Kennedy v Broun

IN THE MATTER OF THE BANKRUPT ESTATE OF JOHN LAWRENCE SHARPE: RE: JOHN LAWRENCE SHARPE; EX PARTE: MAX CHRISTOPHER DONNELLY NG 7633 of 1997 LOCKHART J SYDNEY 16 JANUARY 1998

IN THE MATTER OF THE BANKRUPT ESTATE OF JOHN LAWRENCE SHARPE:

RE: JOHN LAWRENCE SHARPE

EX PARTE: MAX CHRISTOPHER DONNELLY

DATE OF ORDER: 16 JANUARY 1998

WHERE MADE: SYDNEY

1. The questions reserved for the consideration of the Court be answered as follows: Question 1 Whether fees due to the Bankrupt and outstanding at the date of his bankruptcy and the subject of previous memoranda of fees are property available for payment of the Bankrupt's debts within Part VI Division 3 of the Bankruptcy Act 1966 (Cth), or whether those fees constitute income within Part VI Division 4B of the Bankruptcy Act. Answer Fees which are the subject of memoranda of fees issued by the Bankrupt and outstanding at the date of his bankruptcy are not property available for payment of his debts within Part VI Division 3 of the Bankruptcy Act. They constitute income within Part VI Division 4B of the Bankruptcy Act.

Question 2 If the fees are property of the Bankrupt available for payment of his debts and are recovered by the Trustee, are they income in the hands of the Trustee under the Income Tax Assessment Act 1936 ("the Assessment Act")? Answer The fees are not property available for payment of the Bankrupt's debts. It is, therefore, unnecessary to answer this question. Question 3 How does the Trustee treat fees rendered by the Bankrupt before the date of bankruptcy, but before or after 1 July 1994 (the date of amendment to the Legal Profession Act)? Answer The Trustee should treat memoranda of fees rendered by the Bankrupt before the date of his bankruptcy, whether rendered before or after 1 July 1994, as income derived by the Bankrupt after commencement of his bankruptcy and as capable of inclusion in the calculation of income contribution assessments under Division 4B of Part VI of the Bankruptcy Act. 2. The costs of the Deputy Commissioner of Taxation and of the Bankrupt should each be allowed out of the Bankrupt's estate in the usual order of priority. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE MATTER OF THE BANKRUPT ESTATE OF JOHN LAWRENCE SHARPE:

RE: JOHN LAWRENCE SHARPE

EX PARTE: MAX CHRISTOPHER DONNELLY

REASONS FOR JUDGMENT Max Christopher Donnelly ("the Trustee") is the trustee of the bankrupt estate of John Lawrence Sharpe ("the Bankrupt"). The Bankrupt was made bankrupt upon the acceptance of his own petition on 10 September 1996. At the date of his bankruptcy the Bankrupt was a barrister admitted to practise at the New South Wales Bar; and he held a current Practising Certificate. He no longer practices as a barrister. At the date of his bankruptcy outstanding fees were due to the Bankrupt for work carried out by him beforehand. He had rendered memoranda of fees for such work. The Bankrupt's practice primarily involved workers' compensation and third party motor vehicle damages litigation. There were no written retainer contracts between the Bankrupt and any solicitor or party for whom he acted. The fees rendered by the Bankrupt fell into three categories, namely, (a) fees rendered prior to 1 July 1994 and unpaid at the date of bankruptcy; (b) fees rendered for workers compensation matters governed by a scale of fees and unpaid at the date of bankruptcy; (c) fees rendered for which a marked brief had been delivered but were unpaid at the date of bankruptcy. The significance of 1 July 1994 is that the Legal Profession Act 1987 (NSW) has made provision since 1 July 1994 for the recoverability by a barrister for fees due to the barrister by a provision introduced for the first time in New South Wales: see ss 184, 191 and 192. Counsel have informed me that it has been generally accepted that the effect of these amendments to the Legal Profession Act is to entitle a barrister to sue for his fees up to 1 July 1994. Whether this right extends to fees due to the barrister before 1 July 1994 may be of some relevance in this case. At the date of his bankruptcy the Bankrupt was involved in Family Court proceedings with his former wife. The Family Court found on 22 August 1996 that the value of the fees due to the Bankrupt and unpaid at the date of his bankruptcy was $1,300,000. Since the bankruptcy the Trustee has recovered $234,084.58 in unpaid fees due to the Bankrupt at the date of his bankruptcy. In some cases the Trustee cannot determine into which of the above three categories the fees recovered by him apply. The Bankrupt completed his returns for income tax in respect of the period before his bankruptcy on a cash receipts basis. The Trustee seeks directions from the Court pursuant to s 134(4) of the Bankruptcy Act with respect to the following questions:-

1. Whether fees due to the Bankrupt and outstanding at the date of his bankruptcy and the subject of previous memoranda of fees are property available for payment of the Bankrupt's debts within Part VI Division 3 of the Bankruptcy Act 1966 (Cth), or whether those fees constitute income within Part VI Division 4B of the Bankruptcy Act.
2. If the fees are property of the Bankrupt available for payment of his debts and are recovered by the Trustee, are they income in the hands of the Trustee under the Income Tax Assessment Act 1936 ("the Assessment Act")?
3. How does the Trustee treat fees rendered by the Bankrupt before the date of bankruptcy, but before or after 1 July 1994 (the date of amendment to the Legal Profession Act)? Counsel for the Trustee argued as follows:- · Irrespective of the category into which the outstanding fees due to the Bankrupt at the date of his bankruptcy may fall, in each case they constitute "property" within the meaning of the Bankruptcy Act, even if they are subject to some contingency such as assessment. This principle applies to all the fees due to the Bankrupt. · The Trustee is not liable for income tax on the moneys which come into his possession. They are not received to the account of the Bankrupt, but to the account of the creditors of the Bankrupt to be distributed in accordance with the priorities established by the Bankruptcy Act. Such fees are not therefore properly described as "income" in the hands of the Trustee upon which the Trustee is required to lodge an income tax return and to pay income tax. · The fact that the Bankrupt may be required to make contributions of income pursuant to the income contribution provisions of the Bankruptcy Act (set forth in Part VI Division 4B) does not affect the position of unpaid fees as at the date of bankruptcy. Those provisions apply only to income derived after the date of bankruptcy. Counsel for the Commissioner of Taxation argued that:- · The Trustee is not entitled to treat the fees as after acquired property of the Bankrupt and the fees are not property divisible among his creditors. · The Trustee is entitled to treat the fees as income earned by the Bankrupt after the commencement of his bankruptcy. They are capable of inclusion in the calculation of income from contribution assessments under Division 4B of Part VI of the Bankruptcy Act. Counsel for the Bankrupt argued that the receipt of fees by the Trustee in respect of memoranda of fees rendered by the Bankrupt before his bankruptcy gives rise to a liability on the part of the Bankrupt to make income contributions under Part VI Division 4B of the Act. It was argued that outstanding fees unpaid at the commencement of the bankruptcy should be regarded as personal earnings of the Bankrupt. Findings There is the highest authority to support the proposition that a barrister cannot sue for his fees. In the leading English case of Kennedy v Broun (1863) 13 CB (NS) 677; 143 ER 268 Erle CJ said at 287 (ER): "We consider that a promise by a client to pay money to a counsel for his advocacy, whether made before, or during, or after the litigation, has no binding effect; and, furthermore, that the relation of counsel and client renders the parties mutually incapable of making any contract of hiring and service concerning advocacy in litigation." More recently in Rondel v Worsley [1969] 1 AC 191 Lord Morris of Borth-y-Gest said at 236: "[I]t has for long been considered to be settled law that a barrister may not and does not enter into any contract which enables him to sue for his fees." In the same case Lord Pearce said at 262: "[T]he long line of decisions that a barrister cannot sue for his fees ... is consistent. And, in my opinion, it is firmly based on sound policy."

The issue was considered in New South Wales in Re Neville; Ex parte Pike (1896) 17 NSWR (Bankruptcy and Probate Cases) 24 where Manning J said at 26: "[A] barrister is by law incapacitated from entering into a contract of any kind, either with solicitor or client, in respect of fees, for, at all events, litigious work as a barrister." The basis of the rule that a barrister cannot sue for his fees has been put by the authorities on different grounds. First, it has been said that a barrister's inability to sue for his fees is needed to maintain a barrister's immunity from negligence action. This proposition has been questioned in more recent times. In Giannarelli v Wraith (1988) 165 CLR 543 it was held by the High Court that there is no immunity from suit for a barrister or solicitor for work done out of court that is unconnected with work done in court. The High Court applied Rondel v Worsley [1969] 1 AC 191 and Saif Ali v Sydney Mitchell & Co [1980] AC 198. The second basis of the rule rests on a barrister's status. It was expressed by Kindersley VC in Re May 4 Jur NS 1169, in these terms: "I hope the time will never come when such a rule is established [ie that a barrister is entitled to sue for his fees]. I will never make a precedent. If you bring me precedents I must make the order, but I will never willingly derogate from the high position in which a barrister stands and by which he is distinguished from an ordinary tradesman." As recently as Rondel v Worsley [1969] 1 AC 191 Lord Upjohn said at 278 concerning the proposition that counsel cannot sue for his fees: "This has been established for nearly two hundred years and it is usually put upon the ground that a barrister is of too high an estate to condescend to the common arena to sue his client. Fees must be regarded as pure honoraria." The view of Kindersley VC in Re May was considered in the First Report of the Law Reform Commission on the Legal Profession, General Regulation and Structure, Government Printer, 1982 where at para 6.51 it is stated: "This argument is unrealistic and inappropriate in modern times." A third basis on which the doctrine has been based is that barristers should be rendered independent of the verdict so that no temptation may induce them to endeavour to obtain a verdict which in their consciences they are not entitled to have: Morris v Hunt [1819] 1 Chit 544 at 554. The Legal Profession Act of New South Wales, as amended in 1994, though not expressly stating that a barrister may sue for the recovery of fees, plainly impliedly assumes this right: see, for example, ss 184, 191 and 192. A "barrister" by definition under s 3 means "a legal practitioner who holds a current practising certificate as a barrister". It is a long established principle of bankruptcy law that a bankrupt is entitled to retain out of his personal earnings a sufficient amount for the support of the bankrupt and his family. Two schools of thought led to two streams of authority about the basis of this principle. One view was that personal earnings of the bankrupt did not vest in the trustee of his estate; the trustee's only right in respect thereof was to obtain an order under the relevant section of bankruptcy legislation to take from the bankrupt so much of his personal earnings as were not required for the support of himself and his family, if any. The other view, which is favoured in the United Kingdom was that personal earnings of the bankrupt did vest in the trustee (that is the Official Receiver) on his estate except to the extent to which they were required for the support of the bankrupt and his family. See In Re Roberts [1900] 1 QB 122; In Re Walter; Slocock v Official Receiver [1929] 1 Ch 647. I must confess the first view seems to me to be the more logical and sensible view. In Nette v Howarth (1935) 53 CLR 55 Dixon J referred to "the rule long established in bankruptcy, that the personal earnings of a bankrupt do not pass to his trustee except to the extent that they are not required for the support of himself and his family" at 65. See also Federal Commissioner of Taxation v Official Receiver (1956) 95 CLR 300 per Williams J at 312-314 and Fullagar J at 318-320. The distinction between these views is not of particular practical importance today. It is important, though, to examine certain provisions of the Bankruptcy Act. "Property" is defined in s 5 of the Bankruptcy Act as meaning: "Real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property." "The property of the bankrupt" in relation to a bankrupt means relevantly: "The property divisible among the bankrupt's creditors" (s 5). Considered in isolation, the wide definition of property in s 5 of the Bankruptcy Act would seem to me to include fees due to a bankrupt upon his bankruptcy as property available for payment of his debts within Part VI Division 3 of the Bankruptcy Act. However it is necessary to consider Part VI Division 4B of the Bankruptcy Act. The Bankruptcy Act was amended on 1 July 1992 by the introduction of Division 4B which introduced a mechanism for requiring a bankrupt who derives income during the bankruptcy to pay contributions towards the bankrupt's estate and to enable the recovery of certain money and property for the benefit of the bankrupt's estate (s 139J). The former s 131 was repealed. In my opinion the scheme of Division 4B of the Bankruptcy Act proceeds on the assumption that after acquired income of a bankrupt does not vest in the trustee of the bankrupt's estate. Although the after acquired property to which ss 58 and 116 of the Bankruptcy Act apply are sufficiently widely defined to include income of the bankrupt, Division 4B establishes a comprehensive scheme of dealing with after acquired income of the bankrupt. Where it is inconsistent with sections such as ss 58 and 116, provisions of the division must be taken to apply. See Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies (1993) 42 FCR 571 at 577; Re Connie Hawkins; Ex parte Ivor Worrell, Spender J, unreported, 20 December 1996. Income for the purposes of Division 4B bears its ordinary meaning subject to certain qualifications which are not relevant for present purposes (s 139L). If income according to ordinary concepts is "derived" by a bankrupt it will be assessed as income for the purposes of Division 4B. "Derived" is defined by s 139K as meaning "earned, derived or received from any source, whether within or outside Australia". An important provision is s 139M(3) which states: "A reference in this Division to income derived by a bankrupt during a contribution assessment period includes a reference to income so derived in respect of work done or services performed by the bankrupt before that period or work to be done or services to be performed by the bankrupt after that period." The expression "contribution assessment period" in relation to a bankrupt is defined by s 139K as meaning a period that in effect subsists during the period of the bankruptcy. Section 139M(3) is applicable to the present case. A barrister assessed to income tax upon a cash basis derives income from fees from his professional activity in the year of income in which those fees are received or deemed to be received, but not necessarily the year in which those fees were earned. Further, the unpaid fees of the Bankrupt are in respect of work done by the Bankrupt before the contribution assessment period. In my opinion it follows that the Trustee is not entitled to treat the unpaid fees as after acquired property of the Bankrupt available for payment of his debts within Division 3 of Part VI of the Bankruptcy Act. It does not seem to me to matter whether the memoranda of fees rendered by the Bankrupt before the date of his bankruptcy were rendered before or after 1 July 1994 (being the date of the relevant amendments made to the Legal Profession Act 1987 (NSW)). Nor does it matter whether the brief (I have in mind the requirements of the Legal Profession Act 1987) was marked or whether a "fees, disclosure and retainer" contract was entered into or whether the fees had been assessed. This application for directions by the Trustee was properly brought and raises questions of importance to the administration of the Bankrupt's estate. The Court gives directions to the trustee as follows: Question 1 Fees which are the subject of memoranda of fees issued by the Bankrupt and outstanding at the date of his bankruptcy are not property available for payment of his debts within Part VI Division 3 of the Bankruptcy Act. They constitute income within Part VI Division 4B of the Bankruptcy Act. Question 2 The fees are not property available for payment of the Bankrupt's debts. It is, therefore, unnecessary to answer this question. Question 3 The Trustee should treat memoranda of fees rendered by the Bankrupt before the date of his bankruptcy, whether rendered before or after 1 July 1994, as income derived by the Bankrupt after commencement of his bankruptcy and as capable of inclusion in the calculation of income contribution assessments under Division 4B of Part VI of the Bankruptcy Act. The Trustee is entitled to the costs of the proceeding in the usual way which does not need an order of the Court. The costs of the Deputy Commissioner of Taxation and of the Bankrupt should each be allowed out of the Bankrupt's estate in the usual order of priority.

I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lockhart

Counsel for the Trustee: Mr M R Aldridge Mr J T Johnson

Solicitor for the Trustee: Sally Nash & Co

Counsel for the Bankrupt: Mr B J Skinner

Solicitor for the Bankrupt: Gillis Delaney Brown

Counsel for Deputy Commissioner of Taxation: Mr S W Gibb

Solicitor for Deputy Commissioner of Taxation: Australian Government Solicitor

Date of Hearing: 22 August 1997

Date of Judgment: 16 January 1998