Birdseye v Sheahan

[2002] FCA 1319

Federal Court of Australia|2002-10-25|Before: Carr J

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Court

Federal Court of Australia

Decision date

2002-10-25

Before

Carr J

Source

Original judgment source is linked above.

Judgment (18 paragraphs)

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INTRODUCTION 1 This is an appeal from declaratory and other orders made by a Federal Magistrate on 22 March 2002. The orders involved two discrete categories of relief. First, the learned Magistrate ordered that certain causes of action be vested in the respondent (who is the trustee in bankruptcy of the appellant). That order was made pursuant to Part VI Div 4A ("Division 4A") of the Bankruptcy Act 1966 (Cth) ("the Act"). Secondly, his Honour declared that the appellant had a charge or right of lien over certain property of the Nicholas Birdseye Family Trust to secure the sum of $47,557.03.

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factual background 2 The appellant (also referred to in these reasons as "Mr Birdseye") is an accountant. At all material times both before and after the commencement of his bankruptcy the appellant conducted his accounting practice, known as Nicholas Birdseye & Associates ("the Practice"), as trustee of a discretionary family trust known as the Nicholas Birdseye Family Trust ("the Trust"). 3 The Trust was settled on 1 July 1986 by Mr Birdseye's father. There are two beneficiaries, Mr Birdseye and his wife. The specified powers of the Trust include carrying on the profession and activities of accountants, auditors and tax agents and the rendering of management, commercial, financial, secretarial and related services. 4 On 9 November 1998, a sequestration order was made by this Court in respect of Mr Birdseye's estate, upon the petition of the Deputy Commissioner of Taxation. Mr Birdseye continued to conduct the Practice and in doing so employed four persons. The income of the Practice thus continued to be received by Mr Birdseye in his capacity as trustee of the Trust. 5 On 4 October 2001, the respondent filed an application under s 139A of the Act seeking an order that any and all causes of action against Mrs Birdseye in respect of moneys said to be owing by her to the Trust be vested in him as trustee of the bankrupt estate of Mr Birdseye. As a related, but separate claim, the respondent also sought an order for payment out of the assets of the Trust of the sum of $47,557.03, being the amount of an assessment of payroll tax levied against the appellant personally, but which arose out of his conduct of the Practice.

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the evidence and the decision at first instance 10 Only one witness was called at the hearing before the Magistrate. He was a Mr Ian Lock, a partner of the respondent. Mr Lock swore an affidavit to which was annexed a large bundle of documents including ledgers and transcripts of evidence of examinations of Mr and Mrs Birdseye which had been conducted before Deputy Registrars of this Court. Those transcripts were admitted into evidence without objection. It should be noted that neither the appellant nor Mrs Birdseye gave evidence before his Honour. 11 The appellant did not dispute that he supplied personal services to the Trust and that he controlled the Trust during what he considered to be the appropriate examinable period, namely, the two years immediately preceding the commencement of his bankruptcy. The respondent contended that the examinable period extended back to two years earlier than that. 12 The first question for the Magistrate to resolve was what was the examinable period. Examinable period is defined in s 5 of the Act as follows: "Examinable period", in relation to an application under section 139A by the trustee of a bankrupt's estate means the period beginning: (a) if, at a time or times during the period beginning 4 years before, and ending 2 years before, the commencement of the bankruptcy, the bankrupt became unable to pay his or her debts, as they became due, from his or her own money - at that time, or at the first of those times, as the case may be; or (b) in any other case - 2 years before the commencement of the bankruptcy; and ending on the day on which the application is made." 13 The respondent had submitted to the Magistrate that the examinable period commenced on 10 November 1994 (i.e. four years before the commencement of the bankruptcy) on the basis of certain responses given by the appellant in questions set out in his statement of affairs. These were as follows: "17. Details of bankruptcies or arrangements with creditors in last ten years" - In 1994 tried to do Part X - details attached, was in "adjourned" Part X status for two and a half years - the law changed 8 January 1997 whereby you could only be in "adjourned" status for four months and then when came out, Part X was not voted on." 14 The "details attached" were not attached to the statement of affairs, but in response to Question 21 in the statement of affairs "List what you believe to be the causes of your bankruptcy or insolvency", the appellant responded: "Fraud done to me in 1990 by Mr Andreas Yohannsen". In response to Question 22 "When did you begin having difficulties meeting your debts?", the answer was: "1990". 15 The Magistrate took the view that the commission by the appellant of an act of bankruptcy, the signing of an authority under s 188, and what the Magistrate described as "the admissions" referred to above indicated the appellant's inability to pay his debts as and when they fell due from his own money. The Magistrate then reasoned as follows: "On the basis of the debtor's admission that he went into Part X in 1994 I would find that at a period beginning four years before and ending two years before the commencement of the bankruptcy the bankrupt became unable to pay his debts. I do not accept the respondent's argument that "during the period…became unable" excludes a situation in which the debtor was unable to pay his debts at the commencement of the period. I would therefore find that the examinable period for the purposes of this application commenced on 10 November 1994." 16 It was common ground that the appellant had received some remuneration for his services. Thus, s 139D(1)(b)(i) did not apply. 17 The Magistrate then considered whether the remuneration that the appellant received for the personal services which he had supplied to the Trust was substantially less than a person supplying those services in similar circumstances might reasonably be expected to have received if the person had dealt at arm's length in relation to the supply of those services [see s 139D(1)(b)(ii)]. The Magistrate found that that was the case. I will return below to his Honour's reasoning on that point. 18 The next issue was whether the Trust had acquired an estate in particular property as a direct or indirect result of matters including the supply by the appellant of those services [s 139D(1)(c)]. 19 After an analysis of the evidence, his Honour found that there were two particular properties which the Trust owned and which had been created directly or indirectly from the underpaid services of the appellant. Those were a loan to the appellant himself and a loan, found by his Honour to have been made, not to the appellant as he had claimed, but to Mrs Birdseye. 20 His Honour also found that the appellant had enjoyed the benefit of the payments made which had given rise to the creation of that chose in action [s 139D(1)(d)]. It does not appear that there was any dispute that if it were found that the Trust had acquired an estate in particular property, it still had that estate, although the appellant's written outline of submissions indicated that that was in issue in the appeal. It is sufficiently clear that the Magistrate found that all the requirements of s 139D had been established on the evidence before him ["That disposes of the claim under s 139D"]. The appeal was fought on that assumption. 21 In relation to the discrete claim for relief in respect of an amount of $47,557.03, the Magistrate found that that sum was owed by Mr Birdseye (as trustee of the Trust) to the Deputy Commissioner of Taxation in respect of group tax owing by him at the time that he became bankrupt. The Magistrate found that in equity and under s 35(2) of the Trustee Act 1936 (S.A.) the appellant had a right of reimbursement out of the property of the Trust in respect of such an expense. He held that the right of exoneration vested in the respondent as trustee of the appellant's bankrupt estate and that the appellant had a charge or lien over the property of the Trust in respect of that trust debt.

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my reasoning 25 Mr Birdseye's own evidence (set out at paragraph 13 above), upon which the Magistrate relied, was that in 1994 he implemented the steps necessary to reach an arrangement with his creditors under Part X of the Act. Mr Birdseye said that he was in "adjourned" Part X status for 2½ years and that the law changed on 8 January 1997 when, according to Mr Birdseye, he could only be in "adjourned" status for four months. 26 From that evidence I think that it was reasonable for the Magistrate to infer that Mr Birdseye, at some time in 1994 became unable to pay his debts as they became due from his own money. At all material times Mr Birdseye was an accountant. I think that it was open, in those circumstances, for the Magistrate to infer that Mr Birdseye would not have "attempted a Part X" unless he was unable to pay his debts as and when they fell due. It would also have been reasonable for the Magistrate to infer that a meeting of his creditors was adjourned about 2½ years before 8 January 1997. That would place the date of the meeting at or about 8 July 1994. 27 As explained above, the Magistrate considered that it was sufficient for Mr Birdseye to have been unable to pay his debts at the commencement of the period for him to have become bankrupt during that period. It is not necessary for me to decide whether that construction is correct. That is, whether the word "became" in the definition of "examinable period" may be construed as "was". I am inclined, with respect, to agree with the Magistrate's construction. There is a degree of ambiguity, but such a construction would accord with the clear purpose of the relevant provisions. At paragraph 36 of the Explanatory Memorandum for the amendments to the Act [the Bankruptcy Amendment Act 1987, No 119 of 1987] which included the introduction of Division 4A the following appears: "A bankruptcy 'commences' from the date of the first available act of bankruptcy within six months of the presentation of a creditor's or debtor's petition. If at any time during the first two years of that four year period the debtor is insolvent in that he or she is unable to pay his or her debts as they become due out of his or her own money, then the examinable period commences, and the Court is empowered to make orders in respect of an entity's property." 28 However, in the present matter the appellant's own evidence indicates that he became insolvent on or about 8 July 1994. The act of bankruptcy relied upon by the petitioning creditor occurred no later than 17 March 1998. Accordingly, there was, in my opinion, sufficient evidence for the Magistrate to infer that Mr Birdseye became unable to pay his debts during the period beginning 17 March 1994. That is, he became unable to pay his debts during the first two years of the four years before the commencement of his bankruptcy. The Magistrate, in my opinion, did not err on this point.

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B. Whether the appellant received substantially less remuneration than a person might reasonably be expected to have received if that person had dealt with the Trust at arm's length 29 The Magistrate referred to various pieces of evidence. First, there was Mr Birdseye's statement, in his statement of affairs, that his income in the twelve months preceding the date of that document (14 January 1999) had been $15,000, comprising a salary by way of distribution from the Trust of $5,000 plus drawings of $10,000. Mr Birdseye estimated his income for the following twelve months in the same amount. The appellant complained that this evidence related only to that two year period. That is true, but in my opinion, on the basis of that evidence and the evidence to which I refer immediately below and in the absence of any contradictory evidence from Mr Birdseye, it was open to the Magistrate to assume that the arrangement continued during the relevant period. 30 The Magistrate scrutinised such evidence as there was concerning the income which Mr Birdseye derived from the Practice. This included evidence from Mr Birdseye during his examination before Deputy Registrar Fisher on 18 January 2001 that he received remuneration based on the taxable income of the Trust after expenses. He said that he did not receive all of the net profit, it was given partly to his wife, and also partly to his children. That had been the case generally for some five years before the date of the examination. Mr Birdseye said that the net profit of the Practice for the year ended 30 June 1998 had been about $150,000. In relation to that evidence, counsel for the appellant referred me to other evidence comprising monthly summaries of fee earnings, tax returns and profit and loss statements which he submitted showed that the Practice could not on any basis generate a net profit of $150,000. Once again, I consider that it was open to the Magistrate to accept Mr Birdseye's own evidence as to the likely profitability of the Practice conducted through the medium of the Trust. 31 The appellant contended before the Magistrate that, in assessing whether his remuneration had been substantially less in amount than might reasonably have been expected, his drawings should have been taken into account. The Magistrate referred to a difficulty with that proposition which arose out of the fact that the relevant payments were not shown as distributions to Mr Birsdeye, but as loans. 32 The Magistrate's reasoning on this point was encapsulated as follows: "28. I would be prepared to find that a remuneration of $15,000.00 was less than a person supplying the services which Mr Birdseye supplied to the accountancy practice would have received on the basis of an arm's length transaction. But I do not need to do this. The respondent himself has submitted that his remuneration should be calculated at a much higher figure based upon the value of moneys paid on his behalf and loaned to him. That is sufficient proof that the money which was actually paid as remuneration was inadequate. The respondent cannot approbate and reprobate." 33 Counsel for the appellant submitted that the Magistrate's reasoning was illogical. 34 Counsel also submitted that the appellant's remuneration should be taken to include any personal expenses, including living expenses, met by the Trust for his benefit and any payments made to meet joint obligations with his wife together with any benefits in kind. 35 The appellant referred to the fact that the respondent had, under Part VI Division 4B of the Act, assessed his remuneration as being in the order of $60,000 per annum. He submitted that the respondent could not, on the one hand, levy an income contribution assessment on the premise that the appellant earned $60,000 per annum and, at the same time, invoke the provisions of s 139B on the basis that the appellant was inadequately remunerated.

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my reasoning 36 First, I reject the illogicality argument. The appellant urged upon the Magistrate that his remuneration should be calculated at a much higher figure, due to the value of moneys paid on his behalf and loaned to him. Such an argument would not necessarily constitute an express admission that the remuneration of $15,000 was less than would have been received on the basis of an arm's length transaction. But it was, in my opinion, open to the Magistrate on the evidence and arguments advanced on behalf of the appellant to infer, as he did, that the money which was actually paid to the appellant as remuneration was inadequate. In the context of paragraph 28 of his Honour's reasons (set out above) the word "inadequate" must, in my opinion, be construed as being less than what a person supplying the relevant services in similar circumstances might reasonably be expected to have received on the basis of an arm's length dealing. 37 As the payments upon which the appellant relies were treated as loans either to him or to his wife, I do not think that the Magistrate was required to regard the amount of those loans as constituting part of the appellant's remuneration. 38 On appeal, counsel for the appellant argued that the appellant's use of the loan account constituted part of his remuneration. I do not accept that submission. If moneys are expended for the benefit of, or at the direction of an employee, but must be repaid to the employer, I do not consider that they may be regarded as part of his or her remuneration. In my view, at best, the value of an interest-free loan might form part of remuneration in such circumstances, but there was no evidence about that value. 39 The appellant complained that the respondent had provided no evidence to the Magistrate as to what value might have been attributed to the services supplied by Mr Birdseye when assessed on an arm's length basis. I would accept that, in an ideal case, it might be preferable for an applicant to call evidence about what remuneration a person might receive from an entity if that person had dealt with the entity at arm's length. But the statutory requirement is only to show that what the bankrupt received by way of remuneration was substantially less than what a person supplying those services in similar circumstances might reasonably be expected to have received if he or she had dealt with the entity at arm's length. 40 In my view, it was open to the Magistrate to have regard to the nature of Mr Birdseye's duties and the nature and extent of the economic activities carried on by the Practice to conclude that $15,000 per annum was substantially less than a person would have been paid pursuant to an arm's length dealing. 41 The appellant submitted that Mr Birdseye was not the sole generator of fees. The Practice employed four persons. He submitted that this was "a matter of relevance" in assessing what level of remuneration might have been appropriate. I think that a fair reading of the Magistrate's reasons shows that he did take this factor into account when considering what portion of the money constituted by Mr Birdseye's loan account was an asset derived from the underpayment for his services by the Trust. At paragraph 35 of his reasons, his Honour said this: "However, I have already found that remuneration is something that should not be narrowly construed. I believe that it should include payment for management skill. In this case the management skill relates to the work of the four employees. I would class as part of the remuneration of a sole principal in a firm of accountants the profit which he obtains from the services of his employees who he is responsible to manage and in respect of whom he takes an entrepreneurial risk." 42 I would respectfully agree with that reasoning. 43 I would also reject the appellant's argument based on an asserted inconsistency of approach taken by the respondent under Division 4A on the one hand and Division 4B on the other hand. The former Division directs attention to "the remuneration in money or other property" that the bankrupt received. The latter Division is concerned with the derivation of "income", an expression which is very widely defined by s 139L. 44 In my view, it was open on the evidence before the Magistrate to find that the requirements of s 139D(1)(b)(ii) had been satisfied.

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my reasoning 48 In my view, it was open to the Magistrate, on the evidence, to make the finding that the Trust moneys expended in meeting Mrs Birdseye's obligations under the mortgage to the bank and the other expenditure made by her, resulted in the creation of loans repayable by her. 49 There was a conflict in the accounting evidence before the Magistrate. For example, on the one hand there was an item of expenditure in the monthly summaries for the year ended 30 June 1998 entitled "Teresa's Expenditure" showing a total of such expenditure for the year of $35,446.61. In what was described as the General Ledger Listing for the periods 1 July 1999 to 31 December 2000 and 1 October 2000 to 28 February 2001 there was a large number of entries recording expenditure in a similar manner, namely, "Teresa's Expenditure" and under that heading (in the earlier period) "Teresa's Cheque Book". In the later period the identifier was simply "Teresa's Cheque Book". On the other hand, an entry was made in the ledger on 30 June 1998 whereby the whole of that amount was debited to Mr Birdseye's loan account. 50 There was also evidence of substantial payments, described as "Teresa's Expenditure", which were made by using the cheque book in her possession during the financial years ended 30 June 1999 and 30 June 2000. 51 There was no evidence that would support an inference that these moneys amounted to distributions to Mrs Birdseye of any beneficial entitlement to a Trust property. As the Magistrate reasoned, the evidence was that the Trustee decided that the moneys were to be classed as a loan. The Magistrate stated that he was prepared to accept that part of the evidence, but was not prepared to infer that the obligations of the loan were to be borne by Mr Birdseye. In my opinion, it was open to the Magistrate to accept the evidence shown in the monthly summaries and the General Ledger Listing as indicating expenditure by Mrs Birdseye for which she was assuming legal liability. In those circumstances, in my opinion, "particular property" came into existence i.e. a chose in action constituted by a debt owed by Mrs Birdseye to the Trust, the precise amount of which fluctuated from time to time. 52 I reject the appellant's submission that particular property must be tangible. No authority was cited for that proposition. In argument, I put to counsel the proposition that a patent or a copyright might well constitute "property", although not tangible property. He did not disagree. 53 The term "property" is very widely defined in s 5 of the Act: "Property means 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." 54 In my view, there is no basis upon which to read down the words of s 139D(1)(c) so as to exclude a chose in action constituted by the balance owing at any particular time under a running account of the type maintained between the Trust and Mrs Birdseye from constituting "particular property". 55 The appellant relied upon the fact that Mrs Birdseye was, apparently, defending proceedings brought in the District Court of South Australia to recover the loan moneys. In my view, that is irrelevant to the issue for determination in these proceedings. 56 I reject also the appellant's complaint that the respondent had led no evidence as to how to calculate what proportion of the alleged loan was attributable to Mr Birdseye's personal services. 57 In my view, the subsection does not require this. It only requires proof on the balance of probabilities that the entity acquired an estate in particular property as a direct or indirect result of, or of matters including, the supply by the bankrupt of those services. It is sufficient that the supply by the bankrupt of the relevant services was one of the matters. This is, in my opinion, clear from the use of the word "including".

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D. Did the appellant use or derive a benefit from the property? 58 The Magistrate's reasoning on this point was as follows: "44. I think there is much force in Dr Baxter's (counsel for the respondent) argument that the whole purpose of the sub-section would be negated if a potential bankrupt utilised the services of a straw man to purchase an asset with the proceeds of funds derived from the underpayment to the bankrupt. Deriving a benefit from the "property" must include deriving a benefit from any other property which was created therefrom. 45. However, in this case the chose in action did not purchase the house in which Mrs Birdseye lived, it was already hers. But it was hers subject to a mortgage. Her interest in the property increased by virtue of the capital repayments made under that mortgage. Her continuing right to occupy the premises was contingent upon her paying the interest under the mortgage. The chose in action was used to effect both of those payments. Mr Birdseye enjoyed the benefit of those payments by continuing to reside in the premises. He also enjoyed the benefit of some of the moneys used for Mrs Birdseye's personal expenditure. He would have enjoyed the flowers at their home. He would have enjoyed the meat that was put on their table. I am satisfied that the requirements of s 139D(1)(d) are satisfied in this case." 59 I agree with the submissions made on behalf of the appellant that his Honour was in error on this point. The property in which the Magistrate held the Trust had acquired an estate was the debt owing by Mrs Birdseye to the Trust. [He also found another property, namely the loan to the appellant himself, but that was not the subject of any orders at first instance.] In my respectful opinion, the Magistrate erred when he said that the chose in action was used to make the capital and interest repayments on the mortgage secured by the matrimonial home. 60 In my view, in order to satisfy the requirements of s 139D(1)(d), the appellant was required to show that Mr Birdseye used or derived a benefit from the chose in action constituted by the debt owed by Mrs Birdseye to the Trust. If, for example, that debt had been used as security to provide a loan to Mr Birdseye, that might have been a relevant benefit. It would have been a benefit in the same way as if the relevant "particular property" had been, say, a house or a boat which had been put at his disposal. 61 In oral argument, counsel for the respondent, as well as supporting the Magistrate's reasoning, submitted that the fact that Mr Birdseye "… has an asset in his hands which he can convert to cash" was a sufficient benefit. In anticipation of an argument based on the fact that the debt was owed to Mr Birdseye in his capacity as trustee of the Trust, counsel advanced a subsidiary argument. That was that Mr Birdseye was a potential beneficiary of the Trust and there was thus also a potential benefit to him from the fact that he had (as trustee) in his hands the chose in action which he could convert to cash. 62 I do not accept either of those submissions. Section 139D(1)(d) requires proof that the bankrupt used or derived a benefit from the property. That language speaks of matters which have in fact occurred. There was no evidence that Mr Birdseye used or derived any benefit from the chose in action constituted by the debt owing by his wife to the entity, i.e. the Trust. 63 The Magistrate can be seen to have treated the outlay by Mrs Birdseye of moneys belonging to the Trust as resulting in Mr Birdseye using or deriving a benefit. But the moneys belonging to the Trust were never found to be the relevant "particular property". It was not the respondent's case that the money from time to time standing to the credit of the Trust's bank account (assuming the account was in credit at the relevant times) when Mrs Birdseye drew the cheques was the relevant "particular property" (i.e. the debt from time to time owing by the bank). The respondent's focus was on the debt owing by Mrs Birdseye. One possible reason for that course being adopted might have been the difficulty in proving, once the moneys in the bank had been expended, that the Trust still had an estate in that property - see s 139D(1)(e). 64 I have mentioned above that, in his written outline of submissions, the appellant denied that the Trust still had an estate in the particular property which the Magistrate found it had acquired. In oral submissions, counsel for the appellant said that if I found in favour of the appellant on the s 139D(1)(d) point, then it could not be said that the Trust still had an estate in the property. There would, so he submitted, be no property to deal with. He then added: "If your Honour is against us with (d) then (e) follows. The entity does retain its estate in the putative chose in action". 65 I disagree with the first part of that submission. I have found in favour of the appellant in relation to s 139D(1)(d) on the basis that there was no evidence that he used or derived any benefit from the chose in action constituted by the debt owing by his wife to the Trust. That does not mean that there was no property to deal with. The Magistrate found (and I have held that it was open to him on the evidence to do so) that there was particular property. 66 However, it is not necessary for me to consider the application of s 139D(1)(e). 67 In my view, his Honour erred in finding that the requirement set out in s 139D(1)(d) had been established. As all of the requirements specified in s 139D(1) are cumulative, a failure to satisfy one requirement results in failure of the application. Accordingly the appeal on this point must be allowed and the application dismissed.

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the tax debt 68 As a discrete part of his appeal, the appellant challenged the following declaratory order made by the Magistrate: "2. The applicant has a charge or right of lien over the property of the Nicholas Birdseye Family Trust in respect of trust debts as at the date of bankruptcy, including a debt due to the Deputy Commissioner of Taxation in the sum of $47,557.03." 69 Counsel for the appellant submitted (by adopting submissions made at first instance by the appellant's then counsel) that before such a declaration could be made, it was necessary to identify the assets of the Trust. In written submissions, counsel argued that the property to which the above order was directed was the right of the Trustee to recover under the alleged chose in action against Mrs Birdseye. He suggested that counsel for the respondent had indicated this in submissions made to the Magistrate. The appellant contended that if there were no such property then the above order "falls away". 70 On this latter point, I think that counsel for the appellant has wrongly characterised the submission made by counsel for the respondent before the Magistrate. From the transcript it can be seen that the respondent's counsel identified the accounting practice as being "a quite substantial asset" with a profit of about $150,000 per annum. Furthermore, the Magistrate found (and I have held that it was open for him to so find) that the Trustee has a chose in action constituted by the moneys owing by Mrs Birdseye. 71 I accept that a court would not normally make a declaration unless it were shown to have utility. In my view, there was sufficient evidence before the Magistrate to indicate that the Trust had assets. 72 There was no dispute about the fact that the appellant had incurred the debt to the Commissioner of Taxation. 73 In those circumstances, in my opinion, there was no error on the Magistrate's part in making a declaration that the respondent had a charge or right of lien over the property of the Trust in respect of that debt. 74 The appellant argued that the declaration was too widely expressed as extending beyond that debt to all Trust debts as at the date of bankruptcy. Counsel for the respondent conceded that the declaration had been too widely drawn and that it should be amended to read: "The applicant has a charge or right of lien over the property of the Nicholas Birdseye Family Trust in respect of the debt due to the Deputy Commissioner of Taxation in the sum of $47,557.03 as at the date of bankruptcy". 75 I agree with the proposed re-wording of the declaration.