The authorities
43 In Re Gillies; Ex parte Official Trustee in Bankruptcy v Gilles [1993] FCA 289; (1993) 42 FCR 571, one of the questions on an application by a trustee in bankruptcy for directions was whether a fund accumulated from the income earned by a bankrupt from employment during his bankruptcy was after-acquired income for the purposes of s 58(1) and s 116(1). After a detailed examination of the history of legislative provisions and of the structure and purpose of Div 4B of Pt VI of the Bankruptcy Act, French J concluded that the scheme in the Division was inconsistent with the application of ss 58 and 116 to after-acquired income, at [376]-[377]. His Honour held that the scheme in Div 4B of Pt VI was based on the continuing assumption that the income of a bankrupt does not vest in a trustee, and that a bankrupt's liability with respect to income is confined to the liability to make the income contribution for which Div 4B in Pt VI provided.
44 French J went on to say that he was inclined to the view that assets purchased by a bankrupt with after-acquired income would, if not within any of the exclusions to which s 116(2) refers, constitute property divisible among the creditors and vest in the trustee. However, his Honour refrained from expressing a final view, at [577].
45 The decision of French J in Re Gillies has been followed, or referred to with approval, in a number of subsequent decisions. These include Re Hawkins; Ex parte Worrell (1996) 71 FCR 371 at 375 (Spender J) (in relation to payments made pursuant to a maintenance agreement between husband and wife); Re Sharpe; Ex parte Donnelly (1998) 80 FCR 536 at 540 (Lockhart J) (in relation to fees earnt by a barrister before his bankruptcy but paid during the bankruptcy); Trustee of the Property of O'Reilly v Law Society of New South Wales [2001] FCA 701, (2001) 110 FCR 574 at [8] (Katz J) (in relation to the fees and disbursements due to a solicitor in respect of work performed before his bankruptcy); Combis v Harding [2014] FCA 1391 at [20] (Siopis J) (in relation to income under a testamentary trust); Michell, in the matter of Lee [2012] FCA 1046, (2012) 207 FCR 96 at [18]-[19] (Gray J) (in relation to the pre-bankruptcy fees earnt by a barrister); Davey v Dessco Pty Ltd [2017] VSC 744 at [29]-[30] (J Forrest) (in relation to the ability of a bankrupt to sue in his or her own name for personal income earned during the bankruptcy).
46 These authorities support the proposition that the after-acquired income of a bankrupt remains vested in the bankrupt rather than in the bankrupt's trustee pursuant to ss 58 and 116, subject, however, to the bankrupt's obligations to make a contribution under Div 4B of Pt VI of the Bankruptcy Act: Barwick v Goodridge [2011] NSWSC 1233; (2011) 255 FLR 245 at [24].
47 It is for this reason that several authorities have recognised that the entitlement to sue for unpaid wages or salary due to a bankrupt does not vest in the trustee in bankruptcy: Randall v Deputy Commissioner of Taxation [2008] FCA 1939; (2008) 174 FCR 441; Davey v Dessco at [33]. It was no doubt for this reason that Mr Ambrose informed Mr Badcock on 28 August 2019 that he took the view that Mr Badcock's underpayment of wages claim in the SAET did not vest in him as the trustee in bankruptcy.
48 Mr Ambrose relied on authorities which have concerned the question of whether property acquired from the bankrupt's post-bankruptcy income is after-acquired property for the purposes of s 58(1)(b). In Rodway v White [2009] WASC 201; (2009) 233 FLR 262, one question was whether shares in public companies acquired by the bankrupt using income which he had, in accordance with Div 4B of Pt VI, been entitled to retain was after-acquired property. As EM Heenan J noted at [33]-[35], this was a question on which there had, to that time, been no authoritative determination although, as noted, French J in Re Gillies had expressed a preliminary view that property of that kind could be after-acquired property which vested in the trustee.
49 In his reasons for concluding that the shares were after-acquired property, EM Heenan J adverted to the status of income held by the bankrupt in a bank account:
[51] It is immediately apparent that there is some incongruity in speaking of after-acquired income as not vesting in the trustee yet maintaining that after-acquired property (whether acquired with the use of that income or not) does. The incongruity arises from the difference in character assumed to exist between income and property. Plainly there is a difference in those concepts but income generally means money (or other valuable consideration) itself constituting property, obtained by a person over some period. Such income, take wages or salary for example, once received will probably be in the form of cash or credit in a bank or similar account. The accumulating cash on hand, and the accumulating balance in the bank or other account will each be a form of property of the bankrupt from the moment it is paid or received. There is no suggestion by the respondents, nor does the decision in Gillies (supra) appear to contemplate, that the proceeds of income, whether it be cash or credits in bank accounts, as originally received or accumulated will constitute 'after-acquired property' within the meaning of s 116. This is probably due to the effect of Div 4B and the idea that after-acquired property does not include income at least in the form in which it was earned. That concept may need a little extension to cater, for example, with a situation where income is received in cash, and is then converted by the recipient to a credit in a bank or deposit account, and is then transferred to a second, third or subsequent bank or deposit account, each transition constituting, strictly speaking, the acquisition of property in the form of the subsequent account or accounts. The inconsistencies between this analysis of what constitutes property and the notion of 'after-acquired property' in s 116 can probably be ignored for the present notwithstanding that they reveal some special and fundamental changes to the conventional notion of 'property'.
(Emphasis added)
50 EM Heenan J also noted at [66], that the respondents (the persons who had successfully prosecuted the bankrupt for a bankruptcy offence) had accepted that the "mere depositing of [post-bankruptcy] income in a bank account, or the transfer of all or part of it to another bank account, so converting the case or the chose in action from one form of property to another is not within the meaning of the submission or the reach of the [Bankruptcy] Act".
51 The status of shares in public companies acquired with post-bankruptcy income below the contribution threshold fixed by Div 4B of Pt VI was considered again by the Full Court in Di Cioccio. Their Honours noted that the Bankruptcy Act does not prohibit a bankrupt from acquiring a specific item of property but simply deems that after-acquired property will vest in the bankrupt's trustee unless the property is a kind specified in s 116(2). They went on to note that s 116(2) does not refer expressly to property representing income previously derived by the undischarged bankrupt or to property acquired by the bankrupt using property representing income previously derived and there was no implication in the scheme of the Act to that effect, at [33]-[37].
52 Having reached that conclusion, their Honours rejected a submission of counsel for the bankrupt based on the status of income deposited into a bank account:
[41] During the course of argument, counsel for Mr Di Cioccio submitted that if this construction of the Act was adopted, it would create an anomaly. An anomaly was said to arise because an amount standing to the credit of a bank account in the name of the bankrupt would be property … that would immediately vest in a trustee (s 58) and be divisible amongst the creditors of the bankrupt (s 116(1)) even if the amounts standing to the credit of the bank account were in fact income derived by the bankrupt below the actual income threshold amount applicable to that bankrupt.
[42] There are a number of answers to that contention, all found in the Act. First, s 134(1)(ma) provides that, subject to the Act, a trustee may "make such allowance out of the estate as he or she thinks just to the bankrupt, the spouse or de facto partner of the bankrupt or the family of the bankrupt": see [17] above. Section 134 operates as a safety value. It is a provision which assumes that a trustee will act sensibly and fairly. A decision of the trustee is reviewable: s 178 of the Act. Second, it is not uncommon for a bankrupt to be required to open a supervised account: s 139ZIE of the Act. Under the supervised account regime, a bankrupt must not make a withdrawal from the supervised account unless, amongst other things, the bankrupt has the consent of the trustee: ss 139ZIG(1), (2)(a) and (3). The Act, or at least those provisions of the Act dealing with supervised accounts, suggests that the safety valve provided by s 134 is intended to operate in relation to a bank account into which income derived by the bankrupt below the actual income threshold amount applicable to that bankrupt is deposited.
[43] Third, s 116 of the Act. The fact that an amount standing to the credit of a bank account in the name of the bankrupt would constitute after acquired property under s 116(1) is not a complete statement. If, for example, the bankrupt retained the credit balance in the bank account to build up sufficient funds to later buy tools of trade for use in earning income by personal exertion, the amount may arguably fall within the exception provided under s 116(2)(c) as "property that is for use by the bankrupt in earning income by personal exertion …". In this context, "property" is defined both for s 116(1) and s 116(2): see [9] above. There is no anomaly.
(Citation omitted and emphasis in the original)
53 Accordingly, the appeal against the primary judge's conclusion that the shares were after-acquired property was vested in the trustee in bankruptcy was dismissed.
54 In Gittins v Field (Trustee) [2018] FCA 976, Charlesworth J referred to the difficulty which Di Cioccio represented to an application of the reasoning in Re Gillies:
[59] Mr Gittins submits that since the decision of the Full Court in Di Cioccio there is a "degree of difficulty in applying" Re Gillies and the line of authority that followed. To an extent, I agree. If the Act were to operate so as to vest in the trustee of a bankrupt's estate an amount standing to the credit of a bank account in the bankrupt's name comprised of money in the nature of income payments (and so confer proprietary rights in the money as income) it is difficult to comprehend what meaningful work the income contribution scheme would have to do. The closing paragraphs of the judgment in Di Cioccio appear to be an unexplained departure from the historical position that the income of a bankrupt does not vest in the trustee …
55 In Devine v State of Queensland [2020] QSC 229 Holmes CJ referred to a similar difficulty. In that case, the issue was whether a sunken ship was after-acquired property of a bankrupt which vested in the trustee of his estate. Holmes CJ reviewed several of the authorities referred to above and concluded that the ship could not reasonably be regarded as "income" for the purposes of Div 4B of Pt VI. In reasoning to that conclusion, her Honour said (relevantly for the purposes of the present litigation):
[36] I agree with Charlesworth J that Di Cioccio presents difficulties for the application of Re Gillies. The statement that Div 4B plays no part in the determination of what property is divisible among creditors under s 116 seems on its face a rejection of the reasoning in Re Gillies, that the Division's scheme was inconsistent with the application of s 116 to income. The rejection in Di Cioccio of any distinction between income and capital for the purposes of ss 58 and 116, combined with the statement that any property not within s 116(2) is caught by s 116(1), would also seem to suggest the application of s 116(1) to after-acquired income, at odds with French J's conclusion. Yet one would expect that if some major departure from the reasoning and result in Re Gillies were intended, that would have been said, given the volume of judicial approval of the case over the years.
[37] The Court's view in Di Cioccio that, although a bankrupt was entitled to retain income derived below the actual income threshold amount, such income as represented by a credit in a bank account was after-acquired property also seems, at first blush, at odds with the conclusion in Re Gillies that accumulated after-acquired income did not vest in the trustee. However, there is nothing in Re Gillies to indicate in what form the funds under consideration there were held. Although there was in Di Cioccio no explicit statement to this effect, I infer from the reference to Foley v Hill that the Court proceeded on the basis that an account credit representing income would be after-acquired property in the form of a chose in action acquired with that income. At a time when most remuneration is received by way of bank deposit, and few people would hold their income, however received, in hard currency, that approach would seem to have significant implications for the conventional approach that a bankrupt's income and rights in relation to it are protected; and as Charlesworth J observed in Gittins, it would leave little work for Div 4B. But if my analysis is correct, the court in Di Cioccio did not in this part of its judgment say that the income itself was property divisible amongst creditors.
[38] There is obiter of the Court of Appeal of this State in Geia v Palm Island Aboriginal Council as to the correctness of French J's conclusion in Re Gillies that income did not vest in the trustee. I propose to adhere to the view, widely accepted in the cases, that a bankrupt is entitled to retain his or her income, subject to the obligation to contribute. I would not accept the defendant's submission that Di Cioccio has the effect of dooming the plaintiff's action to failure, whether the Defender is after-acquired income or not.
(Citations omitted)