De Santis v Aravanis

Orders made by the primary judge 32 The primary judge made orders to the following effect: (1) A declaration that the whole of the Property is vested in Mr Aravanis as trustee in bankruptcy of Mr De Santis. (2) A declaration that Mrs De Santis has a charge over the Property to the extent of 32% of the equity in it. (3) Mr Aravanis be appointed trustee for the sale of the property ("the Trustee"). (4) The Trustee be empowered to offer the Property for sale and to sell the Property by public auction with power to fix a reserve price, or alternatively, to sell the Property by private treaty at the best available price. (5) Any sale by the Trustee may be made to Mrs De Santis either as a result of sale at auction or by private treaty, without the requirement for the payment of a deposit and upon such terms as to the payment of the balance of the purchase price as the Trustee considers appropriate. (6) The Trustee be empowered and authorised to obtain a valuation of the Property by employing a registered valuer, if he thinks it necessary. (7) After sale of the Property at auction or by private treaty, the Trustee be empowered to deduct from the proceeds of sale: (a) the commission and other expenses of any real estate agent employed by the Trustee; (b) the reasonable remuneration and expenses of the Trustee in respect of the sale; (c) the reasonable legal expenses of transferring the land to the purchaser; (d) any taxes including but not limited to capital gains tax, land tax and goods and services tax (GST); (e) to make all necessary adjustments of rates and taxes on settlement of the sale; and (f) insurance and any other reasonable expenses for protection and maintenance of the Property. (8) The Trustee must hold the proceeds of sale (after deduction of the expenses in Order 7) on trust for Mr Aravanis as trustee of the bankrupt estate of Mr De Santis and Mrs De Santis in accordance with these Orders. 33 The primary judge subsequently ordered that Mrs de Santis pay Mr Aravanis' costs limited to costs associated with responding to Mrs De Santis' application under s 79 of the Family Law Act and responding to her proceedings in the Supreme Court of New South Wales which were discontinued. He made no order as to costs in relation to the proceedings in the Court below: De Santis v Aravanis (No 2) [2012] FMCAfam 1488.

The Current Proceedings 34 Mrs De Santis seeks to have the orders of the primary judge set aside, a declaration made that Mr Aravanis holds the Property on trust for her, that he should transfer it to her, and costs.

Mrs De Santis' grounds of appeal 35 The notice of appeal sets out the following grounds (as written): Grounds of appeal 1. His Honour erred in holding that the Applicant Wife has a charge over land comprised in [folio number] and known as [Address] ([Property]), equal to 32% of the value of [Property], when his Honour had already held that that the First Respondent Trustee held his interest as registered proprietor of [Property] on trust for the Wife. 2. His Honour ordering consequential relief of having a writ of possession issue and for the Trustee to be appointed trustee for sale of the [Property]. 3. His Honour ought to have declared that the Trustee holds [Property] on trust for the Wife and ordered him to transfer [Property] to the Wife. 4. His Honour erred in finding that the bankrupt acquired an equitable interest in [Property] by way of equitable charge, because the Bankrupt, prior to becoming bankrupt, had given his Wife $31,074. 5. His Honour erred in finding that the Trustee acquired an equitable interest in [Property], by way of equitable charge, because after his Bankruptcy, the Bankrupt paid money he was entitled to keep into an account held by his Wife, and the Wife treated this money as her own, mixed it with other money of hers and used this money to make payments including mortgage repayments on [Property]. 6. His Honour ought to have held that the Trustee had not proven that any equitable interest in [Property] had been acquired by the Bankrupt and/or the Trustee. 7. His Honour erred in adopting an analysis that the respective interests of the Wife and Bankrupt/Trustee could be determined solely by looking at the amount each was said to have contributed to mortgage repayments, when this analysis overlooked: a. The Wife provided the deposit of $67,000 for the purchase of [Property]; b. The Wife paid the stamp duty of $25,644 for the purchase of [Property]; c. On settlement the wife provided another $26,551 towards the purchase price for the purchase of [Property]: d. The extent to which mortgage repayments represented payments of interest as opposed to reduction of principal; 8. His Honour ought to have held that the Trustee had not established, if he was entitled to a declaration of the existence of an equitable charge, the extent of the charge. 9. His Honour failed to give adequate reasons. 36 Mrs De Santis made no written or oral submissions concerning Ground 9. 37 Mr Aravanis submitted that, having regard to the written and oral submissions made by Mrs De Santis in the Court below, it was difficult to determine any basis on which the present appeal might be pursued. Mr Aravanis said that Mrs De Santis had proposed the following order in closing submissions to the primary judge: A declaration that Andrew Aravanis as Trustee of the Bankrupt Estate of Geoffrey De Santis hold the property [as] Trustee for himself and Lorraine June De Santis in the proportions 576449/695644 and 119195/695644. 38 This argument should be rejected. It is plain from Mrs De Santis' written submissions to the Court below that this order was proposed if the primary judge decided the respective entitlements on the basis that Mrs De Santis had an interest in the Property by way of resulting trust, which is not what he did.

New argument 39 Mr Allen, Counsel for Mrs De Santis on the appeal, conceded that leave was required to pursue the argument that pre-bankruptcy mortgage payments were not made by Mr De Santis but instead by Mrs De Santis. His argument was that when Mr De Santis' wages were paid into their joint account, which was controlled by Mrs De Santis, she was free to do with that money as she wished, relying on West v Mead [2003] NSWSC 161. He says the result is that payments from the joint account in satisfaction of obligations under the mortgage do not confer any right of indemnity, recoupment or exoneration on Mr De Santis since they were made by Mrs De Santis from money she was entitled to use for her own benefit. 40 Mr Allen did not appear in the Court below. It is plain from closing submissions and the transcript of the proceedings in the Court below that Mrs De Santis' Counsel conducted her case on the basis of : (1) A concession that mortgage payments from the joint account in the pre-bankruptcy period were made by Mr De Santis and that Mr Aravanis was entitled to a charge in relation to those payments on the basis that Mr De Santis was entitled to an indemnity for them in reliance on Octavo Investments. This concession was made on the basis that it eliminated the need for argument about Mr Aravanis' claims under ss 120 and 121 of the Bankruptcy Act in relation to these payments. This basis for proceeding was accepted by Mr Aravanis and adopted by the primary judge: see De Santis at [17]; (2) In relation to the post-bankruptcy period, the position asserted by Mrs De Santis also assumed that mortgage payments from her account may be attributed to Mr De Santis. The position was that, because Mr De Santis' contributions to her account were made out of his income, any right of indemnity for mortgage payments was not included in property divisible among Mr De Santis' creditors under s 116(1) of the Bankruptcy Act and so was not "after-acquired property" which vested in Mr Aravanis under s 58(1)(b) of the Bankruptcy Act; and (3) In relation to the post-bankruptcy period, and assuming that Mrs De Santis did not succeed on the "after-acquired property" argument because (contrary to Mrs De Santis' submission) the primary judge felt bound by the decision in Rodway v White (2009) 233 FLR 262 (Rodway v White) at [66], Mrs De Santis argued that account should also be taken of contributions to Mrs De Santis' account from sources other than Mr De Santis' wages in determining contributions to mortgage payments which Mr Aravanis was entitled to recover. 41 Mr Allen submitted that there was clearly an error in legal reasoning in the conduct of Mrs De Santis' case in the Court below; the consequence of the intermediate step of the payment of Mr De Santis' wages into the joint account before the payment of the mortgage was missed in relation to the pre-bankruptcy period. He submitted that this issue takes on greater prominence in the post-bankruptcy period because Mr De Santis' earnings were paid into an account of Mrs De Santis and Mr De Santis ceased to be her trustee when the Property was registered in the name of Mr Aravanis. 42 Mr Allen further submitted that it was inappropriate for Mr Aravanis to take advantage of this mistake by opposing leave. He submitted that consistent with Re Condon; Ex parte James (1874) LR 9 Ch App 609 (Ex parte James), as an officer of the Court Mr Aravanis ought not seek to obtain a benefit to which the facts disclose he is not entitled and the public interest lies in him not doing so. Mr Johnson, Counsel for Mr Aravanis, submitted that a trustee appointed as a result of a debtor's petition is not an officer of the Court. 43 Trustees in bankruptcy have traditionally been regarded as officers of the Court given the functions, powers and duties imposed on them by the Bankruptcy Act and the fact that their conduct is subject to the supervision of the Court under Div 4 of Part VIII of the Bankruptcy Act: see Tapp v LawCover Insurance Pty Ltd [2013] FCA 35 at [16]; Ferella v Official Trustee in Bankruptcy (No 2) [2011] FCA 619 at [12] and Adsett v Berlouis (1992) 37 FCR 201 at 208. Accordingly, I do not accept Mr Johnson's argument. However, little turns on the issue since Mr Johnson conceded that the trustee's duties are akin to those of an officer of the Court and that a trustee would be required to perform his duties honestly. 44 In Ex parte James at 614, James LJ said: With regard to the other point, that the money was voluntarily paid to the trustee under a mistake of law, and not of fact, 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. 45 In contrast to the situation in Ex parte James, the question which Mrs De Santis seeks to argue for the first time on appeal is contestable and contrary to the position adopted by Mrs De Santis in the Court below with the benefit of legal advice from both her solicitor and barrister. The characterisation of payments from the joint account or, for that matter, from the account in Mrs De Santis' name alone, is dependent on factual matters that must be established by evidence. It is not a case where Mrs De Santis has an established right which Mr Aravanis is seeking to deny her by a technical argument. I do not consider that it is inequitable in the circumstances of this case for Mr Aravanis to oppose Mrs De Santis' leave application. 46 Except in extraordinary circumstances, it is inimical to the due administration of justice if, on appeal, a party can raise a point that was available but was not taken at the trial: see Metwally v University of Wollongong (1985) 60 ALR 68 at 71; Coulton v Holcome (1986) 162 CLR 1 at 8; Whisprun Pty Ltd v Dixon (2003) 200 ALR 447 (Whisprun) at [51]. This avoids the undesirable consequence of encouraging tactical decisions not to present an issue at first instance in order to keep it in reserve for appeal, and it avoids the injustice to a party occasioned by having to meet new facts and new issues of law for the first time at the appeal court. In some cases when a question of law is raised for the first time on appeal, as for example upon the construction of a document, or upon facts either admitted or proved beyond controversy, it is expedient in the interests of justice that the question should be argued and decided: Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438. Even when no question of further evidence arises, it may not be in the interests of justice to allow it to be raised on appeal: Whisprun at [51] per Gleeson CJ, McHugh and Gummow JJ. In other cases, the appropriate course may be to refer the matter back to the primary judge: Mr Aravanis' Counsel contended that this would be inappropriate due to cost. 47 Mr Allen submitted that Mrs De Santis' right to have her case decided according to law overrode considerations of the desirability of the finality of litigation. He suggested that the position for which he contends could be addressed by legal reasoning, not by resolution of factual disputes. He noted cross examination of Mrs De Santis appearing at T 102 in relation to the suggestion that Mr De Santis paid his earnings into Mrs De Santis' account for rent and living expenses and that she paid the mortgage and other expenses from that account. This question and answer touches on the issue. However, it does not reflect the gravamen of the conduct of Mrs De Santis' case in the Court below, nor is it obvious that other evidence from Mr and Mrs De Santis and their son John (from whose account moneys were contributed and who was not a witness) would not be relevant. 48 Mr Allen said that he did not now seek to raise an argument based on advancement, and that his new argument was relevant to Grounds 4, 6 and 8. Those matters had not been addressed in Mr Allen's written submissions and I was not satisfied that the scope of the leave which Mrs De Santis sought was sufficiently defined for Mr Aravanis to be able to address it adequately. Indeed, Mr Allen did not say in his outline of submissions that he was seeking to argue a case different from the one advanced before the primary judge, or address any of the consequences which might flow from taking that course: he only acknowledged these issues in response to Mr Aravanis' argument on the issue in Mr Aravanis' outline of submissions. I do not regard that as satisfactory; aspects of the application only emerged piecemeal at the hearing and that afforded little opportunity for Mr Aravanis to consider what, if any, other evidence or argument might properly have been adduced if the argument had been raised at trial. 49 It is the duty of the Court to allow both applicant and respondent to conduct their roles so as to achieve just resolution of causes of action. Mrs De Santis' conduct of her claims since they were first made in the Supreme Court of New South Wales and the Family Court was chaotic and constantly shifting; Mr Allen's request for leave to argue a case substantially different from the final conduct of Mrs De Santis' case in the Court below in the interest of justice to her raises real questions of fairness to Mr Aravanis and the creditors whose interests he has a duty to assist. I indicated that I was prepared to adjourn the matter to allow Mrs De Santis to make a more formal application for leave to which Mr Aravanis could respond. I noted that any adjournment would have cost implications. The hearing was briefly adjourned to allow Mr Allen to get instructions. Mrs De Santis elected to proceed and in that circumstance I consider that she abandoned the leave application. Ground 4 of the appeal is dismissed, as are Grounds 5, 6 and 8 to the extent they rely on this argument. 50 There is one other matter I should mention. Mr Allen submitted that the argument that Mrs De Santis made the mortgage payments would be even stronger in the post-bankruptcy period when: (1) Mr De Santis' wages were paid to an account in Mrs De Santis' name only and there is no evidence that she was not free to do with those monies what she wished; and (2) when Mr Aravanis became the registered proprietor of the Property, Mr De Santis could not have been making payments in his capacity as trustee. He contended that no leave was required to raise this argument in relation to post-bankruptcy payments because it has to be established what property was in fact acquired by Mr De Santis in order to determine the rights between the parties. 51 Although it was common ground that Mr De Santis' wages were paid into an account of Mrs De Santis in the post-bankruptcy period and mortgage payments were made from that account, neither of the arguments submitted by Mr Allen was raised in the Court below. It appears from my reading of the primary judge's reasons, the closing submissions filed in the Court below, and the transcript of closing submissions that: (1) Mrs De Santis' case in relation to both pre-and-post-bankruptcy periods was conducted on the basis set out at [40] above; and (2) Mrs De Santis expressly submitted in her outline of closing submissions in the Court below that the fact that Mr De Santis became bankrupt did not, without more, cause him to cease to be trustee. In any event, Mr De Santis' removal from office as trustee would not destroy his right of indemnity for liabilities previously incurred: see Trim Perfect Australia Pty Ltd (In liq) v Albrook Constructions Pty Ltd [2006] NSWSC 153 (Trim) at 20 set out at [72] below. 52 I therefore do not accept Mr Allen's submission that leave would not have been required to change the basis of Mrs De Santis' case in relation to the post-bankruptcy period.

Mr Aravanis' cross-appeal 53 Mr Aravanis, by notice of cross-appeal, seeks to have the orders of the primary judge set aside and a declaration that Mrs De Santis does not have an interest in the Property or, in the alternative, a declaration that the interest be a charge to the extent of 16.7% of the equity in the Property. Mr Aravanis also seeks costs and authorisation of the sale of the Property. The grounds of the cross-appeal are as follows (as written): Grounds of cross-appeal 1. The Federal Magistrate erred in law in failing to find on the available evidence that the express trust purported to be signed 3rd September 2006 with respect to [address] West Pennant Hills ("the property") was a sham. 2. The Federal Magistrate ought to have found that the conduct of the Appellant and the Second Respondent was such that the allegation that the property was held on express trust by the Second respondent for the Appellant was a sham. 3. The Federal Magistrate erred in failing to have regard to, or gave insufficient weight to, the conduct of the Second Respondent as Trustee of the express trust over the property, in particular the Second Respondent borrowed in his own capacity and paid the substantial acquisition cost and paid the mortgage secured over the property. 4. The Federal Magistrate erred in law in failing to give any or any appreciate weight to the statement made by the Second Respondent in his Statement of Affairs prepared in accordance with s 54 and s 55(2) of the Bankruptcy Act 1966 that he owned the property 5. The Federal Magistrate erred in failing to give proper reasons to support the finding at paragraph 38 of the judgment. 6. Alternatively to paragraph 4 above, the Federal Magistrate erred in finding that as the Second Respondent was a Trustee he was entitled to be fully indemnified from the trust for creating and preserving the trust asset and such a right of indemnity vested in the First Respondent, under Section 58 of the Bankruptcy Act both as property and after acquired property. 7. The Federal Magistrate erred the exercise of his discretion in finding the Appellant was entitled to a charge equivalent to 32% of the net proceeds of sale whereas her charge should only be 16.7% as this was not supported by the available evidence. 8. The First Respondent ought to have been awarded costs of the proceedings below. The costs should follow the event. The matter was not a Family Law proceedings. The First Respondent was successful, and should have been awarded 67% of his costs, or such other proportion as was reasonable. The First Respondent should not have been denied his costs in circumstances where the Appellant's Defence to Cross Claim was only filed on the first day of the hearing. 9. The Appellant to pay the First Respondent's costs of the Court below and of this appeal. 10. The Federal Magistrate erred by failing to order costs on an indemnity basis with respect to the Appellant's incompetent Family Law Application. 11. Such further or other grounds as may become apparent on review of the transcript of hearing. 54 It is convenient first to address Mr Aravanis' cross-appeal on the question of whether the primary judge erred in finding that the express trust created under the Agreement was not a sham, since the analysis of other grounds of appeal and cross-appeal flow from whether a trust exists. This would account for the first five grounds of the cross-appeal. The finding at [38] of De Santis is as follows: Once a finding is made about the existence of the trust document it follows it cannot be a sham simply because the person who had the benefit of it acted inconsistently as regards it at times. If the Court accepts, as it does, that the wife had a document that she was advised was invalid in circumstances where she was entitled to rely on that advice, it does not "stretch the bounds of credibility to beyond breaking point" to assert that she did not raise it as a defence until much, much later. Sometimes truth in human affairs is indeed stranger than fiction. Once the Court accepts, as it does, that on 3 September 2006 a trust was established in relation to the home, whether a lay beneficiary of that trust acts in a manner consistent or inconsistent with that fact does not change the fact of the existence of the trust. Nothing the wife could have done after that date, short of renouncing her interest if that were possible, would change the fact of the existence of the trust.

Express trust or sham? 55 Mr Aravanis did not on appeal attack the primary judge's finding about the authenticity of the Agreement and the existence of the express trust. That is unsurprising: the finding was open having regard to the matters which the primary judge took into account and his assessment of the witnesses relevant to the creation of the Agreement. 56 It is apparent from his reasons that in forming this view the primary judge took into account: (1) the evidence that Mrs De Santis contributed $119,155 to the purchase price of the Property; (2) that Mrs De Santis was aware that Mr De Santis had been bankrupt in 2000 and was discharged in 2006; (3) their involvement in each other's financial and personal lives despite their separation; (4) Mrs De Santis' illness and incapacity to raise a loan without Mr De Santis' involvement as an explanation for why her name was not on the purchase contract; (5) the evidence of Mr and Mrs De Santis, Mr Derriman and Mr Corrigan concerning the signing and witnessing of the Agreement and its later sighting by Mr Piscopo; (6) Mrs De Santis' explanation that she had been advised by Legal Aid that the Agreement was invalid as a reason for her failure to disclose it earlier than May 2011; (7) his assessment of Mr De Santis as betraying his wife by re-mortgaging the Property and making "blatantly false" representations to Mr Aravanis and to the Supreme Court of New South Wales in connection with his mother's estate; and (8) that to find a sham would require him to reject the evidence of Messrs Piscopo, Derriman and Corrigan as well as Mrs and Mr De Santis. The primary judge found Messrs Piscopo, Derriman and Corrigan to be reluctant, disinterested participants in the litigation and rejected submissions that their evidence was tainted; their evidence lent credibility to Mr and Mrs De Santis, whose reasons for not invoking the Agreement earlier may not otherwise have been plausible: De Santis at [21]-[28], [30]-[36]. 57 The force of Mr Aravanis' attack was directed to the question of whether the primary judge adequately took into account the conduct of Mr and Mrs De Santis after 3 September 2006 in deciding that the express trust was not a sham. Mr Aravanis pressed the argument of an "emerging sham". The foundation of this argument is language employed by Kirby J in Raftland Pty Ltd v Federal Commissioner of Taxation (2008) 238 CLR 516 (Raftland) at [144]-[149], and in particular at [149]. In Keach v Keach [2011] FamCA 192 at 172.9-172.11, Strickland J reasoned: 172.9 Secondly, it is submitted that the trust does not have to be a sham from the beginning, and the sham can arise from a later event and/or accumulation of events. I have some difficulty with the former given that a trust is established at the time of its creation, and that should be the only time that the trust itself can be found to be a sham. That is perhaps why in many cases the basis of the challenge to a trust is to allege that a party controls the trust and thus the property of the trust should be treated as the property of the party. However, there would not be the same concern where the alleged sham arises from or in the context of a subsequent event or events. Certainly Kirby J in Raftland had no difficulty with the concept of a sham developing over time, albeit his Honour was not considering a trust in that case. His Honour said this at 442: Nor does a departure by the parties from the terms of their original agreement necessarily indicate that they never intended that agreement to be effective and binding according to its tenor. Nevertheless, a sham can develop over time if there is a departure from the original agreement and the parties knowingly do nothing to alter the provisions of their documents as a consequence. (Emphasis added, footnotes omitted) 172.10 His Honour cited a New Zealand Court of Appeal decision, Marac Finance Ltd v Virtue [1981] 1 NZLR 586, where Richardson J said at 588: Where the essential genuineness of the documentation is challenged a document may be brushed aside if and to the extent that it is a sham. There are two such situations: (1) where the document does not reflect the true agreement between the parties in which case the cloak is removed and recognition given to their common intentions; and (2) where the document was bona fide in inception but the parties have departed from their initial agreement and yet have allowed its shadow to mask their new arrangement. (Emphasis added) 172.11 Interestingly, in the more recent decision of the New Zealand Court of Appeal Official Assignee in Bankruptcy in the Property of Reynolds v Wilson and Harvey and Anor referred to above, the court discussed the concept of a sham and the issue of an "emerging sham" with reference to Marac Finance. The Court distinguished the case on the basis that that case involved a financing agreement, not a trust saying: 57.... Once a trust is validly created, the beneficiaries have an interest in the trust property that cannot easily be undone. Unless the later appearance of a sham can be traced back to the creation of the trust, the trust remains valid. An exception to this could be where an item of property is later transferred to the trust, the trust could be a sham with respect to that property only, but the remainder of the trust would remain valid. It is to be noted that in Raftland, Kirby J, in his Honour's discussion of the comparative approaches in different countries to the concept of a "sham" commented that there is a "narrow operation of the doctrine of sham" in New Zealand. 58 The approach taken in Re Reynolds; Official Assignee v Wilson [2008] BCL 585 cited at [172.11] (Official Assignee v Wilson) to the application of the "emerging sham" concept to validly constituted trusts has been adopted by the New South Wales Court of Appeal, at least where the class of beneficiaries is not closed, in Lewis v Condon (2013) 85 NSWLR 99 (Lewis v Condon) at [80]-[82] per Leeming JA (McColl JA and Sackville AJA agreeing): [80] ... there can be no "emerging sham trust" when, as here, the class of beneficiaries is not closed. In the case of other transactions (such as a licence or a lease) an originally effective transaction may, by subsequent agreement of the parties, be permitted to allow its "shadow to mask their new arrangement": Marac Finance Ltd v Virtue [1981] 1 NZLR 586 at 588. This was described in Hitch v Stone [2001] EWCA Civ 63; [2001] STC 214 at [68]: [68] [T]he fact that parties subsequently depart from an agreement does not necessarily mean that they never intended the agreement to be effective and binding. The proper conclusion to draw may be that they agreed to vary their agreement and that they have become bound by the agreement as varied. [81] But there is no equivalent notion in the law of trusts, save to the extent that the rule in Saunders v Vautier (1841) Cr & Ph 240; 41 ER 482 is available. A trust once validly constituted does not change in nature because the trustee and some of the beneficiaries subsequently choose no longer to abide by the obligations of the trust relationship. Such conduct may amount to a breach of trust, and may lead to the removal of the trustee, but does not destroy the proprietary and personal rights and obligations which came into existence when the trust was created. That conclusion accords with what Rimer J said in Shalson v Russo [2003] EWHC 1637 (Ch); [2005] Ch 281 at [216]: [216] If the money never became trust money, then it was not settled property. If it did, and Mr Russo simply misappropriated it by using his de facto control of WIB, then what he was doing was misappropriating trust assets. [82] It also accords with what was said in Official Assignee v Wilson at [57], as had been anticipated by J Palmer, "Dealing with the Emerging Popularity of Sham Trusts" [2007] New Zealand Law Review 81 at 106, and in A v A [2007] EWHC 99 (Fam); [2007] 2 FLR 467 at [42]-[44]. 59 Thus, there are two difficulties faced by a person seeking to establish an "emerging sham" in the context of a validly constituted trust: They must demonstrate the essential elements of a sham. There must be a common intention that acts or documents do not create the legal rights and obligations which they give the appearance of creating; a sham is something intended to be mistaken for something else: see Snook v London & West Riding Investments Ltd [1967] 2 QB 786 at 802; Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 (Sharrment) at 453-4, approved by the High Court in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at [46] and Raftland at [35], [111]-[112], [147]-[149]. It is a strong finding which is to be made cautiously. It cannot be made if another inference is at least equally open: Raftland at [36]; Sharrment at 461; Lewis v Condon at [63]. They must show that all beneficiaries who would together be entitled to call for the trust to be brought to an end renounce their interest or otherwise terminate the trust while continuing the appearance of its existence. 60 I am not satisfied that Mr Aravanis has met this threshold. Mr Aravanis has not suggested a reason for a common intention of Mr and Mrs De Santis to depart from the express trust created on 3 September 2006 and perfected by the purchase of the Property using money contributed by Mrs De Santis and funds borrowed by Mr De Santis. What interest of Mrs De Santis would be served by creating the impression that instead of being beneficial owner of the Property she had some lesser interest in the Property arising from a resulting trust? There is no evidence of agreement between Mr and Mrs De Santis to treat her interest otherwise than as expressed in the Agreement. 61 It is true that Mrs De Santis' actions in failing to tell her lawyers of the Agreement, the manner in which the May 2010 caveat is worded, and her failure to assert her equitable ownership of the Property in accordance with the Agreement to Mr Aravanis or a Court before May 2011 do give rise to "formidable" concerns and properly call into question the validity of the Agreement and the existence of the express trust. However, having had the benefit of seeing the witnesses give evidence on an issue of credit and having taken into account all of these matters and the matters at [56], the primary judge accepted Mrs De Santis' explanation: as a lay person, she made a mistake as to her rights based on advice from Legal Aid. It was open to the primary judge to make that finding, and it is not so plainly wrong or against the weight of incontrovertible evidence that I should displace it on appeal. 62 Mr De Santis' re-mortgage of the Property for his own benefit is simply in breach of trust. His failure to tell Mr Aravanis or the Supreme Court of New South Wales (while prosecuting a claim to his mother's estate) that he held the Property on trust for Mrs De Santis was misleading (at the least), but there is no suggestion that Mrs De Santis knew of or authorised this conduct. It is difficult to see how any wrongful act of a trustee could, without the knowledge and approval of the beneficiary, give rise to an "emerging sham" which would disentitle the beneficiary to claim her interest. 63 Most importantly, Mrs De Santis' actions do not amount to renunciation of her equitable interest. The reasoning of the primary judge in De Santis at [38] that no conduct of Mrs De Santis short of renouncing her interest in the trust created by the Agreement could have displaced her interest is consistent with Official Assignee v Wilson at [57] and Lewis v Condon at [81]. 64 Mr Aravanis' "sham" argument must fail. Mr Aravanis offered no argument in support of Ground 5 of the cross-appeal. Taking the primary judge's reasons as a whole (and in particular the matters referred to at [56] above and De Santis at [38]), I do not consider that the primary judge failed to give adequate reasons for his decision that the Agreement created an express trust and that there was no sham. 65 Grounds 1-5 of the cross-appeal should accordingly be dismissed.

Nature of Mrs De Santis' interest 66 Both Mrs De Santis and Mr Aravanis say that the primary judge erred in treating Mrs De Santis' interest as a 32% charge on the value of the Property after secured creditors had been satisfied, though for different reasons (Ground 1 of the grounds of appeal and Ground 7 of the cross-appeal). 67 Mr Aravanis' complaint (that Mrs De Santis should only be entitled to a 16.7% share) reflects an argument that Mrs De Santis' entitlement should be calculated on the basis of her contribution to the purchase price giving rise to a resulting trust in her favour. I do not accept that argument as I have already found that Mr Aravanis was not successful in his challenge to the express trust constituted by the Agreement. 68 I accept Mrs De Santis' submission that it is inappropriate to speak of her interest in the Property as a charge, although it appears that language used in Mrs De Santis' submissions in the Court below may have contributed to the language employed by the primary judge. 69 Having found that Mrs De Santis was the beneficial owner of the Property, in my opinion the primary judge did err at [77] by failing to make a declaration to that effect. He erred by instead adding together the amount of Mrs De Santis' claim on Mr De Santis' bankrupt estate and the charges which the primary judge had determined the bankrupt estate was entitled to over the Property (on the basis of Mr De Santis' right of indemnity as trustee) and then determining proportionate interests in the residual equity in the Property. In my view there was error both of principle and calculation which I will address subsequently in these reasons. 70 Mrs De Santis' equitable interest is not a charge on the Property; it is a proprietary interest under a bare trust which she enjoys subject to the right of her trustee to be indemnified out of the Property for expenses properly incurred. The primary judge recognised this at [63] of De Santis. It is anomalous to refer to a person having a charge or lien over property of which the person is the owner: see Agusta Pty Ltd v Provident Capital Ltd [2012] NSWCA 26 at [41] per Barrett JA, a remark made in the context of considering the proprietary interest of a trustee occasioned by a right of indemnity out of trust property. This is equally true in relation to the interest of a beneficiary under a bare trust. 71 Mrs De Santis is entitled to a declaration that Mr Aravanis holds the Property on trust for her.

The trustee's right of indemnity 72 The right of a trustee to indemnity out of a trust estate was summarised by Austin J in Trim at [20]: The following propositions seem to me to be established by the case law: (1) A trustee is personally liable for the debts it incurs as trustee, notwithstanding any such provision as cl 16 of the present trust instrument purporting to relieve it of that liability: Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367. (2) Where a trustee incurs expenses or becomes subject to liability in the course of performing the duties of the trust, it has a right of indemnity out of assets of the trust in respect of those expenses or that liability, the right of indemnity taking the form of a right of recoupment of expenditure made by the trustee and a right of exoneration from the liability to make expenditure which has not yet been expended: Octavo Investments at 367; Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226 at 245. (3) The right of indemnity, recoupment and exoneration is supported by security in favour of the trustee over the trust assets in the form of an equitable lien (sometimes referred to as an equitable charge, though it arises as a matter of law rather than by agreement inter parties): Octavo Investments at 367; Buckle at 246. (4) The trustee's equitable lien confers on it a proprietary interest in the trust property, which can be asserted in priority to the claims of the cestuis que trust: Octavo Investments at 370. (5) The trustee's proprietary interest is enforceable by judicial sale or the appointment of a receiver, and ancillary orders such as an order to recover possession of trust property to permit these primary remedies to take effect, but foreclosure is not available: Tennant v Trenchard (1869) LR 4 Eq 537; Seton's Judgments and Orders, 7th ed, 1912, vol 3 pp 2220 to 2225; see also Ashburner's Principles of Equity, 2nd ed, 1983, p 248; EL Sykes and S Walker, The Law of Securities, 5th ed, 1993, p 198; Fisher and Lightwood's Law of Mortgages, Australian ed, 1995 by E L G Tyler, P W Young and C W Croft, p 44; ANZ Banking Group Limited v Intagro Projects Pty Limited [2004] NSWSC 1054 [at 14]. (6) The trustee's proprietary interest may only be enforced by judicial sale or the appointment of a receiver (and ancillary orders) and not merely by sale without curial intervention: The Melbourne Tramways Trust v The Melbourne Tramway and Omnibus Co Ltd (1887) 13 VLR 487 at 490; Re Pumfrey (deceased); The Worcester City and County Banking Company Limited v Blick (1883) 22 ChD 255 at 265; Re Stucley; Stucley v Kekewich [1905] 1 ChD 67; Davies v Littlejohn (1923) 34 CLR 174 at 184; Hewett v Court (1983) 149 CLR 639 at 663. (7) The right of indemnity accrues at the time the obligation is incurred, although it may subsequently become either a right of recoupment or a right of exoneration, depending on how the trustee responds: Xebec Pty Ltd (in liq) v Enthe Pty Ltd (1987) 18 ATR 893; Southern Wine Corporation (in liq) v Frankland River Olive Co Ltd [2005] WASCA 236 at [30]. (8) Loss of office by the trustee (whether by retirement or removal) does not deprive the trustee of an accrued right of indemnity, recoupment or exoneration: Coates v McInerney (1992) 7 WAR 537; Xebec v Enthe [at 898]; Southern Wines [at 30]. 73 See also the summary of relevant principles by Brereton J in Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd (2008) 74 NSWLR 550 at [14]-[22].

Obligation to make good 74 The trustee's right of indemnity extends only to expenses properly incurred. The trustee must make good any loss to the trust estate occasioned by a breach of trust before the trustee's indemnity can be exercised: see Australian Securities and Investments Commission v Letten (No 17) (2011) 286 ALR 346 at [19]-[20] per Gordon J: [19] A trustee's right of indemnification is also subject to a condition precedent - that the trustee make good any loss it caused to the estate (the clear accounts rule). That rule was described and analysed by Brooking J in RWG Management Ltd v Cmr for Corporate Affairs [1985] VR 385; (1984) 9 ACLR 739 (RWG Management) where his Honour said (at VR 397-8; ACLR 750): … a balance is to be struck between what is due by way of compensation and what is due by way of indemnity and … if the balance is in favour of trustee he may recover from the estate to that extent. See also Warne v GDK Financial Solutions Pty Ltd; Billingham v Parbery [2006] NSWSC 259 at [192]. [20] The receivers submitted, and I accept, that the clear accounts rule is essentially a mathematical exercise setting off the trustee's right to indemnity against its liability with respect to previous breaches of trust: RWG Management at VR 397; ACLR 750; CB Darvall & Darvall v Moloney (No 2) [2007] QSC 337 at [19] and Holli Managed Investments Pty Ltd v Australian Securities Commission (1998) 90 FCR 341 at 352-3 ; 160 ALR 409 at 419-20 ; 30 ACSR 113 at 124. Put another way, the quantum of the trustee's right to indemnity may be diminished by breaches unrelated to the liabilities for which the right of indemnity is claimed. … 75 In order to perform the balancing task required by the "clear accounts" rule it is necessary to establish the amount which Mr De Santis would be required to make good by reason of his breach of trust in re-mortgaging the Property and increasing the principal amount of the loan from $596,000 in November 2006 to $655,000 in June 2007, the extent of the indemnity to which Mr De Santis is entitled, and the extent to which the benefit of any indemnity falls into his bankrupt estate. 76 I am satisfied that the primary judge did not err in reaching his finding that Mr De Santis should be taken to have made an unauthorised borrowing of $59,000, not the $85,000 principal amount of the second 2007 loan claimed by Mrs De Santis: see De Santis at [45] and [20]-[21] above. The primary judge referred to the amount of the first 2007 loan as $580,000 and that is consistent with Mr De Santis' application for the loan: Appeal Book at p 189. However, the statements issued by Perpetual at Exhibit P to Mr Rossi's affidavit indicate that on 5 July 2007, the amount of "Loan Advance" for the first 2007 loan was $570,000. Exhibit P also demonstrates that over a seven month period, the principal amount of the first 2007 loan was reduced by only a few hundred dollars. By parity of reasoning and in the absence of any evidence of additional payments in reduction of the initial loan over and above normal monthly payments, there is support for the primary judge's finding that there was no significant reduction in the outstanding principal of the initial loan at the time Mr De Santis effected the re-mortgage on 26 June 2007. 77 Mr De Santis would also be required to make good any interest or charges paid or accrued on the principal amount of $59,000 to the extent to which they were not paid by Mr De Santis. The primary judge's reasons did not address this issue; Mrs De Santis' closing submissions in the Court below suggested that the amount that Mr De Santis was liable to compensate Mrs De Santis for in relation to interest on the second 2007 loan of $85,000 was $17,546, based on her submission that Mr De Santis contributed 43% of the funds deposited to her account and that the interest payments on the second 2007 loan were $30,782 in the post-bankruptcy period. As I have found no error in the primary judge's finding that the amount of the unauthorised redraw should be taken to be $59,000, I will address this issue further below.

Extent of indemnity 78 Ground 6 of Mr Aravanis' cross-appeal addresses the extent of Mr De Santis' indemnity as trustee and the question of the extent to which any indemnity vested in Mr Aravanis. Mr Aravanis argues that the primary judge erred by not finding that Mr Aravanis was entitled to a charge for $275,228.79, being the total of all mortgage payments made on the initial loan and the first and second 2007 loans to January 2012.

Pre-bankruptcy period 79 As I refused Mr Allen's application for leave to argue that mortgage payments from the joint account were made by Mrs De Santis, the concession made by Mrs De Santis in the Court below stands. The impact is that, subject to Mr De Santis' obligation to make good his breaches of trust, Mr De Santis' right as trustee to recoup mortgage payments properly incurred in the pre-bankruptcy period vested in Mr Aravanis under s 58(1) of the Bankruptcy Act upon his appointment and it operates as a lien or proprietary interest in the Property.

Quantification 80 The amount of pre-bankruptcy mortgage payments conceded by Mrs De Santis was $31,074.58: see [24] above. However, as submitted by Mr Aravanis on appeal, this amount appears to be an error of calculation comprising $29,969.34 in payments on the initial loan and $1,105.24 on the second 2007 loan comprising the August and September payments revealed in Exhibit Q. Mr Ash, Counsel for Mrs De Santis in the Court below, conceded in his opening submissions to the Court below, which are recorded at T 7.28-39, that the "ball park" figure was $38,000 for pre-bankruptcy payments. This would comprise $29,969.34 in payments on the initial loan and payments of $3,674.42 and $3,746.03 on the first 2007 loan made before Mr De Santis became bankrupt on 4 October 2007; in total $37,389.79. This calculation would be more consistent with the primary judge's reasoning that no payments on the second 2007 loan should be taken into account: see [22] above. 81 However, consistent with the primary judge's reasoning that the amount of the unauthorised borrowing created by the re-mortgage was $59,000, not $85,000, an amount of $26,000 should be treated as part of the refinancing of the initial loan and interest on that amount should be included in the calculation of interest payments for which Mr De Santis (and through him Mr Aravanis) would be entitled to a right of recoupment (subject to Mr De Santis' obligation to make good his default). Accordingly, I consider that a further amount of $338 (comprising 26/85 of $1,105) should be included in the amount of pre-bankruptcy payments for which Mr Aravanis might properly call for indemnity. 82 Mr Aravanis' lien on the Property from the pre-bankruptcy period is $37,727.79, subject to the clear accounts rule.

Post-bankruptcy period 83 It is common ground that all of Mr De Santis' earnings in the period after 4 October 2007 (which is conveniently referred to as after-acquired income) were paid into the account established by Mrs De Santis alone and these were Mr De Santis' only contributions to the accounts. 84 One of the issues in contention on appeal was whether any right of recoupment acquired by Mr De Santis because of mortgage payments from Mrs De Santis' account in the post-bankruptcy period constituted "after-acquired property" (falling within s 58(1)(b) of the Bankruptcy Act) and was therefore "property divisible among creditors" (within s 116(1)(a) of the Bankruptcy Act). 85 In the Court below, Mr Aravanis contended that Mr De Santis was entitled to claim a constructive trust in relation to mortgage payments attributable to his wages or alternatively he had a right of indemnity as trustee to which Mr Aravanis laid claim as "after-acquired property". On appeal Mr Aravanis pressed the latter argument if the express trust was found not to be a "sham". In the Court below Mrs De Santis argued her case on the basis that Mr De Santis was trustee of an express trust with a right of indemnity, and to the extent that post-bankruptcy mortgage payments are attributable to Mr De Santis' wages, they are not "after-acquired property". 86 Relevantly, under the Bankruptcy Act: s 5(1) defines "property" to mean "real or personal property of every description" including "any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property"; subject to the Bankruptcy Act, under s 58(1)(b) "after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt" in the trustee of the bankrupt's estate; "after-acquired property" is defined by s 58(6) as meaning "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"; and subject to the Bankruptcy Act, under s 116(1)(a) "all property that … has been acquired or is acquired by … or has devolved or devolves on" the bankrupt "after the commencement of the bankruptcy and before his or her discharge" is "property divisible amongst the creditors of the bankrupt". 87 The case law supports the conclusion that after-acquired income of a bankrupt remains vested in the bankrupt, subject to his or her obligation to make contributions under Div 4B of Pt VI of the Bankruptcy Act notwithstanding the breadth of s 58(1) and s 116: it is summarised by Black J in Barwick v Goodridge [2011] NSWSC 1233 at [24]: … In Re Sharpe; Ex Parte Donnelly (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 Re Gillies; Ex Parte The Official Trustee in Bankruptcy v Gillies (1993) 42 FCR 571, 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) 80 FCR 536 at 540; Geia v Palm Island Aboriginal Council [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 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. 88 The primary judge found that any right of indemnity or equity acquired by Mr De Santis by reason of mortgage payments from Mrs De Santis' account was after-acquired property even though it derived from after-acquired income: De Santis at [76]. He relied on the obiter dictum of French J (as he then was) in Re Gillies; Ex parte Official Trustee In Bankruptcy v Gillies (1993) 42 FCR 571 (Re Gillies) at 577: 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. … 89 French J concluded this remark with the comment: "In my opinion, however, no final decision should be given on this point which is still rather hypothetical". 90 The primary judge noted that the obiter dictum in Re Gillies was approved by EM Heenan J in Rodway v White and that, despite submissions from Mrs De Santis that that case was wrongly decided, he was bound to follow them as decisions of superior courts: De Santis at [61]. The primary judge did not refer to the decision of the Full Court of the Federal Court in Meriton Apartments Pty Ltd v Industrial Court of New South Wales (2008) 171 FCR 380 (Meriton Apartments). From my reading of the transcript, the dictum of Branson J at [13] in Meriton Apartments was referred to in the last minutes of the hearing after closing submissions had been made and without any analysis of the judgments of Greenwood and Perram JJ. 91 On the appeal, Mr Aravanis relied on the decision in Rodway v White. In that case, EM Heenan J considered the obiter dictum of French J in Re Gillies and the decision of the Federal Magistrates Court (as it was then known) in Sheahan v O'Brien [2002] FMCA 25 in forming the view that the bankrupt should be convicted of an offence under s 265(1)(a) of the Bankruptcy Act for failing to declare to his trustee as property of the bankrupt (being after-acquired property not falling within s 116(2)) shares acquired by the bankrupt with after-acquired income. However, even though EM Heenan J relied on the decision of the Full Court in Meriton Apartments in forming a view about the jurisdiction of the Supreme Court of Western Australia in bankruptcy matters, he did not consider the views of the Full Court on the issue of whether property acquired with after-acquired income was "after-acquired property" and therefore divisible among creditors. 92 Mrs De Santis submitted that the primary judge erred by failing to take into account the decision of the Full Court in Meriton Apartments, in which the Full Court was required to consider whether a trustee in bankruptcy could effectively assign to the bankrupt, ahead of his discharge from bankruptcy, the right to prosecute an action commenced by the bankrupt before he became bankrupt, or whether the cause of action would immediately re-vest in the trustee in bankruptcy as after-acquired property under ss 58(1)(b) and (6) and s 116(1). 93 At [13] of Meriton Apartments Branson J agreed with Greenwood and Perram JJ that the Bankruptcy Act recognises that classes of property other than those identified in s 116(2) may fall outside the classes of property of the bankrupt which vest in the bankrupt's trustee for the benefit of creditors. She noted that both ss 58 and 116(1) operate "subject to [the] Act". For these reasons, she decided that if the power given to the trustee by s 134(1)(a) to sell all or any of the property of the bankrupt is properly understood to authorise a sale of property to the bankrupt before discharge, neither s 58 nor s 116(1) would operate to re-vest the property so sold in the bankrupt's trustee for the benefit of the bankrupt's creditors. 94 Justice Greenwood considered the scheme of the Bankruptcy Act and, after noting the wide import of s 116, he concluded at [138]-[140]: [138] Division 4B of Pt VI establishes the regime by which a bankrupt who derives income during the bankruptcy is required to pay income contributions to the estate. The Division recognises that a bankrupt will derive income during the bankruptcy (ss 139L, 139M and 139N) and by s 139P or s 139Q the bankrupt is liable to pay a "contribution amount" (s 139S) to the trustee, of income of the bankrupt that exceeds an "actual income threshold amount" (s 139K), during a contribution assessment period (s 139K). The bankrupt must provide evidence of income (s 139U). Division 4B establishes an assessment of income and a contributions review procedure. A contribution is payable at such time as the trustee determines (s 139ZG). The payment of contributions might be managed by a supervised account regime under Div 4B. Otherwise, the bankrupt is entitled to derive and receive income. [139] Income is not property under the Bankruptcy Act. [140] A bankrupt entitled to derive and receive income subject to any contribution assessment and contribution amount payable to the trustee, might use that income to acquire property prior to discharge. Such property might well fall outside the exemption of s 116(2). Similarly, a bankrupt might earn income through the use of s 116(2)(c) property and acquire property outside the scope of s 116(2). The Bankruptcy Act does not seek to bring that property acquired through expenditure of income retained by the bankrupt under either s 116(2)(c) or Div 4B, within s 116(1) as property divisible among the creditors. Since these classes of property fall outside s 116(2) and yet do not comprise property divisible amongst the creditors for the purposes of s 116(1), it seems that the Bankruptcy Act recognises that classes of property other than the s 116(2) classes, may also fall outside the notion of property divisible amongst the creditors for the purposes of ss 116 and 58. It does not follow that because an assignment of property (whether an action or other property) by the trustee to the bankrupt is not expressly exempt by s 116(2), such an assignment is, necessarily within ss 116(1) and 58 of the Bankruptcy Act. That position is consistent with Kitson v Hardwick (1872) LR CP 473; Ramsey v Hartley [1977] 1 WLR 686; and Stein v Blake [1996] AC 243. 95 Perram J noted that, taken to its extreme, the argument that property acquired with income earned by a bankrupt vests in the trustee means that although the Bankruptcy Act permits a bankrupt to earn income, it does not permit the bankrupt to acquire any property with that income. The obvious injustice of that situation was accepted in Kitson v Hardwick (1872) LR 7 CP 473. Having said that, Perram J also noted that unless there are some limits there would be little work for s 58(1)(b) to do. Ultimately he did not have to decide the issue because he decided that it was against the policy of the Bankruptcy Act to allow a trustee to assign to the bankrupt a right to conduct an action commenced by the bankrupt because of the risk it poses to the other party and "an essential hostility to a bankrupt standing possessed of curial proceedings" which s 60 exhibits: see Meriton Apartments at [234]-[238]. 96 Mr Johnson sought to distinguish Meriton Apartments from Rodway v White on the basis that Meriton Apartments dealt with the assignment of a cause of action, not after-acquired income. However, in Meriton Apartments, the Full Court considered the scheme of the Bankruptcy Act and two of the judges relied on the view that the Bankruptcy Act recognised that there could be property outside the scope of s 116(2) which nonetheless does not fall within s 116(1) and s 58. Perram J noted the injustice caused by an interpretation that even though the bankrupt may earn income she or he may not acquire property with it. 97 Greenwood J framed his consideration having regard to the commonly accepted view that income is not property under the Bankruptcy Act and found that "The Bankruptcy Act does not seek to bring that property acquired through expenditure of income retained by the bankrupt under either s 116(2)(c) or Div 4B, within s 116(1) as property divisible among the creditors." This interpretation avoids the threshold difficulty which EM Heenan J recognised in Rodway v White at [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 Gilles (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. ... 98 Having regard to the views of the Full Court in Meriton Apartments I consider that I would be bound to find that any property acquired by a bankrupt with after-acquired income does not vest in the trustee in bankruptcy. This is so, despite the fact that none of the members of the Full Court referred to the obiter dictum of French J in Re Gillies. 99 As a matter of policy, I do not consider that the view expressed by Greenwood J (supported by Branson J) unduly limits the scope of ss 58 and 116 of the Bankruptcy Act. Nor does it undermine the scheme of the Bankruptcy Act. It avoids the injustice identified by Perram J. If a bankrupt may keep property acquired with after-acquired income, she or he will be encouraged to generate the income. That serves the useful purpose of encouraging a bankrupt to optimise income upon which the contribution scheme under Div 4B of Part VI will operate for the benefit of creditors, and it encourages the bankrupt to be usefully employed. This interpretation does not deprive s 116(1) or ss 58(1)(b) and (6) of significant scope, because to the extent that a person is the beneficiary of a windfall such as a bequest, a gift or a lottery win after they become bankrupt, that windfall constitutes after-acquired property divisible among creditors. 100 However, in my view, the way each of Mrs De Santis and Mr Aravanis framed the issue failed to have regard to the special nature of the property which Mr De Santis is said to derive from the mortgage payments in the post-bankruptcy period. In my opinion, the real issue was: even if mortgage payments made in the post-bankruptcy period were attributable to Mr De Santis' after-acquired income, did Mr De Santis have the right of recoupment out of the trust assets because such a right arose at the time of the payment, or did that right vest in Mr Aravanis upon his appointment as trustee in October 2007? In my view, the right was vested in Mr Aravanis upon his appointment even though the occasion for its exercise arose in the post-bankruptcy period by reason of the payments made by Mr De Santis out of after-acquired income. 101 It is trite to say that the right of indemnity accrues at the time an obligation is incurred: Xebec Pty Ltd (In liq) v Enthe Pty Ltd (1987) 87 ATC 4570 (Xebec v Enthe) at 4574; Southern Wine Corporation Pty Ltd (In liq) v Frankland River Olive Co Ltd (2005) 31 WAR 162 (Southern Wine Corporation) at [30]; it is not subsequently lost by cessation of office whether by retirement or removal: Xebec v Enthe at 4574-5; Coates v McInerney (1992) 7 WAR 537 at 539; Southern Wine Corporation at [30); Dimos v Dikeakos Nominees Pty Ltd (1996) 68 FCR 39 at 43. 102 But when is the obligation incurred? In my view, the obligation is incurred at the time the borrowing is made, even though principal, interest and other charges may only become due and payable periodically; the indemnity is a continuing right from the time the obligation is incurred which can be enjoyed as exoneration or recoupment depending on how the trustee responds in satisfying the obligation. The right of indemnity is secured by a lien over trust property from the time the obligation is incurred and it confers on the trustee a proprietary right in the trust property which takes priority over the beneficiary's interest until the obligation has been satisfied in full. This flows from the High Court's decision in Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226 at [47]-[50] (footnotes deleted): [47] In Worrall v Harford, Lord Eldon LC said: "It is in the nature of the office of a trustee, whether expressed in the instrument, or not, that the trust property shall reimburse him all the charges and expences [sic] incurred in the execution of the trust."" The entitlement of a trustee who has borrowed moneys for application to trust purposes has been described as follows: "Where the trustee acting within his powers makes a contract with a third person in the course of the administration of the trust, although the trustee is ordinarily personally liable to the third person on the contract, he is entitled to indemnity out of the trust estate. If he has discharged the liability out of his individual property, he is entitled to reimbursement; if he has not discharged it, he is entitled to apply the trust property in discharging it, that is, he is entitled to exoneration." In aid of that right to reimbursement or exoneration for liabilities properly incurred in the administration of the trust, the trustee cannot be compelled to surrender the trust property to the beneficiaries until the claim has been satisfied. In that sense, the entitlement to reimbursement or exoneration confers a priority in the further administration of the trust. Accordingly, in an administration action, if it appears probable that the trust fund will be insufficient for the full recoupment of the trustee, the trustee is entitled to the insertion in the order for administration of a direction that there be payment in the appropriate order of priority. [48] Until the right to reimbursement or exoneration has been satisfied, "it is impossible to say what the trust fund is". The entitlement of the beneficiaries in respect of the assets held by the trustee which constitutes the "property" to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves. The entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them. To the extent that the assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not "trust assets" or "trust property" in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries. [49] The entitlement to reimbursement and exoneration was identified by Lindley LJ as "the price paid by cestuis que trust for the gratuitous and onerous services of trustees". The right of the trustee has been described as a first charge upon the assets vested in the trustee, as one upon the "trust assets", and as conferring upon the trustee an "interest in the trust property [which] amounts to a proprietary interest". [50] However, the starting point in the class of case under consideration is that the assets held by the trustee are "no longer property held solely in the interests of the beneficiaries of the trust". The term "trust assets" may be used to identify those held by the trustee upon the terms of the trust, but, in respect of such assets, there exist the respective proprietary rights, in order of priority, of the trustee and the beneficiaries. The interests of the beneficiaries are not "encumbered" by the trustee's right of exoneration or reimbursement. Rather, the trustee's right to exoneration or recoupment "takes priority over the rights in or in reference to the assets of beneficiaries or others who stand in that situation". A court of equity may authorise the sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration. In that sense, there is an equitable charge over the "trust assets" which may be enforced in the same way as any other equitable charge. However, the enforcement of the charge is an exercise of the prior rights conferred upon the trustee as a necessary incident of the office of trustee. It is not a security interest or right which has been created, whether consensually or by operation of law, over the interests of the beneficiaries so as to encumber them in the sense required by s 66(1) of the Act. In valuing the interests of beneficiaries which are conveyed by an instrument, there is no encumbrance which the Act requires to be disregarded. 103 Except to the extent of the borrowing undertaken in 2007 which was used for Mr De Santis' personal benefit, these principles apply to the obligations Mr De Santis undertook under the first and second 2007 loans and the related mortgage. 104 Further, upon a trustee's bankruptcy, the right of indemnity vests in the bankrupt's trustee in bankruptcy: Official Assignee of O'Neill v O'Neill (1898) 16 NZLR 628 at 635; Jennings v Mather [1902] 1 KB 1 at 6, 9; Savage v Union Bank of Australia Ltd (1906) 3 CLR 1170 at 1188, 1196; Octavo Investments at 370-1; Re Suco Gold Pty Ltd (In liq) (1983) 33 SASR 99 at 109. 105 Accordingly, as Mr De Santis' right of indemnity conferring a proprietary interest in the Property predated Mr De Santis' bankruptcy, that right became part of his bankrupt estate under ss 58(1)(a) and 116(1)(a) when he became bankrupt in October 2007. As Mr De Santis' right of indemnity to be realised by recoupment out of trust property was vested in Mr Aravanis, it makes no difference that mortgage payments were attributable to Mr De Santis' after-acquired income. I do not consider that this works any unfairness on Mr De Santis. The benefit Mr De Santis received from the mortgage payments was abatement of his personal obligation to the lender. He may derive benefit from Mr Aravanis exercising the right of recoupment if the creditors of his bankrupt estate are satisfied in full. 106 On this basis, the primary judge did not err in concluding that an amount equal to mortgage payments in the post-bankruptcy period attributable to Mr De Santis' income constituted a charge on the Property in Mr Aravanis' favour, subject to the clear accounts rule.

Quantification 107 The primary judge accepted that the aggregate of Mr De Santis' contributions to Mrs De Santis' account in the post-bankruptcy period to January 2012 was $283,542. 108 Mr Aravanis challenged the primary judge's methodology in De Santis at [68]-[74] in so far as he treated approximately $632,881 as the aggregate of all contributions to that account. Mr Aravanis says the primary judge did not take into account "round robin" payments from other accounts kept with the National Australia Bank. I reject this submission. Other than characterising the payments as "round robin", Mr Aravanis has not established why deposits to Mrs De Santis' account from which mortgage payments were made should not be treated as contributions to Mrs De Santis' account attributable to Mrs De Santis, her son John, or any other source from which payments were received (for instance, Mrs De Santis' family). 109 It has not been established that the primary judge erred by accepting $632,881 as the total amount of contributions to Mrs De Santis' account, that Mr De Santis should be taken to have contributed approximately 44.7% of the funds in the account in the post-bankruptcy period, and that Mrs De Santis should be taken to be entitled to the balance in the absence of evidence establishing other claim to those funds. This is despite some accepted gaps in the bank statements in evidence and difficulty in reconciling the information in the aide memoire documents provided by counsel for Mrs De Santis and Mr Aravanis. The primary judge was dealing with the best evidence available to him and I do not consider that substantial injustice arises from the approach that he took. 110 It was initially not entirely clear why the primary judge took into account payments to Mrs De Santis' account up to the end of March 2012, given mortgage payments were only taken into account to January 2012 in Exhibit Q. However, having considered Mrs De Santis' bank statements attached to her 15 May 2012 affidavit, it is clear that if mortgage payments made in February and March 2012 are taken into account, they broadly match the mortgage payments made in August and September 2007 in the pre-bankruptcy period on the two 2007 loans (see [80] above), and the primary judge effected no substantial injustice by accepting the aggregate figures of $213,371 as the payments made on the first 2007 loan and $31,888 made on the second 2007 loan in the post-bankruptcy period. It should be noted at this point that those monetary figures, and the ones that will follow, have been rounded to the nearest dollar. 111 However, I consider that the primary judge did err in some of his calculations: The primary judge took no account of payments made on the second 2007 loan in determining the aggregate amount of mortgage payments (see De Santis at [69]). He should have taken into account 26/85 of the payments made on this loan in the post-bankruptcy period as being an expense of the trust, consistent with his reasoning that only $59,000 of the second 2007 loan was borrowed for Mr De Santis' personal benefit. Of the $31,888 of interest payments on the second 2007 loan, $9,754 should be treated as an expense of the trust and $22,134 should be treated as interest on Mr De Santis' unauthorised borrowing to which Mrs De Santis should be taken to have contributed 55.3% or $12,240; The total amount of interest payments on loans which should be treated as expenses of the trust is $223,125 (comprising $213,371 on the first 2007 loan and $9,754 on the second 2007 loan); Mr De Santis should be taken to have contributed $99,737 to mortgage payments as expenses of the trust in the post-bankruptcy period; Mr De Santis should account for $12,240 of interest on the unauthorised borrowing to which Mrs De Santis contributed; and The primary judge did not allow for interest which accrued after March 2012 on the first 2007 and on the second 2007 loan to the extent it was attributable to the $59,000 unauthorised borrowing.

Costs 112 The primary judge made orders that Mrs De Santis pay Mr Aravanis' costs of the discontinued Supreme Court of New South Wales and Family Court proceedings. Mr Aravanis complains that the primary judge did not order indemnity costs for the discontinued proceedings. The primary judge did not find an element of culpability in Mrs De Santis' conduct which would warrant indemnity costs. Although Mrs De Santis' conduct of proceedings was chaotic and constantly shifting, Mr Aravanis has not established that the primary judge's discretion miscarried. I dismiss this claim. 113 Mr Aravanis complains that the primary judge did not make an order that Mr Aravanis get 67% of his costs in the proceedings in the Court below and says the primary judge failed to take into account the submissions of Mr Aravanis. The primary judge noted that each party had a measure of success and failure in the "rich fabric" of the claims to indemnities and equities which they prosecuted but did not consider that his assessment of costs should descend into minutiae. That view was available to him and there was no reason why the respective proportions in which he found Mrs De Santis and Mr De Santis' bankrupt estate should share in any equity remaining in the Property should dictate the costs order. I do not consider that the primary judge's exercise of discretion miscarried. 114 I will accord the parties an opportunity to provide submissions as to the appropriate costs order on the appeal having regard to my reasons and the proposed orders.

Conclusion 115 Mrs De Santis is entitled to a declaration that Mr Aravanis holds the Property on trust for her and accordingly Orders 1 and 2 of the primary judge's orders should be set aside. 116 Mr Aravanis should be taken to have a charge over the Property for the aggregate amount of $137,465 comprising $37,728 relating to pre-bankruptcy mortgage payments and $99,737 in post-bankruptcy mortgage payments which he is entitled to recoup on behalf of Mr De Santis' bankrupt estate, subject to Mr De Santis' obligation to make good the amounts referred to at [117]-[118] below. 117 Mr De Santis is required to make good $71,240 comprising $59,000 (the principal amount of unauthorised borrowing), together with $12,240, being the amount Mrs De Santis should be taken to have contributed to mortgage payments on the unauthorised borrowing in the post-bankruptcy period. 118 Mr De Santis would also be required to make good any interest and charges accrued and unpaid by Mr De Santis on the unauthorised loan since March 2012, the last date to which statements have been provided. The primary judge's reasons indicate that Mr and Mrs De Santis stopped making payments on the loans, but there is no evidence relating to this issue. 119 Subject to evidence of the accrued unpaid amount on the unauthorised borrowing, it appears that Mr Aravanis would, on a balance of accounts, have a charge on the Property for $66,225. He is entitled to a declaration to that effect, subject to final quantification as envisaged below. As a matter of justice having regard to the balance of accounts, Mr Aravanis should have liberty to raise any payment on the loans since March 2012 made by Mr De Santis or by Mr Aravanis as trustee which should be taken into account consistent with these reasons. 120 If the balance of account indicates that Mr De Santis' obligation to make good loss to the trust estate attributable to his default has been satisfied and there remain moneys payable to Mr Aravanis, Mr Aravanis is entitled to an order for sale of the Property to enforce his charge on the Property. 121 However, Mrs De Santis should first be given the opportunity to fund the amount of the charge. I will ask the parties to confer as to an appropriate time period to be allowed to establish the exact amount of the charge having regard to Mr De Santis' obligation to make good the amount of any accrued but unpaid interest on the unauthorised loan and then for payment of the amount of the charge in favour of Mr Aravanis. 122 Orders 3 to 9 of the primary judge's orders should be set aside and new machinery orders made in lieu. They should include an order that Mrs De Santis is entitled to any surplus after the secured lenders have been satisfied and any lien of Mr Aravanis as trustee of Mr De Santis' bankrupt estate has been satisfied after a clean account for any breach of trust by Mr De Santis has been made. 123 Some of these orders would be academic if the secured lenders have taken enforcement action against the Property: in that event it would be more appropriate to make orders as to any remaining proceeds of sale consistent with these reasons. 124 I will ask the parties to confer as to appropriate orders to give effect to these reasons. I certify that the preceding one hundred and twenty-four (124) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.