Appellant v First Respondent

2 My conclusion is that he or she is entitled to do so, and therefore I differ on this point from the Magistrate, who stayed the bankrupt's civil proceedings.

3 For the reasons I will now set out, Mr Davey's appeal should be allowed and the Magistrate's orders set aside.

4 Mr Davey was bankrupt from 27 February 2014 until 18 April 2017. He continued to practise as a solicitor whilst bankrupt.

5 On 23 May 2016, Mr Davey commenced a Magistrates' Court proceeding against Peter Dessmann, the second respondent, for the recovery of $66,480.88 for legal services allegedly rendered to Mr Dessmann in 2015.

6 On 3 June 2016, Mr Davey commenced a Magistrates' Court proceeding against both Dessco Pty Ltd (Dessco), the first respondent, and Mr Dessmann for the recovery of $17,660.84 for legal services allegedly rendered to both respondents in 2015.

7 On 3 July 2016, Dessco and Mr Dessman filed Defences to Mr Davey's claims in the Magistrates' Court proceedings.

8 On 4 November 2016, Mr Davey filed a Summons applying for summary judgment or alternatively striking out of the Defences of Dessco and Mr Dessman in both proceedings.

9 On 15 February 2017, Dessco and Mr Dessman made an oral application to the Magistrate seeking that both proceedings be permanently stayed on the basis that Mr Davey was an undischarged bankrupt.

10 Her Honour directed that the parties file written submissions on the point.

11 On 22 March 2017, relying on the oral submissions made on 15 February 2017 and the written submissions filed by the parties, the Magistrate made orders striking out Mr Davey's Summons of 4 November 2016 and permanently staying both proceedings. Her Honour awarded costs against Mr Davey.

12 On 18 April 2017, Mr Davey was discharged from bankruptcy.

13 This appeal under s 109 of the Magistrates' Court Act 1989 (Vic) was lodged on 21 April 2017.

Jurisdiction of the Court to determine the appeal

14 It was not suggested by the parties that this Court did not have jurisdiction to deal with this appeal. However, the Court needs to be satisfied that it has jurisdiction.

15 Although the Federal Circuit Court of Australia and the Federal Court of Australia have exclusive jurisdiction regarding bankruptcy matters, this Court has jurisdiction on this appeal despite the fact that regard must be had to relevant provisions of the Bankruptcy Act 1966 (Cth) (the Act). [1] This is because this Court is not exercising jurisdiction given to the Federal Court and Federal Circuit Court by s 27(1) of the Act. It is, instead, determining an issue within its general jurisdiction, being the right of a party to institute proceedings for the payment of a debt - and the appeal from an order in that proceeding.

Proceedings before the Magistrate and the decision

16 There was an issue on the hearing of the appeal as to the reason for her Honour's orders staying the two proceedings and it is therefore necessary to descend into a little more detail as to what happened in the Magistrates' Court. Counsel for the respondents submitted that it was unclear as to why the claims were stayed and suggested that one possibility was the failure of the trustee in bankruptcy to attend the Magistrates' Court hearings, and particularly the hearing on 22 March 2017, of which he had notice.

17 The Defence filed by the respondents in both proceedings does not advert to the bankruptcy of Mr Davey and his alleged lack of standing to bring the two complaints. However, those issues appear to have been raised by Mr Silverstein, who appeared on behalf of the respondents, upon the matter being heard for a mention on 15 February 2017 before her Honour.

18 Mr Davey said the following as to the bankruptcy issue raised by Mr Silverstein:

...there is an answer to the submissions my friends has made. Under section [inaudible][2] of the Bankruptcy Act, which designates that income is not vested in trustee. So with respect to Frank, he hasn't been completely accurate by saying that my income is vested. My professional fees are income. They're exempted under the Bankruptcy Act. I'll just make that brief submission ... this case is entirely not on point because it provides to an occasion whereby there was a cause of action prior to the bankruptcy.[3]

This application's been made without notice ... It raises a jurisdictional issue.[4]

19 Ultimately, the hearing on 15 February 2017 was adjourned and submissions were then filed on behalf of both the respondents and Mr Davey, in relation to the respondents' application to strike out Mr Davey's claims.

The defendants have no objection to the plaintiff earning an income, providing that the method of recovery of any claim is in accordance with due process of the law. In this particular case the plaintiff has failed to maintain due and proper process in the pursuit and/or recovery of monies claimed by him.

The Magistrates' Court has no power to stay legal proceedings under section 60 of the Bankruptcy Act (Cth).

As the plaintiff is an Australian legal practitioner within the meaning of the Legal Professional (Uniform Law) (Vic) he must have known or ought to have known that he was not entitled to commence and/or maintain proceedings in his own name and whilst being an undischarged bankrupt.[5]

21 In response, Mr Davey submitted that his entitlement to earn protected income meant that he had a right to sue for his services, regardless of the fact that he was bankrupt.

22 On 22 March 2017, her Honour reconvened the Court and ruled as follows:

Having regard to the voluminous amount of material that's been filed by both parties by way of submissions, authorities and legislation, I have come to the conclusion that I'm not persuaded by the submissions made by Mr Davey as the plaintiff.

It's clear from his affidavit material that these proceedings were commenced in May and June 2016 where he remained an undischarged bankrupt. These proceedings were not commenced by the trustee nor is it clear whether there were - they were commenced with the trustee's knowledge.

The plaintiff has argued that this litigation has been commenced to recover payment of unpaid legal fees for services rendered by him. He argued he was entitled to earn an income and that that income did not vest itself in the trustee's estate.

His submission remained silent as to his trustee or reference to the trustee.

...

There is no legal representative here from the trustee nor has the court received any correspondence from the trustee confirming his or her willingness to adopt the litigation and to pursue a cause of action and seeking leave to amend the statements of claim.

Accordingly, I strike out the plaintiff's application to strike out the notices of defence on the basis that I'm of the view that the plaintiff has no standing.

Further, the first and second defendant's applications to have the proceedings stayed is granted. [6]

23 I accept that her Honour's reasons are somewhat delphic, although this is easy to understand given the volume of business that is undertaken in the civil jurisdiction of the Magistrates' Court. However, I am comfortably satisfied in light of the oral and written submissions and the reasons provided by the learned Magistrate, that her Honour stayed the proceedings as she was satisfied that Mr Davey had no standing to institute the proceedings which should - if her Honour's reasoning be correct - have been instituted by Mr Davey's trustee in bankruptcy.

(1) Subject to this Act, where a debtor becomes a bankrupt:

(a) the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and

(b) after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.[7]

In this section, after-acquired property, in relation to a bankrupt, means property that is acquired by, or devolves on, the bankrupt on or after the date of the bankruptcy, being property that is divisible amongst the creditors of the bankrupt.

27 Under section 5(1), 'property' is defined as meaning:

... real or personal property of every description, whether situated 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.

(a) 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 her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; and

(b) the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge; and

(c) property that is vested in the trustee of the bankrupt's estate by or under an order under section 139D or 139DA; and

(d) money that is paid to the trustee of the bankrupt's estate under an order under section 139E or 139EA; and

(e) money that is paid to the trustee of the bankrupt's estate under an order under paragraph 128K(1)(b); and

(f) money that is paid to the trustee of the bankrupt's estate under a section 139ZQ notice that relates to a transaction that is void against the trustee under section 128C; and

(g) money that is paid to the trustee of the bankrupt's estate under an order under section 139ZU;

is property divisible amongst the creditors of the bankrupt.

Is Mr Davey, as a bankrupt, able to sue for his fees?

29 It is well-established that income earned by a bankrupt, during his or her bankruptcy, does not come within the definition of after-acquired property and accordingly does not automatically vest in the bankrupt's trustee.[8] This was authoritatively stated in relation to the current structure of the Act by French J in Re Gillies; Ex parte Official Receiver in Bankruptcy:[9]

Despite the absence of an equivalent of s 101 of the 1924 Act or s 131, the scheme of Div 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 Div 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.

30 This decision has been cited with approval on many occasions, including recently by John Dixon J in Sheehan v Brett Young & Ors (No 3)[10] and by the Court of Appeal of the Supreme Court of Queensland in Geia v Palm Island Aboriginal Council.[11]

31 The case law, both before and after Gillies, was summarised by Black J in Adrian Barwick v Goodridge[12], where his Honour noted:

There is a qualification to the general position in respect of personal income of a bankrupt received after the bankruptcy. Division 4B of Pt VI of the Bankruptcy Act in turn deals with a bankrupt's obligation with respect to after-acquired income and provides for the collection of monetary contributions by trustees by reference to the level of the bankrupt's income. A trustee may assess a bankrupt's income in a contribution assessment period, and if the bankrupt's income exceeds "the actual threshold amount" applicable, the bankrupt is liable to pay to the trustee a contribution to the estate from the income derived: Bankruptcy Act s 139P(1). The term "income" is defined for the purposes of Div 4B in s 139L as having its ordinary meaning, subject to specified inclusions and exclusions. Importantly, if income is received by the bankrupt after the date of bankruptcy but for work done or services performed before the bankruptcy, such income is treated as derived by a bankrupt during a contribution assessment period: Bankruptcy Act s 139M(3).

The case law also supports the conclusion that after-acquired income of a bankrupt remains vested in the bankrupt rather than the bankruptcy trustee, subject to his or her contribution obligations under Bankruptcy Act Pt VI Div 4B. In Re Sharpe ; ex parte Donnelly ; [1998] FCA 6; (1998) 80 FCR 536, Lockhart J noted that Bankruptcy Act Div 4B proceeds on the assumption that after-acquired income of a bankrupt does not vest in a trustee of a bankrupt's estate, notwithstanding the definitions of after-acquired property in Bankruptcy Act ss 58 and 116. The structure of Pt VI Div 4B was further considered in Peter Andrew Gillies ; ex parte The Official Trustee in Bankruptcy (1993) 115 ALR 631; [1993] FCA 289, where French J observed that the legislative scheme in Div 4B was inconsistent with the application of Bankruptcy Act ss 58 and 116 to after-acquired income of the bankrupt. The correctness of Gillies was accepted in Re Hawkins ; ex parte Worrell (1996) 71 FCR 371 at 375; Re Sharpe ; ex parte Donnelly [1998] FCA 6; (1998) 80 FCR 536 at 540; Geia v Palm Island Aboriginal Council [2001] QCA 389; [2001] 1 Qd R 245 at 249-250. On the other hand, in Trustee of the Property of O'Reilly v Law Society of New South Wales (2001) 110 FCR 574; [2001] FCA 701 at [8], Katz J accepted the correctness of Gillies but held that there is no implied exclusion under the Bankruptcy Act derived from any general law of bankruptcy for personal earnings of a bankrupt acquired prior to the bankruptcy.[13]

32 As noted by Black J, it is important to remember that this right to retain income is subject to the contribution regime outlined in Div 4B of Pt VI of the Act.[14] That regime effectively allows bankrupts to generate sufficient income in order to feed, house and clothe himself or herself and any dependants.[15]

33 The consequence of these clear statements of principle is as follows: the bankrupt's trustee has no right to sue for income or wages of the bankrupt, as the right to this income has not vested in the trustee. The necessary corollary must be that the right to sue for income is retained by the bankrupt. Indeed, this was the conclusion of Lander J in Randall v Deputy Commissioner of Taxation[16]. His Honour's judgment was summarised by Black J in the following way:

The view that at least after-acquired contractual rights which give rise to after-acquired income should be treated in the same manner as that income finds support in the decision in Randall v Deputy Commissioner of Taxation [2008] FCA 1939, where the Court had to determine whether a bankrupt's application for review of a decision under the Public Service Act 1999 (Cth) was property divisible among creditors within the meaning of the Bankruptcy Act so that the trustee in bankruptcy could file a notice of discontinuance of that application. Lander J noted that the effect of Pt VI Div 4B of the Bankruptcy Act was that a bankrupt's personal earnings or income after bankruptcy did not vest in the trustee in bankruptcy and held that the right to seek a review of a decision to terminate the applicant's employment remained with the applicant, rather than passing to the official trustee. His Honour noted that Pt VI Div 4B continues to recognise, as did its predecessor in Bankruptcy Act 1966 s 131, that the bankrupt's income after bankruptcy is not part of his or her property except to the extent that a contribution is made (at [57]). His Honour referred to Re Gillies as authority that the income earned after the bankrupt's bankruptcy does not vest in the trustee and noted that this is because it is not property divisible among the bankrupt's creditors (at [74]). His Honour noted that the trustee cannot sue for after-acquired income because that income has not vested in the trustee (at [75]), and that the right to sue for the bankrupt's after-acquired income does not vest in the trustee and therefore is exercisable by the bankrupt (at [78]). However, that decision can be distinguished from the present facts because in that case each of the employment contract in issue, the rights arising from it and the income arising from it had arisen after the applicant's bankruptcy.[17]

34 Notably, Randall was also relied upon by the Court of Appeal in Jacks v Jakimowicz[18] as authority for the proposition that the Act does not prevent a plaintiff from commencing certain types of proceedings after becoming bankrupt, the Court of Appeal noted:

In accepting the respondent's submissions below, Judge Lacava held that the Act did not permit the plaintiff to commence his proceeding after bankruptcy. Reliance was placed upon s 60(4). However, s 60(4) relates only to the continuing of an action commenced before a plaintiff became bankrupt. There is no provision in the Act preventing a plaintiff from commencing a proceeding after bankruptcy seeking relief in relation to property that does not vest in the trustee of the estate of the bankrupt. That a plaintiff may bring a proceeding in relation to property which is not 'the property of the bankrupt' within the meaning of s 58(1) of the Act, after being declared bankrupt, is supported by a number of authorities, including Re Iskenderian; ex parte Iskenderian Brothers Pty Ltd & Ors, Griffith v Civil Aviation Authority and Randall v Deputy Commissioner of Taxation. It is, in our view, well arguable that this is what the plaintiff is seeking to do in pursuing the County Court proceeding below. For these reasons, the decision below staying the applicant's proceeding is attended with doubt.[19]

35 The statement of principle that '[t]here is no provision in the Act preventing a plaintiff from commencing a proceeding after bankruptcy seeking relief in relation to property that does not vest in the trustee of the estate of the bankrupt', when combined with what was said in Gillies (that after-acquired income of the bankrupt does not vest in bankrupt's trustee), is compelling authority for the proposition that a bankrupt can commence an action in relation to the recovery of income earned by the bankrupt during his or her bankruptcy.

36 This conclusion is consistent with the decision of Federal Magistrate Riley in the unusual case of Gardiner v Goss[20] in which an undischarged bankrupt was held to have standing to bring a creditor's petition in bankruptcy against a debtor for unpaid cleaning work performed by the creditor.

37 It is also worth noting that the bankrupt's creditors are not disadvantaged by this position as, depending on the quantum of recovery, if the proceeding is successful, the bankrupt will be liable to contribute some of the recovered income under the regime set out in Div 4B of Pt VI of the Act. Conversely, if the amount is too small to attract Div 4B then, putting aside issues of actual ownership and fiduciary duties, the bankrupt's trustee has no incentive to expend funds to recover income to which the bankrupt is entitled.

38 Indeed, the ability to recover a contribution from the bankrupt subsists despite discharge from bankruptcy by reason of the cumulative effect of sections 139K, 139Q 139W and 139WA of the Act.

39 Section 139K provides that 'derived' for the purposes of Division 4B, unless the contrary intention appears, means:

means earned, derived or received from any source, whether within or outside Australia.

Of relevance here is that 'derived' includes income which is 'earned' as distinguished from income which is 'derived or received'.

If the income that a bankrupt is likely to derive, or derived, during a contribution assessment period as assessed by the trustee under a subsequent assessment exceeds the actual income threshold amount applicable in relation to the bankrupt when the subsequent assessment is made, the bankrupt is liable to pay to the trustee a contribution in respect of that period.

If at any time, whether during or after a contribution assessment period, any one or more of the following paragraphs applies or apply:

(a) the trustee is satisfied that the income that is likely to be derived, or was derived, by the bankrupt during that period is or was greater or less than the amount of that income as assessed by the last preceding assessment in respect of that period;

(b) the base income threshold amount increased or decreased after the making of the last preceding assessment in respect of that period and before the end of that period;

(c) the trustee is satisfied that the number of the bankrupt's dependants increased or decreased after the making of the last preceding assessment and before the end of that period;

the trustee is to make a fresh assessment of the income that is likely to be derived, or was derived, by the bankrupt during that period, of the actual income threshold amount that is applicable in relation to the bankrupt when the assessment is made and of the contribution (if any) that the bankrupt is liable to pay in respect of that period.

42 Finally, section 139WA(1) provides (emphasis added in bold):

An assessment under section 139W (including a fresh assessment referred to in subsection 139W(2)) for a contribution assessment period may be made at any time, including:

(a) a time after the end of the contribution assessment period; or

(b) a time after the bankrupt is discharged.

43 The net effect of these provisions is that any judgment in favour of Mr Davey which recovers income earned by Mr Davey whilst he was bankrupt may be recovered by his trustee by a subsequent assessment under s 139W(2). So it may transpire that Mr Davey, if successful in his claims, may be liable to make a contribution under s 139Q to the extent that his income for the relevant period exceeds the relevant base income threshold.

44 So, the end result is that Mr Davey is entitled to sue for the fees he allegedly earned during his bankruptcy.

45 The appeal will be allowed and the orders of the Magistrates' Court of 22 March 2017 will be set aside.

[1] Sutherland v Brien [1999] NSWSC 155; (1999) 149 FLR 321, 323-324 [11] (Austin J); Barwick v Goodridge [2011] NSWSC 1233; (2011) 255 FLR 245, 248 [9] (Black J).

[3] Transcript of Magistrates' Court hearing on 15 February 2017, p 2.

[4] Transcript of Magistrates' Court hearing on 15 February 2017, p 3.

[5] Written submissions of Mr Silverstein, 17 February 2017. [5] - [7].

[6] Transcript of Magistrates' Court hearing on 22 March 2017, pp 3, 4.

[8] Re Gillies; Ex parte Official Receiver in Bankruptcy [1993] FCA 289; (1993) 42 FCR 571, 577 (French J) ('Gillies'). See also: Sheehan v Brett Young & Ors (No 3) [2016] VSC 39; (2016) 50 VR 467, 476 [31] (John Dixon J); Geia v Palm Island Aboriginal Council [2001] QCA 389; [2001] Qd R 245, 250 and the summary of the relevant authorities in Re Lee [2012] FCA 1046; (2012) 207 FCR 96, 100-103 [17]-[28] (Gray J).

[9] [1993] FCA 289; (1993) 42 FCR 571, 576-577 (emphasis added in bold).

[10] [2016] VSC 39; (2016) 50 VR 467, 476 [31] (John Dixon J).

[11] [2001] QCA 389; [2001] Qd R 245, 250.

[12] [2011] NSWSC 1233; (2011) 255 FLR 245.

[13] Ibid, 252 [24] (emphasis added in bold).

[14] Di Cioccio v Official Trustee in Bankruptcy (2015) 229 FCR 1, 10 [22]-[23], 11 [39].

[16] [2008] FCA 1939; [2008] 174 FCR 441 ('Randall').

[17] Adrian Garfield Barwick v Ross Ian Goodridge [2011] NSWSC 1233; (2011) 255 FLR 245, 254-255 [35].

[18] [2011] VSCA 312.

[19] Ibid [13] (Tate JA & Beach AJA) (footnotes omitted) (emphasis added in bold).

[20] [2007] FMCA 1966.