Lockwood v Vince

REASONS FOR JUDGMENT 1 The applicant became a bankrupt on 4 June 2004 when the Official Receiver accepted the bankrupt's own petition which he had presented under s 55 of the Bankruptcy Act 1966 (Cth). The applicant was due to be discharged from his bankruptcy on 5 June 2007: s 149. However, on 25 May 2007 the trustee filed with the Official Receiver a written notice of objection to the discharge. The effect of the objection, if not withdrawn or cancelled, is to extend the bankruptcy for eight years: s 149A(2)(a)(i). The bankrupt seeks an order under s 178 that the trustee withdraw the objection or that it be declared null and void. 2 A notice of objection is required to comply with s 149C. That section provides that the notice must set out the grounds of objection being one or more of the grounds listed in s 149D, refer to the evidence or other material that establishes those grounds and state the trustee's reasons for objecting to the discharge on those grounds. However, the notice need not state reasons if the objection is made on certain grounds including that specified in s 149D(1)(e): s 149C(1A). 3 The ground upon which the trustee relied is that "the bankrupt failed to disclose any particulars of income or expected income as required … by section 139U": see s 149D(1)(e). Section 139U is found in Div 4B of Pt VI. This division provides that a proportion of a bankrupt's income is to be distributed to his creditors. Income is defined in s 139L to have its ordinary meaning. In addition to its ordinary meaning, s 139L deems certain receipts to be income for the purposes of the division. Among the receipts deemed to be income is "the value of a benefit that: (A) is provided in any circumstances by any person (the provider) to the bankrupt; and (B) is a benefit within the meaning of the Fringe Benefits Tax Assessment Act 1986 as in force at the beginning of 1 July 1992 … being that value as worked out in accordance with the provisions of that Act but subject to any modifications of any provisions of that Act made by the regulations under this Act.": s 139L(1)(a)(v). 4 A bankrupt is required periodically to provide to his trustee a statement setting out, among other things, the income that he has derived during a particular period, referred to in the Bankruptcy Act as a "contribution assessment period": s 139U(1). Income that a bankrupt "derives" includes income that is not actually received by the bankrupt. It includes income that "is dealt with on behalf of the bankrupt or as the bankrupt directs": s 139M(1)(c). 5 For the purposes of this application the relevant contribution assessment period is 4 June 2005 to 3 June 2006. In his statement provided pursuant to s 139U the bankrupt said that the income he derived during the contribution assessment period was $55,000, being his gross earnings from his employment with Myohealth Pty Ltd and upon which he paid $12,111 by way of income tax. In his notice of objection the trustee alleges that the bankrupt failed to disclose other income, namely twelve monthly payments of, respectively, $1,610 and $2,600 each that had been paid by Lockwood Investments (Australia) Pty Ltd into "two investment property loan accounts" with Westpac Banking Corporation. Lockwood Investments is a company of which the bankrupt's wife, Lisa Lockwood, is the sole director and shareholder. It is the trustee of several trusts established for the benefit of the Lockwood family. The objection states that: "Disclosure of the payments received would have increased [the bankrupt's] income by approximately $50,520 and generated a liability to pay income contributions." 6 It is common ground that Lockwood Investments made the payments to which the notice refers. The point in contention is whether the payments constituted income of the bankrupt. To resolve that issue it is necessary, first, to relate some background facts. 7 Immediately before his bankruptcy the bankrupt was indebted to Westpac in the sum of $967,328. This amount was the aggregate of three facilities Westpac had provided to the bankrupt. A separate account was maintained for each facility. One was styled "Investment Property Loan" and the account number was 71-1129. Westpac had advanced approximately $250,000 under this facility. The periodic monthly payments of $1,610 were paid into this account. The second facility was for approximately $350,000 and was also styled "Investment Property Loan". The account number was 71-1110. Monthly payments of $2,500 were paid into this account. The balance of the debt related to a commercial bill facility not mentioned in the notice of objection. 8 Each facility is secured by a guarantee given by Mrs Lockwood. The obligations under the guarantee are supported by a first ranking mortgage over a property in Melbourne at 15 Woodmasons Street, Malvern. Mrs Lockwood is the registered proprietor of the Woodmasons Street property. It is the family home where she, her husband and their children live. 9 The effect of bankruptcy is to divest the bankrupt of his property and vest that property in his trustee and to make it available for the payment of his provable debts: Cummings v Claremont Petroleum NL (1996) 185 CLR 124, 132. Speaking strictly, the provable debts of the bankrupt may still be described as his debts but they will be released when the bankrupt is discharged from bankruptcy: Bankruptcy Act, s 153. Accordingly, the debts are no longer debts that are owing by him: Cummings at 137. In Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 the High Court said (at 594-595): "The effect of the bankruptcy … is that the debtor is no longer obliged to pay his creditors; indeed he is disabled from doing so. If he offered payment they could not safely accept it; their right is a right of proof against the estate." 10 The bankruptcy did not affect Mrs Lockwood's liability under the guarantee, save that it may have been an event of default. Whether or not it was, Westpac has been kept at bay because the interest on the loans continued to be paid as did a small amount to reduce the principal debt. The interest was paid when Westpac applied the money that was deposited into account no 71-1129 and account no 71-1110 for that purpose. 11 The indirect source of the payments that found their way into the two accounts was Myohealth. That company conducts a business as trustee of a unit trust. The unit trust has three unit holders - Courten Pty Ltd, Jomolu Pty Ltd and Square Circle Pty Ltd. This last-mentioned company is the trustee of a trust in which the bankrupt's wife has an interest. The bankrupt informed the trustee that he (the bankrupt) was "aware that this [t]rust may be associated with my spouse but not anything specific as to the [t]rust and its [d]eed. However, its decisions are its alone and I do not have anything to do with this trust." I have no doubt that the bankrupt knows a lot about this trust. 12 At any rate, each unit holder in the Myohealth Unit Trust received monthly payments of $15,833. The Myohealth general ledger describes those payments as "unit trust distributions". It seems that the payments are either distributions of income or advances to unit holders on account of income. 13 Following the receipt by Square Circle of its distribution the amount was then paid into a banking account maintained by Mrs Lockwood. From her account the money found its way into a bank account maintained by Lockwood Investments. From that account $1,610 per month was paid into account number 71-11129 and $2,500 per month was paid into account number 71-1110. 14 Upon these facts the first question that arises is whether the monthly payments were income derived by the bankrupt. To reiterate, it will be income if it is income according to the ordinary meaning of that term (s 139L) or if the payments are deemed to be income by reason of s 139L(1)(a)(v), that is, if they have been "provided" to the bankrupt and are "benefits" within the meaning of the Fringe Benefits Tax Assessment Act. The trustee also suggested that the payments might be deemed income by reason of s 139L(1)(a)(vi) as "loans" to the bankrupt by an associated entity. Yet the trustee did not pursue the point - in particular, how and whether the definition of associated entity in ss 5 and 5B-5E would be met - and so I will not consider the issue further. 15 Whether or not a payment is income according to ordinary concepts depends upon the characterisation of the payment in the hands of the recipient. A payment will be income if it is received as a reward for the provision of services or for some other revenue producing activity: Scott v Federal Commissioner of Taxation (1966) 117 CLR 514; Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47; Squatting Investment Co Ltd v Federal Commissioner of Taxation (1953) 86 CLR 570. That is, for a payment to be income the payment must be remuneration obtained from personal exertion (eg wages), from carrying on a business (eg profit) or from the use of capital (eg dividends, interest). 16 The view that what the bankrupt received in this case was income (assuming, that is, that he received anything at all) rests on the assumption that the payments were periodic and regular. The trustee relies on Commissioner of Taxation (Cth) v Myer Emporium Ltd (1987) 163 CLR 199, 215 where the High Court said: "The periodicity, regularity, and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind." But that is not a complete statement of what constitutes income. As the other cases to which I have referred make plain, it is necessary that a payment relates to a person's assets, or to employment, or to services rendered or to a business carried on to enable it to be treated as income. 17 It is in any event doubtful whether it can be said the bankrupt was "provided" the amounts paid into the two accounts. The accounts into which the money was paid were frozen. That is, from the commencement of his bankruptcy the bankrupt was not permitted to deal with those accounts. In particular he could not withdraw any money that had been deposited into either account. Put another way, the accounts were not under his control. What happened was that immediately upon money being deposited into either account it was applied by the bank in reduction of the principal and interest due on the relevant loan. It could not in law be applied in discharge of the bankrupt's indebtedness to the bank (as his debt to the bank was no longer payable by him personally). On the other hand, it could be applied in discharge of Mrs Lockwood's obligations under her guarantee. On this basis it is difficult to see how it could be said the amounts had been "received" by the bankrupt. 18 This approach receives support from National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251 (Batty's Case). Davis and Batty had a partnership. Davis, without the knowledge of Batty, fraudulently obtained funds from a client, Bushby, and deposited them into a partnership account at the bank. When Bushby sued the bank to recover the funds, the bank sought indemnification from Batty. 19 Gibbs CJ (with whom Wilson, Brennan and Dawson JJ agreed) held, based on agency principles, that Batty could not be liable. However, Gibbs CJ in obiter considered (at 264) the question of whether Batty could be liable "because the moneys went into the firm's account, without his knowledge and without his actual or apparent authority" and "Batty did not deal with the money in any way nor expressly authorize anyone else to do so." Gibbs CJ concluded (at 268-269) that the nominal recipient: "ought not to be liable unless ... he knew or ought to have known that he had possession or control of [the money]. In other words, where the defendant has not had the benefit of the money, has not played any part in disposing of it and was ignorant of the fact that it was theoretically under his control, he should not be liable in the absence of fault on his part." 20 In so concluding, Gibbs CJ relied (at 267-68) on what was said by Dixon J in James v Oxley (1939) 61 CLR 433, 456 to the effect that an accountholder who has no effective means of controlling the money in the account "may be regarded as never having really received it." 21 Dixon J also said (at 456) in a passage quoted with approval in Batty's Case by Wilson J (at 270): "In substance, money, though temporarily [in an account], may never be in the actual de facto control of any member of the firm except the fraudulent partner. ... In such circumstances, the technical 'receipt' by the firm may be considered as insufficient to make payment into the account a receipt to the use of the [the accountholder]." 22 In Batty's Case, Brennan J employed a similar analysis. He said (at 274): "A bank which credits a customer's account with the proceeds of a collected cheque has both accounted to the customer for the proceeds and borrowed the proceeds from the customer .... The borrowing results in a credit item in favour of the customer in the account between the bank and its customer. The debt represented by such item cannot exist unless the customer has authorized the bank to collect the cheque on behalf of the customer, to pay the proceeds of the collected cheque to and to borrow the proceeds from the customer, or the customer knows and acquiesces in the bank's doing so. Mr. Batty had no knowledge of the Bank's collection of the cheques and crediting of the trust account. The firm did not do anything to accept the credit and it derived no benefit from it. It is not liable for money had and received to the use of the Bank merely by reason of the posting of a credit entry in a statement of account." 23 Both Dixon J and the majority in Batty's Case did suggest that knowledge of the funds' presence prior to withdrawal was key to the analysis of "receipt", but the facts in those cases were that the accountholder would have had some ability to act on knowledge (ie, exercise control). Here, on the other hand, the bankrupt may have had knowledge of the funds' presence in his accounts, but had no ability to act on it. Thus the fact of his knowledge should not be determinative. This accords with the comments of Dawson J in Batty's Case. He said (at 299-300): "The credit entry in the partnership bank account was, for the purposes of the claim for money had and received, sufficient to establish that the money was paid, but the question remained whether it was paid to the firm having regard to the circumstance that it was not in fact used in, and did not otherwise enter into, the course of the partnership business. If that had been the case, then whether Mr. Batty knew of it or not, he would have been liable as a partner, but as it was not, the question was whether, as explained by Dixon J in James v Oxley, the receipt by the partnership of the money in its bank account was a mere technical receipt involving no de facto control on the part of Mr. Batty as a partner or whether he knew or ought to have known of its presence before it was withdrawn …" 24 Again, the question of knowledge appears to presuppose an ability to act on that knowledge (by exercising control over the funds). Because the bankrupt in this case could not act on his knowledge and exercise any control over the funds (because the accounts were frozen), the credit entry in the accounts may be regarded as a mere technical receipt rather than income. 25 As regards the application of s 139L(1)(a)(v), it is certainly true that the word "benefit" is given a very wide meaning. It is defined in s 136 of the Fringe Benefits Tax Assessment Act to include "any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility". But to fall within s 139L(1)(a)(v) the benefit must have been "provided … to the bankrupt". For the same reason that I reached the conclusion that the deposits had not been "received" by the bankrupt it cannot be said that he was provided with any benefit from the payments. 26 On behalf of the trustee it was argued that other kinds of benefits had been provided to the bankrupt during the contribution assessment period. Those purported benefits include the provision of accommodation, cash payments made into a bank account other than the bank accounts mentioned in these reasons, and so forth. I have not thought it appropriate to determine whether the trustee is correct in his assertion that other benefits had been received. The reason for my not dealing with them is that the notice of objection only referred to the payments that were deposited into the two accounts and I did not think it permissible for the trustee on this application to rely on other benefits, not referred to, to support his objection: see Re Hall (1994) 14 ACSR 488, 492-493; Prentice v Wood (2002) 119 FCR 296, 299. If the trustee's claims are correct then they would need to be dealt with by the trustee in a further notice of objection. 27 Accordingly, the orders I propose to make are that within 14 days the trustee take all necessary steps to withdraw his objection filed on 25 May 2007. I have allowed 14 days within which the objection is to be withdrawn to enable the trustee to consider whether he wishes to file a further notice of objection. 28 So far as the costs are concerned, I think they should for the time being be reserved. The trustee picked up the possibility of the bankrupt having received other benefits during the course of preparing this case for trial. It might turn out that the bankrupt has in fact withheld information from the trustee. Only time will tell. I do not propose to consider costs until I know whether or not the trustee intends to file another notice of objection. I will leave it to the parties to make submissions on costs at an appropriate time. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.