Rambaldi, In the Matter of Houston (Bankrupt) [2008] FCA 1519 (8 October 2008)

Last Updated: 13 October 2008

FEDERAL COURT OF AUSTRALIA

Rambaldi, In the Matter of Houston (Bankrupt) [2008] FCA 1519

BANKRUPTCY – application for a direction under s 134(4) of the Bankruptcy Act 1966 (Cth) – the bankrupt being one of the beneficiaries under a will before recent discharge from bankruptcy – whether bankrupt’s trustees may join in co-beneficiaries in receiving in specie distribution of shares under the will – not unfair or unconscionable in the sense of Ex Parte James; In re Condon (1874) LR 9 Ch App 609 – direction granted






Bankruptcy Act 1966 (Cth) ss 58, 59, 134(4)

Ex Parte James; In re Condon (1874) LR 9 Ch App 609
In Re Clark (A Bankrupt), Ex parte The Trustee v Texaco Ltd [1975] 1 WLR 559
Re Ayoub; Ex parte Silvia (1983) 67 FLR 144
















GESS MICHAEL RAMBALDI AND ANDREW REGINALD YEO AS TRUSTEES OF THE PROPERTY OF MICHAEL NAIRN HOUSTON, A BANKRUPT
VID 656 OF 2008

KENNY J
8 OCTOBER 2008
MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 656 OF 2008

IN THE MATTER OF THE BANKRUPT ESTATE OF MICHAEL HOUSTON

	GESS MICHAEL RAMBALDI AND ANDREW REGINALD YEO AS TRUSTEES OF THE PROPERTY OF MICHAEL NAIRN HOUSTON, A BANKRUPT Applicant
JUDGE:	KENNY J
DATE OF ORDER:	8 OCTOBER 2008
WHERE MADE:	MELBOURNE

THE COURT DIRECTS THAT:

1. The applicants, in realising the interest of the bankrupt in the estate of his late uncle, David Julian De Marnay-Houston who died leaving a will dated 13 April 1991 ("the will"), may join the co-beneficiaries under the will in calling upon the executor of the will, Perpetual Trustees Victoria Limited, to effect an in specie distribution of the residuary estate to the beneficiaries.

THE COURT ORDERS THAT:

1. The cost of this application be costs in the estate of the bankrupt.

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

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 656 OF 2008

IN THE MATTER OF THE BANKRUPT ESTATE OF MICHAEL HOUSTON

GESS MICHAEL RAMBALDI AND ANDREW REGINALD YEO AS TRUSTEES OF THE PROPERTY OF MICHAEL NAIRN HOUSTON, A BANKRUPT APPLICANT

JUDGE:	KENNY J
DATE:	8 OCTOBER 2008
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

INTRODUCTION

1 The applicants are the trustees of the bankrupt estate of Michael Nairn Houston ("the bankrupt"). This is an application under s 134(4) of the Bankruptcy Act 1966 (Cth) ("Bankruptcy Act") for a direction as to whether, in realising the interest of the bankrupt in the estate of his late uncle, David Simon Julian De Marnay-Houston ("the deceased") who died leaving a will dated 13 April 1991 ("the will"), the applicants may join the co-beneficiaries under the will in calling upon the executor of the will, Perpetual Trustees Victoria Limited ("Perpetual"), to effect an in specie distribution of the residuary estate of the beneficiaries.

2 The application is supported by an affidavit of Gess Michael Rambaldi sworn on 21 August 2008 and some other affidavits of a formal kind. The application was served on the Deputy Commissioner of Taxation (who did not appear) and the bankrupt. The bankrupt, although not a party, was represented with leave. I am indebted to his representative, Mr O’Brien, and to the trustees’ counsel, Mr Randall, for their submissions.

BACKGROUND

3 The facts upon which the present application is made may be briefly summarised as follows:

• On 11 August 2005, Mr Rambaldi and Andrew Reginald Yeo ("the trustees") were appointed as joint and several trustees of the bankrupt estate of the bankrupt following a sequestration order which was made against him on that day on the petition of Macquarie Bank Limited.

• On about 6 October 2005, the bankrupt filed his statement of affairs.

• On 13 August 2007, the deceased died leaving the will.

• Under the will, the deceased appointed Perpetual, the bankrupt and his brother Ian Nairn Houston, as trustees of the will.

• The deceased left his residuary estate to five parties, one of whom is the bankrupt. Relevantly, the will provides that:

I LEAVE all the residue of my estate both real and personal to my Trustees upon trust to realise and convert such residue into money and after payment of all duties debts and funeral and testamentary expenses to stand possessed of the proceeds of such realisation and of any unrealised part of my estate (hereinafter called "my residuary estate") upon the following trusts:

(a) To pay the income to arise therefrom to my mother during her life.

(b) Upon the death of the survivor of my mother and myself to stand possessed of my residuary estate as to both capital and income for such of them [my four other relatives and the bankrupt] as survive me and if more than one in equal shares.

• The deceased’s mother pre-deceased him.

• By virtue of s 58(1)(b) of the Bankruptcy Act, the bankrupt’s interest in the deceased’s estate is an interest which vests in the trustees as after acquired property.

• On 28 November 2007, Perpetual obtained probate of the deceased’s will.

• The Inventory of Assets and Liabilities lodged by Perpetual in support of its application for probate discloses assets valued in excess of $15 million including approximately $10 million in shareholding ("the Shares").

• The bankrupt was recently discharged from his bankruptcy.

THE PRESENT APPLICATION

4 This application concerns a direction as to the manner and form in which the bankrupt’s interest as to the Shares in the deceased estate ought to be distributed to the trustees.

5 Mr Rambaldi deposed, in his affidavit of 21 August 2008, that: (1) the investment value, as at 27 June 2008, made up of shares, cash and units in a property trust held for the benefit of the bankrupt estate was $1,954,467.88; (2) the "discounted" capital gain disclosed was $304,615.77; and (3) he estimates the sale of the bankrupt’s interest in the Shares would crystallise a tax liability of approximately $141,077. Furthermore, the trustees have received proofs of debt in the bankrupt estate which have been admitted to prove in the amount of $2,220,889.

6 In the circumstances that have arisen, the trustees may elect to obtain an in specie distribution of the bankrupt’s interest in the Shares or for Perpetual to sell the bankrupt’s interest in the Shares and distribute the sale proceeds to them. The other four beneficiaries of the will have elected to obtain an in specie distribution of their interest in the Shares. Perpetual made distributions in specie to the other beneficiaries on 23 April 2008. The bankrupt’s entitlement was put into a sub-account pending instructions.

7 Issues have arisen concerning the possible capital gains tax and other consequences associated with an in specie distribution, as outlined in the affidavit of Mr Rambaldi and counsel’s submissions. In particular, on one view, the creditors of the bankrupt estate would receive what might be regarded as a "windfall" in that the bankrupt estate would take the benefit of the share sale whilst not having to meet capital gains tax. This tax liability would fall on the (now discharged) bankrupt, with the real possibility that he would be unable to meet it. The Commissioner might, of course, bring fresh bankruptcy proceedings if the Commissioner considered this a proper course. The trustees are concerned that, if they call for an in specie distribution, they may not be acting in accordance with the duties imposed upon them as trustees and officers of this Court as set down in Ex Parte James; In re Condon (1874) LR 9 Ch App 609 ("Ex parte James").

CONSIDERATION

8 In Ex parte James, money had been paid voluntarily to a trustee in bankruptcy under a mistake of law. The money was irrecoverable under ordinarily principles. The Court of Appeal in Chancery held that, in such a case, the trustee was not bound strictly by the law. In a much-cited passage, James LJ said (at 614):

I think that the principle that money paid under a mistake of law cannot be recovered must not be pressed too far, and there are several cases in which the Court of Chancery has held itself not bound strictly by it. I am of opinion that a trustee in bankruptcy is an officer of the Court. He has inquisitorial powers given him by the Court, and the Court regards him as its officer, and he is to hold money in his hands upon trust for its equitable distribution among the creditors. The Court, then, finding that he has in his hands money which in equity belongs to some one else, ought to set an example to the world by paying it to the person really entitled to it. In my opinion the Court of Bankruptcy ought to be as honest as other people.

9 In Re Clark (A Bankrupt), Ex parte The Trustee v Texaco Ltd [1975] 1 WLR 559, at 563-54, Walton J stated the following conditions that must be present in order to attract the operation of the rule in Ex parte James:

(1) There must be some form of enrichment of the assets of the bankrupt by the person seeking to have the rule applied (citing Government of India v Taylor [1955] AC 491 per Lord Keith). (2) Except in the most unusual cases, the claimant must not be in a position to submit an ordinary proof of debt. The rule is not to be used merely to confer a preference on an otherwise unsecured creditor, but to provide relief for a person who would otherwise be without any. (3) In all the circumstances, it was not fair for an honest person to keep the money. (4) When the rule applies, it applies only to the extent necessary to nullify the enrichment of the estate.

10 It will be apparent from this discussion that the principle in Ex parte James has generally been invoked in different circumstances from the present. The decision in Re Ayoub; Ex parte Silvia (1983) 67 FLR 144 ("Re Ayoub") is, however, of some assistance. In Re Ayoub, the bankrupt had purchased liquor and office equipment from four suppliers, on credit, who were unaware of his bankruptcy. The trustee sought a direction from the Court, pursuant to s 134(4) of the Bankruptcy Act, as to whether he would be justified in paying out the claims of the subsequent creditors of the assets of the estate in priority to unsecured creditors. Morling J declined to apply the rule in Ex parte James on the basis that it would not be unconscionable for the trustee to require the four creditors to pursue their rights by taking fresh bankruptcy proceedings against the bankrupt: see ss 58 and 59 of the Bankruptcy Act. That is, to require the four creditors to take fresh proceedings would not amount to inequitable conduct of the kind that had been regarded as sufficient to invoke the rule in Ex parte James. It was not to the point that the exercise of those rights might prove fruitless.

11 Turning to the present case, if the trustees call for an in specie distribution and subsequently sell the Shares, any tax liability that might arise in consequence would fall to be dealt with under the law. If it falls on the now discharged bankrupt, who fails to meet it, then the Commissioner may pursue his rights as may be advised.

12 Mr O’Brien highlighted that the circumstances that had arisen might be thought to work contrary to the will of the deceased. For the reasons mentioned at the hearing, this consideration does not lead me to reach a different conclusion.

13 Therefore, in all the circumstances, acknowledging that there are difficulties, I do not consider it unfair or unconscionable, in the sense referred to in Ex parte James, to direct that the trustees call upon Perpetual to make an in specie distribution of the bankrupt’s interest in the Shares to them, and I would make the direction sought.

I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny.

Associate:

Dated: 8 October 2008

Counsel for the Applicants:	Mr R S Randall
Solicitor for the Applicants:	Piper Alderman

Solicitor for the Bankrupt:	Mr M O’Brien
	Aitken Partners
Date of Hearing:	8 October 2008
Date of Judgment:	8 October 2008