so would have altered the terms of the original s.79 Order which (subject to what is said below) only made her a creditor of the first respondent for the sum of $34,000. Orders under s.79 can only be varied by an application under s.79A and in limited circumstances. The hearing before Faulks J in December was not such an application. The parties must have been aware of this because His Honour allowed the first respondent time to make such an application.
I am satisfied that the property is not subject to a charge in favour of the applicant such as to make her a secured creditor in his bankruptcy.
The final question to be decided is whether or not the nature of a s.79 order is such as to create an immediate estate or interest in money ordered to be paid by one party to another so that the sum does not form part of his assets for the purposes of s.58 of the Bankruptcy Act.
Counsel for both the applicant and the second respondent provided me with written submissions in relation to these aspects of the matter. At 1.4 of the applicant’s submissions he states:
“The next stage of the argument is that once an order is made under section 79, the beneficial interest passes and the other party holds his or her legal interest upon constructive trust for the other party. It no longer forms part of the estate of the first party.”
At 2.2 he states:
“The party or a child who is to receive title being transferred to him or her becomes beneficially owner of the property that is, by the order, to become his or hers. Pending formal transfer, or even pending enforcement, the owner at law becomes a constructive trustee of that property. The same applies to money that is to be paid over, as money to the value stated becomes the property of the other party. It is held by the former owner in trust for the other party.”
The difficulty which I have with this submission is that it ignores one of the basic principles of the law of trusts. That is that the subject matter of a trust must be certain. It must be clear what the property is upon which the trust is to operate: Federal Commissioner of Taxation v Clarke (1927) 40 CLR 246. There can be no trust without property. Consequently, if there is no property upon which the trust can take effect, or if it is so described by the settlor that it cannot be identified, there can be no trust.
The nature of the orders made against the husband in this case were to pay a sum of money to the wife. Such an order creates the relationship of debtor and creditor. A debtor is not a trustee for his creditor since there is no identifiable fund which the latter is entitled to compel the debtor to apply for his or her benefit.
Pursuant to the consent orders made in the Family Court, the husband merely has a duty to pay an amount of money to the wife, not specific notes and coins, but some money of his own. The obligation is personal and does not relate to any particular property. In Henry v Hammond [1913] 2 KB 515 (approved by Dixon J in Cohen v Cohen (1929) 42 CLR 91 at 101 and Foster J in Walsh Bay Developments Pty Limited & Anor v Commissioner of Taxation (1994) 94 ATC 4682, (1994) 29 ATR 311) Channell J at 521 said:
“We must apply the principle to a case where the property is a sum of money. It is clear that if the terms upon which the person receives the money are that he is bound to keep it separate, either in a bank or elsewhere, and to hand that money so kept as a separate fund to the person entitled to it, then he is a trustee of that money and must hand it over to the person who is his cestui que trust. If, on the other hand, he is not bound to keep the money separate, but is entitled to mix it with his own money and deal with it as he pleases, and when called upon to hand over an equivalent sum of money, then, in my opinion, he is not a trustee …. but a mere debtor. All the authorities seem to me to be consistent with that statement of the law.”
This is the true nature of the orders made by consent and then by Faulks J. The husband was to find amongst his assets a sum of money which he was to pay to his wife, if he did not have that amount of money he could not pay it. His assets were not charged to pay it and the existence of the order did not create such a charge. The cases considered by the applicant’s counsel in his submissions such as Calabrese v Miuccio & Muccio (1984) FLC 91-548, Corry v Corry (1983) FLC 91-343, Pertsoulis v Pertsoulis (1979) FLC 90-613, Bourke v Bourke (No 2) (1994) FLC 92-479 deal with severances of joint tenancies, clearly definable property.
The applicant alleges that the debtor was in abuse of process by declaring himself bankrupt as soon as he was placed in a position whereby he was required to comply with the order of the Family Court. The applicant says that the debtor was not insolvent and that:
“The self-bankruptcy in the circumstances of this case is a serious abuse of process because it stifles the Family Court’s power to enforce its orders.”
I accept that in the appropriate circumstances such as those appearing in Clyne v DCT [1984] 154 CLR 589 that the debtor’s petition should be annulled. I accept that this can happen where a party to a marriage takes out his own petition to avoid the consequences of family law orders (Turner v Turner & Official Trustee in Bankruptcy [2001] FMCA 9). But I have found that the bankrupt is insolvent and that I should exercise my discretion not to annul the bankruptcy (see [11] of these reasons). The applicant relies on Audet v Audet; Official Trustee in Bankruptcy (1995) FLC 92-607. To my mind that case does not assist her. It reiterates the general principle that a post-s.79 consent award bankruptcy does not affect the accrued rights of the parties (subject always to the provisions of ss.120 and 121 of the Bankruptcy Act). If these rights are as between a debtor and a creditor then the creditor can prove her debt in the bankruptcy.
I am satisfied that I should not grant any of the orders requested by the applicant in these proceedings. I dismiss the application. I order that the applicant pay to the second respondent its costs pursuant to Part 21, rule 21.10 of the Federal Magistrates Court Rules. I certify that the matter was suitable for an advocate pursuant to Rule 21.15.
There remains outstanding the costs orders in respect of the final hearing before Faulks J which were reserved by his Honour. I do not appear to have been addressed on this subject and I therefore grant leave to the parties to provide me with their written submissions within seven days.
I certify that the preceding thirty-three (33) paragraphs are a true copy of the reasons for judgment of Raphael FM
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