Peter Andrew Gillies Ex Parte: the Official Trustee In Bankruptcy; the Trustee of the Property of Peter Andrew Gillies [1993] FCA 289; (1993) 115 ALR 631 (1993) 42 FCR 571 (11 June 1993)

FEDERAL COURT OF AUSTRALIA

PETER ANDREW GILLIES
Ex parte: THE OFFICIAL TRUSTEE IN BANKRUPTCY; the Trustee of the property of
PETER ANDREW GILLIES
No. 496 of 1991
FED No. 409
Number of pages - 6
Bankruptcy
[1993] FCA 289; (1993) 115 ALR 631
(1993) 42 FCR 571

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
GENERAL DIVISION
French J(1)

CATCHWORDS

Bankruptcy - after-acquired income - whether vests in trustee - consideration of legislative scheme for requiring contributions of income - continuing assumption that income does not vest in the trustee - accumulated after-acquired income available for composition.

Bankruptcy Act 1966 s.134(4)

Re Roberts (1900) 1 QB 122

Federal Commissioner of Taxation v. Official Receiver [1956] HCA 24; (1956) 95 CLR 300

Re Weiss; Ex parte Official Trustee in Bankruptcy [1985] FCA 283; (1985) 7 FCR 121

Nette v. Howarth [1935] HCA 22; (1935) 53 CLR 55

Weissova v. Official Trustee in Bankruptcy (1986) 12 FCR 106

Edelsten's Trustee v. Commissioner of Taxation (1987) 16 FCR 386

Thistlethwayte v. Gender Estates Pty Ltd (1976) 8 ALR 700

Lyford v. Levit (1984) 2 FCR 264

HEARING

PERTH, 2 June 1993
11:6:1993

Counsel for the Applicant: Mr F. Carles

Solicitors for the Applicant: Australian Government Solicitor

ORDER

THE COURT ORDERS THAT:
1. The sum of $4,000 accumulated from the income of the bankrupt

since 1 July 1992 is not after-acquired property of the bankrupt
which vests in the Official Trustee pursuant to s.58(1)(a) and
(6) of the Bankruptcy Act 1966.
2. The sum of $4,000 accumulated from his income by the bankrupt
since 1 July 1992 can be offered to his known creditors in the
form of a composition proposal.

Note: Settlement and entry of Orders is dealt with in Rule 124 of the Bankruptcy Rules.

DECISION

FRENCH J On 4 April 1991, Peter Andrew Gillies, who is a professional diver, became a bankrupt upon acceptance by the Registrar in Bankruptcy of his debtor's petition filed on that date. At the time of his bankruptcy he was employed by the Department of Defence at the Naval Base, HMAS Stirling. His unsecured creditors as disclosed in the statement of affairs were owed a total of $22,000. His assets comprised a 1965 Holden HQ motor vehicle said to be worth $800, $6 cash and a Defence Force Retirement and Death Benefit valued at $8,000.

2. At present Mr Gillies works as a contract diver for periods which generally range between two and six weeks. He works offshore with little or no expenses during these periods as all outgoings are provided by his employers. The Official Trustee has assessed Mr Gillies' income for the purposes of sub-division C of Part VI of the Bankruptcy Act for the period 1 July 1992 to 30 June 1993 and ascertained that he is liable to pay a contribution to the Trustee of $3,865 for that financial year. $1,932 has been paid to date for the period to 31 December 1992. The remaining sum of $1,933 must be paid to the Official Trustee by 30 June 1993.

3. On 20 January 1993, Mr Gillies submitted a proposal for a composition to the Official Trustee. The terms of the composition involved payment of a sum of $4,000. On 8 February he wrote to the Official Trustee advising that by March 1993 he would have accumulated that sum from payments received from diving contracts since 1 July 1992. Mr Gillies seeks to have the composition accepted so that he may obtain an annulment of his bankruptcy. This would enable him to seek advanced diving qualifications overseas to enhance his employment opportunities. He also intends to acquire another motor vehicle as his primary means of transport to replace the existing vehicle which has been assessed as unroadworthy by the Western Australian Police Department.

The Question for Determination
4. The Official Trustee seeks directions from the Court under s.134(4) of the Bankruptcy Act in respect of the following questions:

1. Whether the sum of $4,000 accumulated from his income by
the bankrupt since 1 July 1992 can be offered to his
known creditors in the form of a composition proposal.
2. Whether the sum of $4,000 accumulated from his income by
the bankrupt since 1 July 1992 is after-acquired property
of the bankrupt which vests in the Official Trustee
pursuant to s.58(1)(a) and (6) of the Bankruptcy Act
1966.
3. Whether any asset purchased by the respondent with the
said sum of $4,000 or any other moneys accumulated from
his income by him since the date of his bankruptcy is
after-acquired property of the bankrupt which vests in
the Official Trustee pursuant to s.58(1)(a) and (6) of
the Bankruptcy Act 1966.

Mr Gillies was given notice of the hearing of the application but indicated his intention not to attend.

The Legal Framework
5. The assumption of control over the property of the bankrupt, including after-acquired property is fundamental to bankruptcy law. Section 141 of the Bankruptcy Act 1849 (Imp) (12 and 13 Vic C 106) vested in the Assignee of a person adjudged bankrupt "all his personal estate and effects, present and future...and all property which he may purchase, or which may revert, descend, be devised or bequeathed or come to him, before he shall have obtained his certificate...". In the Bankruptcy Act 1869 (Imp) (32 and 33 Vic C 71) s.15 included in the definition of property of the bankrupt divisible among his creditors:

"15(3) All such property as may belong to or be vested
in the bankrupt at the commencement of the bankruptcy
or may be acquired by or devolve on him during its
continuance."

By s.90 of that Act where a bankrupt was in receipt of a salary or income (subject to certain exceptions relating to Crown employees) the court, upon the application of the trustee, could make such order as it thought just "for the payment of such salary or income, or of any part thereof, to the trustee during the bankruptcy, and to the Registrar if necessary after the close of the bankruptcy...". The vesting and income provisions of the 1869 Act were reflected in ss.44 and 53(2) of the Bankruptcy Act 1883 (Imp) (46 and 47 Vic C 52). They were later translated to ss.38 and 51 of the Bankruptcy Act 1914 (UK).

6. The Bankruptcy Act 1924 (Cwth) provided in s.60 for the vesting of the bankrupt's property in the official receiver upon the making of a sequestration order. By s.91(i) the vesting extended to after-acquired property. Section 101 provided:

"101. Subject to this Act, where a bankrupt is in
receipt of pay, pension, salary, emoluments, profits,
wages, earnings, or income, the trustee shall receive
for distribution amongst the creditors so much thereof
as the Court, on the application of the trustee,
directs:
Provided that this section shall not apply to any pay,
pension, salary, or wages which by any Act or State
Act is made exempt from attachment or incapable of
being assigned or charged."

The Court of Appeal, passing upon s.44 of the 1883 Act in Re Roberts (1900) 1 QB 122 took the view that:

"After bankruptcy and before his discharge, whatever
property a bankrupt acquires belongs to his trustee,
save only what is necessary for his support."

However in Federal Commissioner of Taxation v. Official Receiver [1956] HCA 24; (1956) 95 CLR 300, Williams J (Dixon J agreeing) said that the question whether the bankrupt's income in excess of that necessary for his support vested in the official receiver was academic because "if the official receiver claims any part of these earnings he must apply to the Bankruptcy Court for an order". In the absence of such an order, it was said, "the bankrupt is free to dispose of the whole of those earnings". A distinction was drawn between s.101 of the Bankruptcy Act 1924 and the terms of s.90 of the Bankruptcy Act 1869 (Imp), s.53(2) of the Bankruptcy Act 1883 (Imp) and s.51(2) of the Bankruptcy Act 1914 (UK). Of s.101 Williams J said:

"It provides that where a bankrupt is in receipt of pay
etc the trustee shall receive...so much thereof as the
court, on the application of the trustee, directs. It
therefore provides in express terms that an order of
the court is necessary before any part of such pay etc
can be recovered by the trustee and it is implicit in
the section that in the absence of such an order none
of the pay etc vests in the trustee under section
91(i) of the Act." (p 315)

Fullagar J at 320 stated his opinion in relation to personal earnings after bankruptcy "that, whatever may be the position under the English Act, under the Australian Act the only way in which the trustee can effectively "intervene" is by making an application for an order under s.101". See also Kitto J at 331. Taylor J at 340 found in s.101 the suggestion that "the title to the trustee's right to receive any part of a bankrupt's personal earnings after bankruptcy will be found in an order made under this section and that such an order will not constitute a mere quantification of the trustee's pre-existing right.".

7. Section 101 was considered in the 1962 Report of the Committee, headed by Sir Thomas Clyne, which was appointed by the Attorney-General to review the Bankruptcy Law of the Commonwealth. The committee referred to the judgment of the High Court in Federal Commissioner of Taxation v. Official Receiver (supra) and noted particularly the construction of s.101 preferred by Fullagar J, namely that personal earnings did not vest in the official receiver. At para.199 the committee said:

"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."

The recommendation was reflected in the enactment of s.131 of the Bankruptcy Act 1966 (Cwth) which provided, inter alia:

"131(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."

The word "income" was not defined for the purposes of that section, but was accepted in its judicial exposition as "a word of large meaning" - Re Weiss; Ex parte Official Trustee in Bankruptcy [1985] FCA 283; (1985) 7 FCR 121 at 123-4. It extended, as did the same word in s.101 of the 1924 Act, to payments of a revenue nature. While not necessarily connoting a regular periodicity in payment, the concept of a bankrupt "in receipt of income" was said to suggest recurrence as an actual or expected characteristic - Nette v. Howarth [1935] HCA 22; (1935) 53 CLR 55 at 64 per Dixon J, applied to s.131 in Weissova v. Official Trustee in Bankruptcy (1986) 12 FCR 106 at 110 per Beaumont J (Evatt and Neaves JJ agreeing). See also Edelsten's Trustee v. Commissioner of Taxation (1987) 16 FCR 386 at 393 per Burchett J. In the latter case moneys, being fees for medical services payable to a medical practitioner by the Health Insurance Commission after he became a bankrupt, were deferred income and therefore income for the purposes of the section. The language of s.131 was seen as more generous to the bankrupt than that of its predecessor s.101 - Thistlethwayte v. Gender Estates Pty Ltd (1976) 8 ALR 700 at 702 per Bowen CJ in Eq. It imposed on the trustee the burden of satisfying the court that an order should be made - Lyford v. Levit (1984) 2 FCR 264 at 269.

8. Section 131 was repealed by s.24 of the Bankruptcy Amendment Act 1991, the material parts of which came into force on 1 July 1992. By virtue of s.51(1) of that Act the relevant amendments of the Principal Act applied to persons who were bankrupt at the commencement of those amendments. The amending Act inserted into the Bankruptcy Act 1966 a new Division 4B entitled "Contribution by bankrupt and recovery of property". A statement of its objects is set out in s.139J. They are:

"(a) to require a bankrupt who derives income
during the bankruptcy to pay contributions
towards the bankrupt's estate; and
(b) to enable the recovery of certain money
and property for the benefit of the
bankrupt's estate."

The Division establishes a liability on the part of a person who is bankrupt to make a contribution out of the excess of his income over a threshold amount which is a function of the maximum basic rate of pension payable under the Social Security Act 1991. The Division does not impose a liability to contribute in respect of the entire excess. In the Explanatory Memorandum relating to the Bill it was said that s.131 had not been a particularly useful instrument for trustees because of the cost of court processes which it was necessary to invoke and the self-defeating nature of the custodial sanction for non-compliance with an order once made. Reference was made in the Memorandum to the class of bankrupts who earned large incomes after bankruptcy and for all practical purposes were not required to make any repayment to creditors from that income. The Memorandum went on to outline the statutory mechanism established by the amendments for imposing upon bankrupts a liability to contribute. There was no suggestion in the Memorandum that the amendments would effect a vesting of after-acquired income in the trustee.

9. Before turning to the contribution provisions it should be noted that the vesting provisions of the Act remain unchanged in their application to after-acquired property. When a debtor becomes a bankrupt, all after-acquired property vests as soon as it is acquired by or devolves on the bankrupt on or after the date of the bankruptcy being property that is divisible among the creditors of the bankrupt (s.58). The property divisible among creditors is defined by s.116 and includes "all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him, or has devolved or devolves on him, after the commencement of the bankruptcy and before his discharge". The word "property" is defined in s.4 as:

"real or personal property of every description,
whether situate in Australia or elsewhere, and
includes any estate, interest or profit, whether
present or future, vested or contingent, arising out
of or incident to any such real or personal property."

The central provision of Division 4B is s.139P(1) which provides that:

"139P(1) Subject to section 139Q, if the income that a
bankrupt is likely to derive during a contribution
assessment period as assessed by the trustee under an
original assessment exceeds the actual income
threshold amount applicable in relation to the
bankrupt when that assessment is made, the bankrupt is
liable to pay to the trustee a contribution in respect
of that period."

Section 139Q provides for a liability to contribute where the trustee makes a fresh or amended assessment of income. The "contribution assessment period" is a period beginning on the commencement of the bankruptcy or Division 4B, whichever is later, or its anniversary, and ends one year after that commencement or anniversary. Thus the contribution assessment periods relevant to a given bankruptcy are successive periods of one year after the commencement of the bankruptcy or Division 4B. "Income" means, inter alia, "any amount derived by the bankrupt that is income according to ordinary usages and concepts" (s.139L). The Act defines, in s.139K, a "base income threshold amount" which at any time means "the amount that, at that time, is specified in column 3, item 2, Table B, point 1064-B1, Pension Rate Calculator A, in the Social Security Act 1991, multiplied by 3.5". Where the bankrupt has no dependants the "actual income threshold amount" is the basic income threshold amount. Otherwise it is increased according to the number of dependants (s.139K). The quantum of the bankrupt's liability is determined under s.139S, which provides:

"139S The contribution that a bankrupt is liable to
pay in respect of a contribution assessment period is
the amount worked out in accordance with the formula:
Assessed income - Actual income threshold amount
2
where:
"Assessed income" means the amount assessed by the
trustee to be the income that the bankrupt is likely
to derive, or derived, during the contribution
assessment period;
"Actual income threshold amount" means the actual
income threshold amount assessed by the trustee to be
applicable in relation to the bankrupt when the
assessment is made."

Ancillary provisions require the bankrupt to furnish information to the trustee for the purposes of the assessment process (ss.139U and 139V). The trustee is obliged to make an assessment as soon as practicable after the start of each contribution assessment period and, where circumstances require, a fresh assessment (s.139W). A reasonable remuneration may also be assessed where a bankrupt has engaged in work during a contribution assessment period and received less than a reasonable remuneration (s.139Y). Assessments may be reviewed by the Inspector-General and decisions relating to assessments by the Administrative Appeals Tribunal (s.139ZF). A contribution is payable at such time as the trustee determines or in such instalments payable at such times as the trustee determines (s.139ZG). If excess contribution is paid there is no entitlement to a refund (s.139ZH).

10. In the present case the trustee has made his assessment, and the consequent liability to make the relevant payments derives from the Act. There is no suggestion that the liability resulting from the assessment will not be paid by the bankrupt. The real issue in this case is whether income in excess of the contribution to be made by the bankrupt has vested in the trustee.

11. The Bankruptcy Act 1966 no longer contains the equivalent of s.101 of the 1924 Act or the former s.131. Section 101 of the 1924 Act was the foundation of the views expressed by members of the High Court in the Official Receiver case which ultimately led to the enactment of s.131. Despite the absence of an equivalent of s.101 of the 1924 Act or s.131, the scheme of Division 4B rests upon the continuing assumption that the income of the bankrupt does not vest in the trustee. The liability to contribute is limited to half the excess of assessed income over the actual income threshold amount. Before it arises, a process of assessment is required to be undertaken by the trustee. It is true that the after-acquired property to which ss.58 and 116 apply is defined widely enough to encompass income. However, in my opinion, the legislative scheme now in place is quite inconsistent with the application of those provisions to after-acquired income. This follows from the comprehensive scheme embodied in Division 4B which approaches a code for dealing with after-acquired income of the bankrupt. There is nothing in the extrinsic material to support a change in the approach to after-acquired income which would bring it within after-acquired property vesting in the trustee. In my opinion such income does not vest in the trustee.

Conclusions
12. The contributions assessed against Mr Gillies in this case give rise to a statutory liability to make the payment determined by the Trustee on the date specified. The liability does not operate to vest accumulated income in the Official Trustee. For the reasons I have previously discussed therefore, the sum of $4,000 accumulated from Mr Gillies' income since 1 July 1992 is not after-acquired property and can be offered to his known creditors in the form of a composition proposal. No question of an asset purchase, other than the purchase of a motor vehicle, arises in the present case. Provided such motor vehicle would answer the description of property used by the bankrupt as a means of transport and whose aggregate value does not exceed $2,500, then it would not constitute property divisible among the creditors. It would, of course, be open to the creditors under s.116(2)(ca) to authorise expenditure of a greater amount. I am inclined to the view that assets purchased by a bankrupt with after-acquired income will, if not within any of the excluded categories in s.116(2), constitute property divisible among the creditors and vest in the trustee. In my opinion, however, no final decision should be given on this point which is still rather hypothetical. In the event, the directions I propose to give pursuant to s.134(4) of the Bankruptcy Act 1966 are:

1. The sum of $4,000 accumulated from the income of the
bankrupt since 1 July 1992 is not after-acquired property
of the bankrupt which vests in the Official Trustee
pursuant to s.58(1)(a) and (6) of the Bankruptcy Act 1966.
2. The sum of $4,000 accumulated from his income by the
bankrupt since 1 July 1992 can be offered to his known
creditors in the form of a composition proposal.