Di Cioccio v Official Trustee in Bankruptcy

REASONS FOR JUDGMENT 1 The question in dispute in this proceeding is whether shares purchased by the bankrupt ("Mr Di Cioccio") come within the meaning of "after-acquired property" in s 58(1) of the Bankruptcy Act 1966 (Cth) which vested in the respondent ("the Official Trustee") and is divisible amongst the creditors pursuant to s 116. Mr Di Cioccio contended that the shares were not after-acquired property devolving upon his trustee in bankruptcy pursuant to s 58, and is not available for division amongst the creditors pursuant to s 116, because the shares were acquired from Mr Di Cioccio's savings from income which he received during his bankruptcy which was below the threshold amount in respect of which he was required to make contributions to his trustee under Division 4B of Part 6 of the Bankruptcy Act 1966 (Cth). 2 The Bankruptcy Act 1966 (Cth) provides, by s 58(1)(a), that the property of a bankrupt (other than after-acquired property) vests forthwith in the relevant trustee and, unless specifically excluded, is divisible amongst the creditors of the bankrupt pursuant to s 116. After-acquired property of the bankrupt vests with the trustee by operation of the s 58(1)(b) "as soon as it is acquired by, or devolves on, the bankrupt". After-acquired property is defined by s 58(6) to mean property that is acquired by or devolves on the bankrupt. Property is given a broad meaning by s 5(1) and is wide enough to include shares and choses in action. The ordinary and natural meaning of the words in these provisions extend to the shares which Mr Di Cioccio acquired. 3 Mr Di Cioccio acquired shares in several companies between 14 June 2013 and 27 September 2013 during the period of his bankruptcy. Those shares come within the meaning of "property" and would ordinarily vest in the trustee as after-acquired property of the bankrupt. Mr Di Cioccio, however, contended that the shares are excluded from the operation of those provisions by reason of Division 4B of Part 6 of the Bankruptcy Act 1966 (Cth). That Division deals with the obligations of a bankrupt to pay to the trustee amounts of income exceeding a threshold amount. Mr Di Cioccio received income during the term of his bankruptcy which was below the threshold that would have required him to pay any excess to the Official Trustee. Mr Di Cioccio, however, was able to save the income he received, and he applied the money saved to the purchase of shares. Mr Di Cioccio was made bankrupt on 20 January 2012 and was able to save the money partly because he was serving a term of imprisonment between 20 December 2011 and 13 February 2013. He was paid $2,500 by cheque upon his release on 13 February 2013 for the work he had performed whilst in prison. He lived with his parents upon his release from prison from 13 February 2013 to 17 October 2013, during which time he was on a Newstart allowance and his parents paid for his food, clothing and other living expenses and was not required to pay rent. In all Mr Di Cioccio was able to save $8,849.63 which he applied in part to purchase the shares. 4 On 17 October 2013 Mr Di Cioccio informed the respondent that he intended to purchase a motorcar. Mr Di Cioccio also informed the Official Trustee, when asked, that the money to purchase the car was to come from the sale of shares he had purchased from the income he had saved. The Official Trustee then informed Mr Di Cioccio that the shares purchased by him were an asset which had vested in the Official Trustee pursuant to s 58(1). On 22 October 2013 Mr Di Cioccio sought a review of that decision by the estate and administration team of the Australian Financial Security Authority who affirmed it in October. Mr Di Cioccio has sought a review by this Court of that decision under s 178 of the Bankruptcy Act 1966 (Cth). On 30 October 2013 the Official Trustee sold the shares and realised $9,240.19. 5 The application for review to this Court depends upon the construction of the relevant provisions of the Bankruptcy Act 1966 (Cth). The Official Trustee adopted the view, and contended at the hearing, that any shares acquired by Mr Di Cioccio during the bankruptcy was after-acquired property within the meaning of s 58(1)(b) and vested in the Official Trustee notwithstanding that the shares were acquired from money which had been available for the personal use of the bankrupt as contemplated by Division 4B. Mr Di Cioccio, in contrast, contended that the money received by him as income was governed by Division 4B and that it did not lose its character as income excluded from ss 58 and 116 by its application in the acquisition of shares. 6 The point at issue was considered in obiter dicta by French J (as the Chief Justice then was) in Re Gillies; Ex parte Official Trustee in Bankruptcy (1993) 42 FCR 571 and was decided adversely to Mr Di Cioccio's contention by Heenan J in Rodway v White (2009) 233 FLR 262. In Re Gillies it had been not necessary to decide the issue which arises in this proceeding, but in the context of considering the effect of significant changes to the Bankruptcy Act 1966 (Cth) relating to after-acquired property French J said 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. In my opinion, however, no final decision should be given on this point which is still rather hypothetical. The issue, however, fell for determination in Rodway v White in which Heenan J, in a carefully reasoned decision, adopted the observations of French J in Re Gillies notwithstanding some textual difficulties in the adoption of that view. The observations in Re Gillies, and the decision in Rodway v White, were followed by a Federal Magistrate in Davies v Davies [2012] FMCAfam 866. The parties agreed that the dicta in Re Gillies and decisions in Rodway and Davies were not binding, but that they ought to be followed unless satisfied that the earlier decisions were plainly or clearly wrong: see Nezovic v Minister for Immigration and Multicultural and Indigenous Affairs (No 2) (2003) 133 FCR 190 at [52]; Marr v Australian Telecom Corporation (1991) 34 FCR 82; Bank of Western Australia v Commissioner of Taxation (Cth) (1994) 55 FCR 233. 7 The case for Mr Di Cioccio was that Division 4B established a comprehensive scheme constituting a code for dealing with after-acquired income of a bankrupt and that the income received by Mr Di Cioccio did not change its character as income by its use in the acquisition of the shares. French J in Re Gillies had said that the scheme embodied in Division 4B "approaches a code for dealing with after-acquired income of the bankrupt" (at 577), but his Honour nonetheless expressed a preference for the view that assets purchased by a bankrupt with after-acquired income would constitute property divisible among the creditors and vest in the trustee if not excluded by s 116(2). The observation by French J in Re Gillies quoted above concerning after-acquired property, in other words, had been made in the context of considering Division 4B as approaching a code. 8 The legislative history to Division 4B was traced by French J in Re Gillies. A predecessor to the present provisions was found in s 101 of the Bankruptcy Act 1924 (Cth) which provided that the bankrupt's trustee would receive for distribution amongst the bankrupt's creditors so much of a bankrupt's "pay, pension, salary, emoluments, profits, wages, earnings or income" as the court directed. In Federal Commissioner of Taxation v Official Receiver (1956) 95 CLR 300 the view had been expressed that the personal earnings of a bankrupt did not vest in the official receiver in the absence of an order by the Court, and a report in 1962 by a committee appointed by the Attorney-General, and headed by Sir Thomas Klyne, had recommended the recasting of the provision to give effect to the view that "a bankrupt who is in receipt of income should be entitled to retain it for his own benefit": quoted in Re Gillies at 574. That recommendation was reflected in the former s 131 of the Bankruptcy Act 1966 (Cth) which, by subsection (1), had provided that a bankrupt in receipt of income was "entitled to retain it for his own benefit". Those provisions have now been substituted by Division 4B which creates a liability on the part of a person who is bankrupt to make a contribution from the bankrupt's income in excess of a threshold amount. Section 139P in Division 4B is headed "Liability of bankrupt to pay contribution" and provides: (1) Subject to section 139Q, if the income that a bankrupt is likely to derive during a contribution assessment period as assessed by the trustee under an original assessment exceeds the actual income threshold amount applicable in relation to the bankrupt when that assessment is made, the bankrupt is liable to pay to the trustee a contribution in respect of that period. (2) Subject to section 139Q, if the income that a bankrupt is likely to derive during a contribution assessment period as assessed by the trustee under an original assessment does not exceed the actual income threshold amount applicable in relation to the bankrupt when that assessment is made, the bankrupt is not liable to, but may if he or she so wishes, pay to the trustee a contribution in respect of that period. The legislative scheme thus enacted does not vest in the Official Trustee the income of a bankrupt; rather, it imposes an obligation upon a bankrupt to pay to the trustee a contribution after an assessment by the trustee. The liability imposed by s 139P(1) is limited to the amount by which the income of the bankrupt exceeds the income threshold amount. Subsection 139P(2) provides that a bankrupt may pay to the trustee a contribution where the income assessed does not exceed the actual income threshold amount but "the bankrupt is not liable" (that is, the bankrupt is not obliged) to pay any such amount. 9 The clear legislative policy is, therefore, that a bankrupt's income below the threshold amount belongs wholly to the bankrupt and does not vest with the Official Trustee. "Income" for these purposes is not restricted to money (Federal Commissioner of Taxation v Cooke and Sherden (1980) 42 FLR 403, 412-416) and has a large meaning (Re Weiss; Ex parte Official Trustee in Bankruptcy (1985) 7 FCR 121, 123-4) extending, "as did the same word in s 101 of the 1924 Act, to payments of a revenue nature": Re Gillies; Ex parte Official Trustee in Bankruptcy (1993) 42 FCR 571, 574. The shares in this case were accepted for the purposes of the proceeding as having been paid from income that fell below the threshold amount which Mr Di Cioccio was not required to pay to the Official Trustee under Division 4B. His income had been, to that extent, available for his own use. There appears to be no doubt that the Official Trustee could have had no claim on the money which had been received by Mr Di Cioccio as income if it had been applied by him for most kinds of personal expenditure, but the parties disagreed on the reason for that conclusion. Mr Di Cioccio contended that the reason for that conclusion flowed from the fact that the income was dealt with wholly by Division 4B and, therefore, that the income, and its application, never came within the meaning of after-acquired property for the purposes of ss 58 or 116. In contrast, the Official Trustee contended that the reason income expended upon personal consumption did not vest in the Official Trustee was not because the income, or its use, fell outside the other provisions of the Act, but only because the Act provided specific exclusions from the operation of ss 58 and 116. Thus, the Official Trustee contended, the income and what was acquired with the income was expressly excluded by s 116 rather than that Division 4B operated as an exclusive code to which the other provisions did not apply. Thus, for example, s 116(2)(ba) excludes personal property of the bankrupt from the property divisible among the creditors of the bankrupt where that property (a) has sentimental value for the bankrupt, (b) is of the kind prescribed by the regulations, and (c) is identified by a special resolution passed by the creditors before the trustee realises the property. Regulation 6.03 deals with ordinary household property. The Official Trustee was also able to point to other provisions in s 116 which expressly excluded certain property from that which was divisible amongst the creditors of the bankrupt including "protected money" (as defined in s 116(2D)) which is excluded from s 116(1) by operation of s 116(2)(n) and s 116(3). Protected money excluded from division amongst the bankrupt's debtors included money where the legislature has specifically decided that the amounts ought not to be available for division amongst the creditors. 10 The construction of the provisions urged by the Official Trustee, and to which French J was inclined in Re Gillies, may operate harshly and, perhaps, may appear to operate in tension with the policy in Division 4B. The view urged by the Official Trustee encourages a bankrupt to spend his income, rather than to save it in the purchase of valuable assets, and, in Mr Di Cioccio's case could, perhaps, have been spent by paying rent or board whilst living with his parents. It might be said to be unfair that a bankrupt acting prudently and seeking to make a fresh start after bankruptcy by saving the income which the Act does not require him to contribute for division amongst the creditors should be discouraged from saving the income which is below the contributable amount. The view urged by the Official Trustee, and adopted by Heenan J in Rodway v White, also gives rise to a difficulty of definition. The difficulty lies in the fact that money will ordinarily also be held as a chose in action against a bank or other deposit taker and will, therefore, constitute property when acquired as a chose in action upon deposit of the money into an account or when transferred from one account to another. 11 His Honour in Rodway v White was concerned, as in this case, with whether shares purchased by a bankrupt from income which he had derived below the contributable threshold were after-acquired property. In that case, as was accepted in this case, all of the shares "were purchased with after-acquired income of the bankrupt": (2009) 233 FLR 262 at [5]. The question for determination by his Honour was posed at [33] in the context of saying: [T]he obligation of a bankrupt to make contributions to the trustee from after-acquired income derives from Div 4B rather than from s 116(1)(a) […] That then gives rises to the crucial question of whether other property, purchased by an undischarged bankrupt from the after-acquired income which he or she has been permitted to retain, becomes "after-acquired property" divisible among the creditors […]. This is the novel question upon which no authoritative determination has been made. In considering the question, his Honour noted that the definition of "property" in the context of the question for determination gave rise to a difficulty because an amount received as income and paid into an account would thereby result in the bankrupt acquiring property (as a chose in action) from the application of the income by deposit in an account. In that context his Honour said 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 Gillies (supra) appear to contemplate, that the proceeds of income, whether it be cash or credits in bank accounts, as originally received or accumulated will constitute "after-acquired property" within the meaning of s 116. This is probably due to the effect of Div 4B and the idea that after-acquired property does not include income at least in the form in which it was earned. That concept may need a little extension to cater, for example, with a situation where income is received in cash, and is then converted by the recipient to a credit in a bank or deposit account, and is then transferred to a second, third or subsequent bank or deposit account, each transition constituting, strictly speaking, the acquisition of property in the form of the subsequent account or accounts. The inconsistencies between this analysis of what constitutes property and the notion of "after-acquired property" in s 116 can probably be ignored for the present notwithstanding that they reveal some special and fundamental changes to the conventional notion of "property". His Honour, however, went on to conclude at [66] that the conversion of income into a distinctly different form of property, namely shares, did result in the acquisition of after-acquired property divisible among creditors which vested in the trustee unless otherwise within one of the categories excluded by s 116. 12 It may be seen from the observations in Re Gillies, and the decision in Rodway v White, that the question posed for determination in this proceeding is not free from doubt. It may also be accepted that the submission advanced for Mr Di Cioccio advances one of the polices evident in the Act through Division 4B and that there is some force in the submission that the income dealt with by Division 4B, and therefore, its application, is excluded from the operation of the other provisions of the Act. However the fact that there may be doubt or difficulty in the construction of a statutory provision does not warrant departing from a construction given in an earlier decision unless it was plainly or clearly wrong. In Nezovic, French J said at [52]: Where questions of law and in particular statutory construction are concerned, the view that a judge who has taken one view of the law or a statute is "clearly wrong" is not lightly to be adopted having regard to the choices that so often confront the courts particularly in the area of statutory construction. It cannot be said that the construction adopted in Rodway v White, or the observation expressed in Re Gillies, is "clearly" or "plainly wrong" and ought not to be followed. It is one thing to conclude that money or a chose in action may retain the character of income when substituted for other money or another chose in action, but it is another thing to conclude that the character of income is maintained when it is applied in the acquisition of a distinctly different asset. Heenan J appears to have taken that view when his Honour observed at [51] that "after-acquired property does not include income at least in the form in which it was earned" (emphasis added). Income may take many forms (see Re Weiss; Ex parte Official Trustee in Bankruptcy (1985) 7 FCR 121; Federal Commissioner of Taxation v Cooke and Sherden (1980) 42 FLR 403, 412-416; Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500) and may, no doubt, on occasion take the form of shares or other property (see, for example, Thomas v Federal Commissioner of Taxation (1923) 33 CLR 256; Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215, 219; Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639; Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liq) (2005) 225 CLR 488, 504; Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47; Whitaker v Federal Commissioner of Taxation (1998) 82 FCR 261), but what is received as income may not retain its character as income when applied in the acquisition of goods or other assets. The shares in Rodway v White, and those in this case, fall within the ordinary and natural meaning of the definition of after-acquired property and ceased to be income governed by Division 4B when the income was applied in the purchase of shares. The source for the payment of the shares may have been Mr Di Cioccio's Division 4B income but the source of the payment does not determine the character of the shares which were purchased with the income. 13 The outcome for Mr Di Cioccio may seem harsh but it is not clearly or plainly wrong and accords with one of the important, albeit competing, policy objectives of the Bankruptcy Act 1966 (Cth), namely that after-acquired property of the bankrupt be available for division among creditors in accordance with s 116. The provisions of s 58 and s 116, on the one hand, and those in Division 4B, on the other hand, are not inconsistent, although they may reflect competing policy objectives. Each set of provisions is directed to a specific circumstance and reflects the balance struck by the legislature of the competing objectives. The court "must strive to give meaning to every word of the provision" (Project Blue Sky Inc v Australian Broadcasting Commission (1998) 194 CLR 355, 382 [71]) and adjust the meaning of "competing provisions to achieve that result which will best give effect to the purpose and language of those provisions while maintaining the unity of all the statutory provisions": Project Blue Sky, 382 [70]. Division 4B deals with a bankrupt's income below a threshold and does not concern itself with the consequences of how that income is applied. Other provisions, including ss 58 and 116, may have effect upon what the income below the threshold is used to acquire. That Mr Di Cioccio may have been able to enjoy the income personally had he not purchased the shares is not a sufficient reason to depart from the view expressed in Re Gillies and applied in Rodway v White. The exceptions to s 116 are specified in the section itself and those exceptions do not include assets acquired by application of income below the contribution threshold in Division 4B. The fact that the nature of the funds used to acquire the shares is not determined by the source of the funds used to buy them permits the conclusion expressed in Re Gillies, and applied in Rodway v White, that the shares are after-acquired property vesting in the Official Trustee under s 58(1)(b) and divisible among the creditors under s 116(1). 14 Accordingly, the application will be dismissed. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Pagone.