Authorities
50 In Re Gillies an undischarged bankrupt submitted to the Official Trustee a proposal for a composition with his creditors. The proposed composition involved the bankrupt paying a sum of $4,000 held in a bank account to the credit of the bankrupt. The bankrupt had accumulated the money from earnings derived as a contract diver since the commencement of his bankruptcy. The bankrupt had previously paid a contribution to the trustee of his estate in respect of income earned over the "actual income threshold amount" and there was no suggestion that he would not pay a subsequent contribution that had been assessed by the trustee. The trustee applied for directions as to whether the $4,000 saved by the bankrupt had vested in the trustee.
51 French J referred to s 101 of the former Bankruptcy Act 1924 (Cth) and to the now-repealed s 131 of the Act. His Honour emphasised that neither of those provisions operated to vest the income of a bankrupt in the trustee of the bankrupt's estate. The language of the formerly enacted s 131 was, his Honour said, more generous to the bankrupt than that of its predecessor s 101, because it imposed on the trustee the burden of satisfying a court that an order should be made requiring a bankrupt to pay a contribution to the bankrupt estate. In the absence of such an order, the bankrupt was expressly entitled to retain his or her income for his or her benefit. French J continued (at 576 - 577):
The Bankruptcy Act 1966 no longer contains the equivalent of s 101 of the 1924 Act or the former s 131. Section 101 of the 1924 Act was the foundation of the views expressed by members of the High Court in the Official Receiver case which ultimately led to the enactment of s 131. Despite the absence of an equivalent of s 101 of the 1924 Act or s 131, the scheme of Div 4B rests upon the continuing assumption that the income of the bankrupt does not vest in the trustee. The liability to contribute is limited to half the excess of assessed income over the actual income threshold amount. Before it arises, a process of assessment is required to be undertaken by the trustee. It is true that the after-acquired property to which ss 58 and 116 apply is defined widely enough to encompass income. However, in my opinion, the legislative scheme now in place is quite inconsistent with the application of those provisions to after-acquired income. This follows from the comprehensive scheme embodied in Div 4B which approaches a code for dealing with after-acquired income of the bankrupt. There is nothing in the extrinsic material to support a change in the approach to after-acquired income which would bring it within after-acquired property vesting in the trustee. In my opinion such income does not vest in the trustee.
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The contributions against Mr Gillies in this case give rise to a statutory liability to make the payment determined by the Trustee on the date specified. The liability does not operate to vest accumulated income in the Official Trustee. For the reasons I have previously discussed therefore, the sum of $4,000 accumulated from Mr Gillies' income since 1 July 1992 is not after-acquired property and can be offered to his known creditors in the form of a composition proposal.
52 French J also referred (at 575) to the explanatory memorandum relating to the amendments which introduced Div 4B into Pt VI of the Act. His Honour said:
Reference was made in the Memorandum to the class of bankrupts who earned large incomes after bankruptcy and for all practical purposes were not required to make any repayment to creditors from that income. The Memorandum went on to outline the statutory mechanism established by the amendments for imposing upon bankrupts a liability to contribute. There was no suggestion in the Memorandum that the amendments would effect a vesting of after-acquired income in the trustee.
53 The principle that a bankrupt's income does not vest in the trustee was subsequently applied in Combis, the Trustee of the Property of Landers, a Bankrupt v Harding, Billington and Regan as Executors of the Deceased Estate of Billington [2014] FCA 1391, Re Lee (2012) 207 FCR 96, Re Sharpe; Ex parte Donnelly (1998) 80 FCR 536, and Randall. In the last mentioned case, Lander J said (at [74]):
If the bankrupt's income does not vest in the trustee, it must be because it is not property or at least property divisible among the bankrupt's creditors.
54 His Honour's reasoning appears to rest on the defined terms in s 5(1) being subject to a contrary intention. It is also consistent with s 116(1) being a provision that is subject to the Act. It also aligns with the views of French J that Div 4B of Pt VI "approaches a code" in respect of payments in the nature of income, to which the provisions of the Act that are concerned with the vesting of property are not intended to apply.
55 Whether s 116 of the Act might apply to assets (property) purchased from the income is, however, a different question. On that topic, the trustee in Re Gillies sought a further direction from the Court as to whether a car purchased by the bankrupt with the $4,000 accumulated from his income would be after-acquired property which would vest in the trustee pursuant to s 58(1)(a) and (6) of the Act. French J said (at 577):
No question of an asset purchase, other than the purchase of a motor vehicle, arises in the present case. Provided such motor vehicle would answer the description of property used by the bankrupt as a means of transport and whose aggregate value does not exceed $2,500, then it would not constitute property divisible among the creditors. It would, of course, be open to the creditors under s 116(2)(ca) to authorise expenditure of a greater amount. 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.
56 The status of assets purchased from income accumulated by a bankrupt after the commencement of bankruptcy arose again in Di Cioccio v Official Trustee in Bankruptcy (2015) 229 FCR 1. The Full Court (Edmonds, Gordon and Beach JJ) held that shares purchased by a bankrupt using income falling beneath the statutory threshold were property divisible among the bankrupt's creditors for the purposes of s 116(1) and so vested in the trustee of the bankrupt's estate by the operation of s 58 of the Act. That part of the judgment is consistent with the tentative views expressed by French J in Re Gillies in respect of property acquired with income not otherwise falling within the excluded categories in s 116(2) or (3). As the shares forming the subject matter of the decision in Di Cioccio did not meet any of the descriptions in s 116(2), they had vested in the trustee and were divisible among the bankrupt's creditors. By way of contrast, the Full Court held, property purchased from money that fell within s 116(2)(g) would not vest in the trustee because of the combined operation of s 116(2)(n) and (3).
57 The Full Court construed the Act in its application to the shares as follows:
37 [The provisions in Div 4B of Pt VI] 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] above. 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).
(emphasis in original)
58 Having concluded that the shares had vested in the trustee, the Full Court went on to consider an "anomaly" that was said by the bankrupt to arise should the Court adopt the trustee's construction. The submission, and the Court's response to it, are as follows:
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 [sic]. 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. Secondly, 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: s 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 Thirdly, 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 (2): see [9] above. There is no anomaly.
(emphasis in original)
59 Mr Gittins submits that since the decision of the Full Court in Di Cioccio there is a "degree of difficulty in applying" Re Gillies and the line of authority that followed. To an extent, I agree. If the Act were to operate so as to vest in the trustee of a bankrupt's estate an amount standing to the credit of a bank account in the bankrupt's name comprised of money in the nature of income payments (and so confer proprietary rights in the money as income) it is difficult to comprehend what meaningful work the income contribution scheme would have to do. The closing paragraphs of the judgment in Di Cioccio appear to be an unexplained departure from the historical position that the income of a bankrupt does not vest in the trustee. The trustee in Di Cioccio laid no claim to the amount credited to the bankrupt in the bank account into which the bankrupt's income was deposited. Accordingly, the latter part of the reasoning in Di Cioccio is properly to be regarded as obiter. If I am wrong in that regard, it remains that the conceptual difficulties that might arise in applying that part of the reasoning of the Full Court does not directly arise for resolution in the present case. No statutory liability to pay a contribution arose for consideration by the Full Court and the nature of the liability imposed by s 139P and s 139S was not considered.
60 Consistent with the reasoning in Di Cioccio, in the event that Mr Gittins purchased assets with the Benefits, the assets would be "property" but would not be divisible among his creditors because of the combined operation of s 116(2)(n) and (3). But none of that is in issue. As has already been emphasised, the Trustee has not asserted any proprietary rights or interests in the Benefits, or in any assets that might be purchased with that money in the future. Nor does the Trustee assert any proprietary interest in any amount credited to Mr Gittins in any bank account in which the Benefits might have been deposited. The Trustee asserts no proprietary rights as against Mr Gittins at all.
61 In my view, Mr Gittins' submissions proceed on an assumption that the creation of a liability to pay a debt calculated by factoring the amount of the Benefits into a formula would create an entitlement in the Trustee to the Benefits (or at least a part of them) as property. I have rejected that assumption for reasons given earlier.
62 To the extent that the Benefits fall within the definition of income in s 139L, they are not divisible among Mr Gittins' creditors because they are so defined. That is so because the regime established by Div 4B of Pt VI "approaches a code" (Re Gillies at 577) and because s 116 (which might otherwise capture the Benefits as income payments) is expressed to be subject to the Act. All of that is consistent with the historical position that the income of a bankrupt does not vest in the trustee of the bankrupt's estate and with the accepted position that s 116 of the Act and Div 4B of Pt VI of the Act are directed to different concepts. There is no need to resort to s 116(2) to remove the Benefits, as income, out of the reach of s 116(1).
63 The liability to pay a contribution does not itself fall within s 116(1)(a) or (b) of the Act. Nor would money received by the Trustee upon the payment of the contribution or any part of it. Accordingly, it is unnecessary to resort to the exclusions in s 116(2) to determine whether the amount paid to discharge the debt is or is not property divisible among the Mr Gittins' creditors. On its own terms, s 116(1) captures neither the liability for the debt, nor money paid by the bankrupt to the trustee to discharge it.
64 It follows that I reject Mr Gittins' submission that s 116 of the Act is the sole means by which the sources of money divisible between a bankrupt's creditors may be identified. To demonstrate the point it is pertinent to consider the operation of the Act in respect of a contribution payable by a bankrupt calculated by reference to "income" that does not also meet the description of property falling within any one of the exclusions in s 116(2). The unsecured debt arising under Div 4B of Pt VI (being a debt owed by the bankrupt to the bankrupt's estate) would not fall within s 116(1) of the Act, nor would any money paid to the trustee in the discharge of the liability to pay the debt. Nor, for that matter, would any money paid by a bankrupt as a voluntary contribution to his or her estate pursuant to s 139P(2). The mechanism by which that money is paid to creditors is to be found elsewhere in the Act.
65 The Act expressly contemplates numerous ways by which money (not being "the property of the bankrupt" or money received by the trustee on realisation of such property) may be received by the trustee during the administration of a bankrupt estate. Realisation of the property of the bankrupt is not the only way. Section 116 does not, for example, contain any reference to money the trustee might receive in satisfaction of an order made pursuant to s 139ZQ in relation to transactions that are void against the trustee under ss 120, 121 or 122. Such money is clearly intended to be divisible among creditors, just as money obtained by the direct recourse to proprietary rights in relation to the subject matter of a void transaction must be. All of that tends toward a construction that gives s 140 of the Act a wide meaning so as to include property divisible among creditors within the meaning of s 116, and money received by the trustee by the operation of provisions having nothing to do with the vesting or realisation of the bankrupt's property, including provisions such as s 139P and s 139S.