Re Ankica Dugac v the Official Trustee In Bankruptcy [1988] FCA 42 (1 March 1988)

FEDERAL COURT OF AUSTRALIA

Re: ANKICA DUGAC
And: THE OFFICIAL TRUSTEE IN BANKRUPTCY
No. NSW G85 of 1987
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Sheppard(1), Wilcox(1) and Burchett(1) JJ.

CATCHWORDS

Bankruptcy - Administration of bankrupt estates - Real estate partly vested in Official Trustee and partly in bankrupts' family - Application for declarations as to liability of Official Trustee to contribute to expenditure made by one co-owner - Expenditure to repair damage to property caused by tenant - Circumstances upon which interest should be paid on expenditure incurred by co-owner - Appropriate rate of interest.

Bankruptcy Act 1966

HEARING

SYDNEY
1:3:1988

Counsel for the Appellant: Mr R A Campbell

Solicitors for the Appellant: W H Baker, Love & Geddes

Counsel for the Respondent: Mr B W Walker

Solicitors for the Respondent: Lobban, McNalley & Hartnet

ORDER

The orders made by Evatt J on 6 February 1987 be varied by substituting for:

(a) the words and figures "the sum of $6,000"

the words and figures "a sum of money
equal to 6/95ths of the value of the
property at date of partition or the
price realised on sale, as the case may
be, this sum being"; and

(b) the interest rate of 7.5% per annum
referred to therein the rate of 11% per
annum.

Otherwise the appeal be dismissed.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

This appeal challenges certain declarations made by Evatt J in connection with the administration of the estates of two bankrupts, Mijo Dugac and his son Mario.

2. A sequestration order was made against the estates of the two bankrupts, who carried on a partnership business as formwork contractors, on 9 December 1975, the Official Trustee in Bankruptcy being appointed trustee of their joint and several estates. Seven creditors lodged proofs of debt in the joint estate of the bankrupts. They were admitted to rank for dividend for a total sum of $46,522. No proofs were lodged in the separate estates of the bankrupts. The bankrupts were discharged from bankruptcy on 9 November 1984, no dividend having been paid to the creditors at that time. Mr Mijo Dugac has since died.

3. The Dugac family, Mr Mijo Dugac, his wife, Ankica, Mr Mario Dugac and a daughter, Maria, arrived in Australia from Yugoslavia in 1970. In 1972 a house at Sans Souci was purchased, each of the members of the family having a quarter share as tenants-in-common. Finance was provided by Mercantile Credits Limited, by whom a mortgage was taken. This remained the position at 9 December 1975, so that a consequence of the sequestration order was to vest in the Official Trustee two one quarter shares in the house.

4. The Dugac family continued to occupy the house until 1977, when they moved to Newcastle. At about that time four new rooms were added to the house. Certain minor alterations and repairs were also made. The learned trial judge accepted evidence that Mrs Dugac expended a total of about $17,000 upon this work, but he also accepted the evidence of a valuer called by the present appellant, Mrs Dugac, that the resultant increase in value -- assessed as at September 1986 -- was only $12,000.

5. After the Dugac family moved to Newcastle the house was let to various tenants. The Official Trustee became aware of the position, but it appears that he was never consulted in connection with the decisions to let. At no time did any of the members of the Dugac family account to the Official Trustee for the rent received by them from tenants, despite at least one request in that regard.

6. The last of the tenants left the house in July 1983. That tenant left the house in a damaged condition, causing Mrs Dugac to spend money on repairs. Mrs Dugac estimated her expenditure at $20,000, a figure which, on her estimations, included some $2,300 for replacement of damaged furniture. Mrs Dugac produced no documentary evidence in support of the figure of $20,000. Evatt J described the evidence as to the cost of the renovations as "very scant"; but, because of the view he took upon the principle of recoverability of the moneys expended, it was not necessary for his Honour to reach any conclusion as to the amount expended.

7. Since 1983 the house has remained unoccupied. Some attempts have been made to sell the property and there have been discussions between the Official Trustee and Mrs Dugac about the possibility of one of the parties buying out the interests of the other owners. But no agreement has been reached. One difficulty about a sale to a third party is that the house is in an area intended ultimately to be acquired to enable the construction of an expressway. But, although this fact would no doubt deter some potential purchasers and may depress the value of the property, it does not appear that the property is unsaleable. A major part of the problem is that the parties have been unable to agree as to the distribution between them of the proceeds of any sale.

8. In an effort to resolve these difficulties, the present proceeding was commenced on 19 June 1986. As the Application stood at the time of the trial, the applicants were Mr Mario Dugac and Mrs Dugac. The daughter, Maria, was informed of the proceeding but did not seek to take any active part in its resolution. It is difficult to see that Mr Mario Dugac had any interest in the proceeding. In fact the relief which was granted was in favour of Mrs Dugac alone; and she is the sole appellant.

9. At the trial a number of claims were pressed. Evatt J acceded to two of them. He ordered that, upon any partition or sale of the property, the Official Trustee contribute to Mrs Dugac:

"(i) the sum of $17,442.96 plus interest,
being one half of moneys paid by her in
respect of council rates and water rates
for the property from 1977 until 18
September 1986 and mortgage payments in
respect of the mortgage registered on the
title of the said property from 1977 to
31 January 1986;

(ii) the sum of $6,000.00 in respect of
improvements made to the said property by
the applicant, Ankica Dugac, in
1977-78."

In addition, his Honour ordered that the Official Trustee contribute interest upon the moneys referred to in order (i), calculated at 7.5% per annum on annual rests dated 31 December in each year.

10. Mrs Dugac contends that the orders made by Evatt J are deficient in three respects. Firstly, it is said that his Honour should have ordered contribution by the Official Trustee in connection with the payment made by Mrs Dugac to repair the damage inflicted upon the property by the tenants. Secondly, complaint is made at the absence of an order for payment of interest upon the sum of $6,000 required to be contributed in relation to the 1977-1978 repairs. Finally, the appellant contends that the interest rate of 7.5% selected by his Honour was too low.

11. The principle underlying the orders made by Evatt J was considered in this Court in Squire v Rogers (1979) 27 ALR 330. In that case, in a passage at pp.346-347 with which Forster and Brennan JJ agreed, Deane J said:

"As a general rule, capital expenditure upon
permanent improvements to land by one joint
owner without the authority of his co-owner
creates a passive equity which attaches to the
land. The joint owner making the improvements
is not entitled to bring proceedings for
contribution against his co-owner. In
circumstances where his co-owner (or a
successor in title of his co-owner other than
a purchaser for value without notice) would
otherwise unfairly benefit under an order in
equity (including partition or sale of the
property), he is entitled to an allowance for
his expenditure on such improvements to the
extent to which they result in the present
enhancement of the value (or the price on
sale) of the land: see, generally, Leigh v
Dickeson LR (1884) 15 QBD 60; Williams v
Williams (1899) 81 LT (NS) 163; Re Jones;
Farrington v Forrester (1892) 2 Ch 461;
Brickwood v Young [1905] HCA 12; (1905) 2 CLR 387; Re Byrne
(1906) 6 SR (NSW) 532; McMahon v Public
Curator of Queensland (1952) St R Qd 197;
Noack v Noack (1959) VR 137 and D Mendes da
Costa: Co-Ownership under Victorial Land Law[1961] MelbULawRw 20; ,
3 Melbourne University Law Review 137 at
138ff. The operation of these principles, on
a sale under the Partition Act, was succinctly
stated by A H Simpson CJ in Eq in Boulter v
Boulter (1898) 19 LR (NSW) Eq 135 at 137 in
the following passage: 'Where an owner of an
undivided interest in land spends money in
improving the property so that on a sale under
the Partition Act it fetches an enhanced
price, a Court of Equity in dividing the
proceeds of sale will not allow the other
co-owners to take their shares of the
increased price without making an allowance
for what has been expended to obtain that
increased value: Leigh v Dickinson (sic).
This course of action cannot inflict any
injustice on the other co-owners, for it takes
nothing out of their pockets, it only prevents
them putting into their pockets moneys
obtained by the expenditure of another person,
unless they recoup him such expenditure. In
no case can the co-owner who has improved the
property obtain more than his outlay, though
such outlay may have trebled the value of the
property. And, on the other hand, the
increase in the price obtained is the limit of
what he can receive, though his actual outlay
may be far larger.'"

12. It is important to note that the principle underlying contribution is based upon fairness; a person who has remained passive should not be allowed to benefit from expenditure made by a co-owner which results in an enhanced price on sale. If particular expenditure does not benefit the co-owner, either by increasing the return to the owners whilst the property continues to be held -- for example, an increased rental yield -- or by increasing the price realisable on sale, there is no basis for an order for contribution.

13. The expenditure made by Mrs Dugac in 1983 was necessitated by the damage done to the property by one or more of the tenants. If the decision to let the property, and the choice of the various tenants, had been matters in which the Official Trustee had been involved, it might properly be said that the letting of the property was a joint venture between the co-owners so that all must share the burden of the loss occasioned by tenant damage; and more especially so if all of the co-owners had shared in the benefit of the rents received from those tenants. In such circumstances it would be manifestly unfair for one co-owner to leave the others to bear one of the costs of their joint venture.

14. However, that is not this case. The Official Trustee had nothing to do either with the decision to let the property or with the selection of the various tenants. Neither did he share the rental income. On the contrary, the members of the Dugac family declined to account for that rent. Under those circumstances there is nothing unfair -- as between Mrs Dugac and the Official Trustee -- about Mrs Dugac being left to bear the burden of the expenditure required to make good the damage caused by the tenants. On the contrary, the making of an order would be unfair to the Official Trustee.

15. Counsel for the appellant pointed out that the effect of the expenditure made by Mrs Dugac was to improve the condition of the house, and hence its value, as compared with the situation immediately prior to the repairs being made. This is true; in that sense there was an enhancement. But this is too narrow a perspective. The whole of the facts must be considered. In this case it is of fundamental importance that the diminution in condition and value which immediately preceded the incurring of the expenditure was something for which the Dugacs bore responsibility.

16. In our view Evatt J correctly rejected the appellant's claim for contribution in connection with the 1983 expenditure.

17. The appellant does not challenge the decision of Evatt J to allow $6,000 in respect of the expenditure incurred in 1977-78 but says that, as she has been out of pocket all this time, interest ought to have been allowed. But this submission overlooks the fact that the calculation of $6,000 was based upon the enhancement of value ($12,000) occasioned by the 1977-78 expenditure, as assessed in September 1986. The relevant principle, as was explained in Squire v Rogers, is that an owner who has expended money may recover on sale or partition an appropriate proportion of the money expended or of the added capital value, whichever is the less. In a case where the relevant measure is money expended, there appears to be no reason in principle to refuse to take into account the time when the money was expended and the loss of the value of that money since that date. In such a case the loss of interest is part of the cost incurred. However, where the contribution is measured by the enhancement in the capital value effected by the expenditure, the relevant date is the date of sale or partition. It is not until that date that the true effect of the expenditure may be measured. It follows that there is no question of interest being allowed; the contributor is paying that amount which represents the benefit he or she will obtain on the sale or partition. By definition, that benefit is less than the actual cost to the claimant for contribution, so that the fact that the claimant has also borne a loss of interest is irrelevant.

18. Evatt J was correct in declining to add interest to the award of $6,000.

19. It follows from what has already been said that, in one sense, the present proceeding is premature. The property has not yet been sold or partitioned. It is already 17 months since the date at which the enhancement of value was assessed. And, although it is obviously in the interests of all parties (and the creditors of the two bankrupt estates) for the house to be sold as soon as possible, there may be further delay before a sale is effected. It is most unlikely therefore that the enhancement, as at the date of sale, will be the same as at September 1986. Strictly, the assessment of contribution should have awaited a sale or partition, so that the assessment might have been made as at that date. This would have ensured that neither party would suffer from movements in the market in the meantime.

20. However, the problem of contribution was apparently an impediment to an agreement for sale. From a practical point of view there was some advantage in resolving that question as soon as possible. No doubt it was for this reason that the parties were content to have Evatt J deal with the matter upon the basis of the September 1986 value of the property rather than upon the eventual sale price. Before us the parties maintained that position; but it was agreed that, in view of the delay which has occurred since the hearing before Evatt J, it would be better to amend the order for contribution by referring to a proportion of sale price rather than a dollar amount. The valuer's estimate of the value of the property as at September 1986 being $95,000, the appropriate proportion was agreed to be 6/95. By consent of the parties this Court will amend the order of Evatt J accordingly.

21. Finally, we turn to the question whether the interest rate of 7.5% per annum adopted by Evatt J in connection with the moneys paid by Mrs Dugac for rates and mortgage payments was too low. In connection with this matter his Honour said:

"Determining an actual interest rate appears to
be somewhat arbitrary. Mr Walker submitted
that if a rate was to be imposed it should be
a low rate because the Trustee has not
exercised his rights under the Statute of
Limitations to thwart any claim for
contribution whatsoever. Further, the Court,
when assessing such rate, should include, when
weighing the evidence in this regard, the
evidence showing that it was not Mrs Dugac's
practice to invest her moneys in interest
bearing accounts. It is clear, however, that
the proportion of such money as expended by
Mrs Dugac representing the interests of the
other tenant-in-common including that of the
bankrupts, which should have been paid by the
Trustee, could have earned her throughout a
period of up to 10 years, a market rate of
interest in any bank account.

With some hesitation I have reached the
conclusion that the Court should allow Mrs
Dugac interest on the sums paid for the
council and water rates and the mortgage
repayments. Doing the best I can, I consider
that a rate of 7.5% p.a. in respect of the 10
years commencing 1977 would be fair and
equitable to all parties in the circumstances
of this case."

22. The selection of an interest rate, in circumstances such as this, involves an exercise of judgment rather than calculation. It is a discretionary judgment to which are apposite the principles enshrined in such well known cases as House v The King (1936) 55 CLR 449, Lovell v Lovell [1950] HCA 52; (1950) 81 CLR 513 and Gronow v Gronow [1979] HCA 63; (1979) 144 CLR 513. It is not enough that an appellate court might itself have taken a view different from the trial judge. Intervention is only justified where it appears that the trial judge has fallen into some error of law or of fact, or has proceeded upon an erroneous principle, or where -- no such error being apparent -- the result is so unreasonable or manifestly unjust that the appellate court may infer that, in some unidentified way, there has been a failure properly to exercise the discretion reposed in the trial judge.

23. In the present case no error of fact or of law is revealed in the judgment of Evatt J. It does not appear that his Honour proceeded upon an incorrect principle. The appellant does not dispute that the matters referred to by the trial judge were matters properly to be taken into account. Can it be said that a figure of 7.5% per annum is so low as to indicate that, in some undisclosed way, his Honour failed properly to exercise his discretion?

24. Counsel agreed that, in considering this question, the Court might have regard to the interest rate available during relevant years from Australian Savings Bonds and also to the rate prescribed from time to time under s.94 of the Supreme Court Act 1970 (NSW) for guidance in the calculation of pre-judgment interest. We have in fact examined those figures. In the period from 1 January 1977 to 2 December 1980 the Australian Savings Bond rate varied between 8.75% and 10.25%, exceeding 10% only in the last four months of that time. During that same period the s.94 rate was 10%. Interest rates rose at the end of 1980. The Australian Savings Bond rate peaked at 14.75% between July and September 1982, dropping back to 11.25% by July 1984. The s.94 rate rose to 15.5% between July 1982 and December 1983, before dropping away to 13.5% during 1985 but then rising again, as high as 19.5% in 1986-87.

25. We think that the Australian Savings Bond rate is the more relevant of the two scales. This is a fair indication of the return which Mrs Dugac could have obtained had she had available the moneys in respect of which contribution was ordered and had she chosen to invest those moneys in an easily accessible secure investment. The s.94 figures, which are generally higher, serve to confirm our impression that the rate adopted by the trial judge was too low. Moreover, we think that the discrepancy between what was ordered by his Honour -- who was not assisted by reference to any scale of interest rates -- and what is revealed by those scales is such as to require us to go further and to hold that the allowed rate was so far out of line with what would have been available to Mrs Dugac as to amount to a manifest injustice. This Court should intervene and substitute its own figure. For ease of calculation it is desirable to adopt a single percentage for the whole of the period, that percentage reflecting not merely the matters referred to by his Honour but also the ranges of figures in the two scales to which we have referred. It seems to us that the figure of 11% would be fair to both parties.

26. Accordingly we propose to allow the appeal to the extent of substituting the figure of 11% per annum for that of 7.5% per annum selected by Evatt J. Otherwise the appeal will be dismissed.

27. As to costs, each party has had some success. The main matter argued on the appeal -- both in money terms and duration of argument -- was the claim for contribution in respect of the 1983 expenditure. The appellant failed upon that matter, as also on the second question: interest on the payment of $6,000. The appellant has, however, been successful on the third matter: the interest rate. So she should not be ordered to pay the costs of the appeal generally. However, it would be unfair to the respondent to give the appellant the costs of the appeal generally, without some offset of the costs relating to the issues on which she failed. An apportionment would be difficult to make. We think that substantial justice would be done if no order for costs were made, leaving each party to bear his or her own costs.