ARGUMENT AND ANALYSIS
24 Mr Di Cioccio contended that when a bankrupt acquires property using money or a credit to a bank account representing income previously derived during the bankruptcy that was below the actual income threshold amount (as he did), there is a conflict between the operation and effect of Div 4B of Pt VI of the Act, and s 58(1)(b) in Div 4 of Pt IV and s 116 in Div 3 of Pt VI of the Act. Mr Di Cioccio submitted that the conflict should be resolved by ss 58 and 116 "giving way" to Div 4B of Pt VI with the result that the Shares he acquired were not "after-acquired property" which vested in the Official Trustee under s 58(1) of the Act.
25 For the reasons that follow, that contention is rejected.
26 The issue has been averted to in some decided cases (see eg, Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies (1993) 42 FCR 571; Re Hawkins; Ex parte Worrell (1996) 71 FCR 371; Re Sharpe; Ex parte Donnelly (1998) 80 FCR 536; Meriton Apartments Pty Ltd v Industrial Court of New South Wales (2008) 171 FCR 380; Rodway v White [2009] WASC 201; Barwick v Goodridge [2011] NSWSC 1233 and De Santis v Aravanis [2014] FCA 1243) but has not been decided authoritatively.
27 The question must be decided by this Court as a question of statutory construction. The task of construction must "begin with a consideration of the [statutory] text": Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 at [39]. That starting point requires the Court "to apply the ordinary and grammatical sense of the statutory word(s) to be interpreted having regard both to text and perhaps also context as well as legislative purpose": Screen Australia v EME Productions No 1 Pty Ltd (2012) 200 FCR 282 at [43], citing Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) (2009) 239 CLR 27 at [4] and also at [47].
28 Section 58 is in Div 4 of Pt IV of the Act: see [8] above. It contains the general rule for the vesting of property when a debtor becomes a bankrupt. The general rule is "[s]ubject to this Act". The section deals with the property of a bankrupt at the time of becoming bankrupt (subs (1)(a)) as well as "after-acquired property of the bankrupt" (subs (1)(b)). As s 58(1)(b) states, after-acquired property of the bankrupt vests in the Official Trustee (or the trustee of the bankrupt's estate) as soon as it is acquired by, or devolves on, the bankrupt. As we have seen, after-acquired property is defined in s 58(6) for the purposes of s 58 to mean "property that is acquired by… the bankrupt on or after the date of the bankruptcy, being property that is divisible amongst the creditors of the bankrupt": see [11] above.
29 That last phrase, property [that is] divisible amongst the creditors of the bankrupt, is specifically addressed in s 116 of Div 3 of Pt VI of the Act: see [13] above. That section identifies, subject to other provisions of the Act, the property that is divisible (s 116(1)), and that which is not divisible (s 116(2)), amongst the bankrupt's creditors.
30 The nature of the property (whether it is divisible amongst creditors or not) determines whether or not the property vests in the trustee. If an item of property is of a kind which is divisible amongst the creditors of a bankrupt (s 116(1)), it vests in the trustee. If it is property of a kind which falls within one of the categories listed in s 116(2), it is entitled to be retained by the bankrupt. Section 116(1) is broad. It includes property that has been acquired, or is acquired by, the bankrupt after the commencement of the bankruptcy and before discharge: s 116(1)(a). It is to be read, and is able to be read, with s 58 of the Act.
31 What s 116(2) does is limit the operation of s 116(1) by stating that s 116(1) does not extend to certain identified property. Generally, the effect of the provision is that a bankrupt is permitted to acquire and hold a range of items of property without that property vesting in the trustee and being divisible amongst the bankrupt's creditors. A review of the items of property listed in s 116(2) (and thereby excluded from the operation of s 116(1)) is instructive. For example, the items of property excluded and not divisible amongst a bankrupt's creditors include:
(1) Property held by a bankrupt in trust for another person: s 116(2)(a);
(2) Household property of particular kinds and quantities: s 116(2)(b)(i) read with reg 6.03 of the Regulations;
(3) The bankrupt's property used by him or her in earning income by personal exertion, as limited by value: s 116(2)(c)(i) read with reg 6.03B(1) of the Regulations;
(4) Property used by a bankrupt primarily as a means of transport, as limited by value: s 116(2)(ca) read with reg 6.03B(3) of the Regulations.
32 As will be apparent, the Act enables the bankrupt to retain specific property: including property which the bankrupt requires for day to day living, property used to earn income by personal exertion and a form of transport. At the same time, the Act limits the kinds and value of that property: see [31] above. The Act may be read as encouraging a bankrupt to commence re-establishing themselves but, until discharged, the Act does not permit a bankrupt to commence acquiring all kinds of assets to the detriment of a bankrupt's creditors.
33 Section 116(2) of the Act does not expressly refer to property representing income previously derived by an undischarged bankrupt or, for that matter, to property acquired by an undischarged bankrupt using property representing income previously derived by an undischarged bankrupt below the actual income threshold amount applicable to that bankrupt. The question of construction is whether one can discern from the scheme of the Act such an exemption?
34 The answer is no. As we have seen, ss 58 and 116 are concerned with property, not with the character of property as income or capital. The items of property able to be acquired and retained by an undischarged bankrupt are specified. If an item of property (for example, shares) is not listed in s 116(2) then it is caught by s 116(1) and is divisible amongst the bankrupt's creditors. What role then, if any, does Div 4B have to play in determining the property that is divisible amongst the bankrupt's creditors, and does it, as the appellant contends, conflict with ss 58(1)(b) and 116? Again, the answer is none.
35 Div 4B of Pt VI has two objects. They are set out in s 139J extracted at [18] above. For present purposes, it is sufficient to direct our attention to the first object - to require a bankrupt who derives income during the bankruptcy to pay contributions towards the bankrupt's estate.
36 Div 4B of Pt VI defines what is income (s 139L extracted at [20] above). It also:
(1) Identifies that certain receipts are to be treated as derived in calculating a bankrupt's income: ss 139M and 139K (see definition of derived); and
(2) Provides a formula for working out what contribution of that income (if any) a bankrupt is liable to pay: s 139S.
37 These provisions do not address what is, or what is not, the property of the bankrupt divisible amongst the bankrupt's creditors. The provisions are directed to different concepts. There is no conflict between Div 4B of Pt VI of the Act, and s 58(1)(b) in Div 4 of Pt IV and s 116 in Div 3 of Pt VI of the Act: cf Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [70].
38 Why did the Shares acquired by the bankrupt vest in the Official Trustee?
39 As we have seen, a bankrupt is entitled to retain income derived below the actual income threshold amount applicable to the bankrupt: see [22]-[23]. Given that the actual income threshold amount applicable to a bankrupt is calculated by reference to pension rates, it is open to infer that it is an amount sufficient to enable a bankrupt to feed, house and clothe themselves and their dependents. However, Div 4B of Pt VI says nothing about how a bankrupt might spend that amount.
40 Conversely, ss 58 and 116 provide that after acquired property (except for the specific items of property listed in s 116(2), as read with the Regulations) vests in a bankrupt's trustee. The Act does not prohibit a bankrupt from acquiring a specific item of property. The Act simply deems that after-acquired property vests in the bankrupt's trustee, unless the property is of a kind specified in s 116(2).
41 During the course of argument, counsel for Mr Di Cioccio submitted that if this construction of the Act was adopted, it would create an anomaly. An anomaly was said to arise because an amount standing to the credit of a bank account in the name of the bankrupt would be property (see Foley v Hill (1848) 2 HL Cas 28 and [9]-[10] above) that would immediately vest in a trustee (s 58) and be divisible amongst the creditors of the bankrupt (s 116(1)) even if the amounts standing to the credit of the bank account were in fact income derived by the bankrupt below the actual income threshold amount applicable to that bankrupt.
42 There are a number of answers to that contention, all found in the Act. First, s 134(1)(ma) provides that, subject to the Act, a trustee may "make such allowance out of the estate as he or she thinks just to the bankrupt, the spouse or de facto partner of the bankrupt or the family of the bankrupt": see [17] above. Section 134 operates as a safety value. It is a provision which assumes that a trustee will act sensibly and fairly. A decision of the trustee is reviewable: s 178 of the Act. Second, it is not uncommon for a bankrupt to be required to open a supervised account: s 139ZIE of the Act. Under the supervised account regime, a bankrupt must not make a withdrawal from the supervised account unless, amongst other things, the bankrupt has the consent of the trustee: ss 139ZIG(1), (2)(a) and (3). The Act, or at least those provisions of the Act dealing with supervised accounts, suggests that the safety valve provided by s 134 is intended to operate in relation to a bank account into which income derived by the bankrupt below the actual income threshold amount applicable to that bankrupt is deposited.
43 Third, s 116 of the Act. The fact that an amount standing to the credit of a bank account in the name of the bankrupt would constitute after acquired property under s 116(1) is not a complete statement. If, for example, the bankrupt retained the credit balance in the bank account to build up sufficient funds to later buy tools of trade for use in earning income by personal exertion, the amount may arguably fall within the exception provided under s 116(2)(c) as "property that is for use by the bankrupt in earning income by personal exertion …". In this context, "property" is defined both for s 116(1) and s 116(2): see [9] above. There is no anomaly.