Official Receiver in Bankruptcy v Schultz

The Court delivered the following written judgment: -

Nov. 8 Mason C.J., Brennan, Deane, Dawson and Gaudron JJ.

Elaine Ethel Pereira died on 18 June 1987. By her will, she provided:

3. I give devise and bequeath the whole of my real and personal estate whatsoever and wheresoever situate unto and to the use of my Trustees upon the following trusts that is to say: -

(a) As to my personal belongings and effects and my jewellery or clothing of which I may die possessed for Merle Heather Schultz;

(g) As to the house and contents at 43 Renton Street, Camp Hill, Brisbane to the said Merle Heather Schultz.

Merle Heather Schultz and her husband were the executors of Mrs. Pereira's estate and are the respondents to this appeal. On 11 March 1985, Mrs. Schultz had been declared bankrupt under the Bankruptcy Act 1966 Cth and a sequestration order had been made against her estate.

After Mrs. Pereira's death, her husband made an application for provision out of her estate pursuant to s. 41 of the Succession Act 1981 Q. That application was successful. On 26 July 1988, Moynihan J. directed that the will "be read and construed as though the name Shelton Clement Pereira appeared in Clause 3(g) thereof instead of the name Merle Heather Schultz".

On 20 September 1988, Mrs. Schultz was discharged from bankruptcy. Shortly afterwards, on 8 December 1988, the Full Court of the Supreme Court of Queensland allowed an appeal by the executors against the order of Moynihan J. and varied that order by deleting its operative words and directing instead that the will "be read and construed as though clause 3(g) thereof read: "As to the house and contents at 43 Renton Street for Shelton Clement Pereira for his life and after his death for Merle Heather Schultz absolutely" ".

The question which arises for determination in this appeal, brought by the Official Receiver in Bankruptcy, is whether the interest of Mrs. Schultz described in the order of the Full Court formed part of her bankrupt estate.

At first instance, Cooper J. held that Mrs. Schultz had no beneficial interest at any time in any of the assets of the estate, simply a chose in action entitling her to enforce the administration of the estate. That chose in action had been vested in the Official Receiver. His Honour also held that the order of Moynihan J. had not altered the will or the content of the chose in action, but rather had imposed a personal duty upon the executors of the estate as parties bound by a court order. As such, the order's effect would be to deny to Mrs. Schultz some of the anticipated fruits of her chose in action, but it did not affect the chose in action itself. The Full Court then restored to her those fruits, subject to the life estate in favour of Mr. Pereira. In this way, the interest in remainder was an interest which Mrs. Schultz would receive, not by virtue of the court order, but through the chose in action which had become vested in the Official Receiver. In the alternative, the order of the Full Court varying the order of Moynihan J. operated in his Honour's view from the date of the original order, so that if, contrary to his view, the Full Court order created a new chose in action in favour of Mrs. Schultz (the former right having on this view been destroyed by the order of Moynihan J.), that chose in action nonetheless vested in her during the period of her bankruptcy and was thus vested in the Official Receiver.

Mr. and Mrs. Schultz successfully appealed against the decision of Cooper J. In the Full Court, Connolly J. took the view that the right to due administration of a deceased estate is not an abstract right but is linked to a bequest or devise. On that basis, "there was no right to due administration either in Mrs. Schultz or in the Official [Receiver] in relation to 43 Renton Street between the order of Moynihan J. and that of the Full Court". Connolly J. did not regard the order of the Full Court as operating from the date of the order made by Moynihan J. In this way, Mrs. Schultz was given a right in relation to the house and contents by the order of the Full Court after her discharge from bankruptcy.

Ambrose J. agreed with the orders proposed by Connolly J., but for different reasons. In his Honour's view, Mrs. Schultz obtained under the will a contingent right to the house at 43 Renton Street and its contents, which right vested in the Official Receiver. Further, the order of Moynihan J. extinguished that contingent right, but subject to a further contingency, namely, that the order might be varied or reversed upon appeal. When the Full Court made its order, the extinction of the contingent right to the absolute interest in the property was complete, and a new contingent right, to a remainder interest in the property, was created. That new right was created after Mrs. Schultz had been discharged from bankruptcy and so did not vest in the Official Receiver.

Thomas J. dissented, for reasons broadly similar to those of Cooper J. at first instance. His Honour noted that the Full Court must necessarily have reinstated Mrs. Schultz's entitlement as the intended beneficiary of an absolute interest in the house and contents under the will before it made the order granting a life estate to Mr. Pereira. Otherwise, the Full Court would have been making provision for Mrs. Schultz under s. 41 when she had not been an applicant for provision.

Section 116 of the Bankruptcy Act defines "property divisible amongst the creditors of the bankrupt" to include, subject to presently immaterial exceptions, "all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him, or has devolved or devolves on him, after the commencement of the bankruptcy and before his discharge": s. 116(1)(a). Such property is described as "the property of the bankrupt" in s. 5(1). Further, s. 5(1) states:

"property" means real or personal property of every description , 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 is vested in the Official Receiver pursuant to s. 58(1).

In essence, the Official Receiver's claim is that, when the administration of Mrs. Pereira's estate is completed, and assuming that the house at 43 Renton Street and its contents do not require to be sold in order to meet liabilities of the estate or costs and expenses associated with its administration, that property should vest in the Official Receiver as property divisible amongst Mrs. Schultz's creditors rather than in Mrs. Schultz herself. But the fact that the administration of the deceased estate was incomplete when Mrs. Schultz was discharged from her bankruptcy means that the Official Receiver must point to some interest in property which vested in Mrs. Schultz prior to her discharge from bankruptcy. That is because the property which is the subject-matter of a bequest or devise does not vest in the named beneficiary upon the death of the testator. Section 45(1) of the Succession Act provides:

The property to which a deceased person was entitled for an interest not ceasing on his death shall on his death and notwithstanding any testamentary disposition devolve to and vest in his executor

Not only does the legal ownership in the property not vest in the named beneficiary at the time of death of the testator, nor does the equitable ownership. That emerges from the Privy Council's decision in Commissioner of Stamp Duties (Q.) v Livingston [1] . The reason for this is that, prior to administration of the deceased estate, there is no specific property capable of constituting the subject property of any trust in favour of the beneficiary. It could not be said at that stage what part or parts of the testator's property would need to be realized for the purposes of administration [2] . So it was held that the beneficiary does not have a proprietary interest in each of the assets which are the subject of the devise or bequest such that he or she can say "this is mine" or "this belongs to me". Although Livingston was concerned with a residuary estate, the observations it contains apply with equal force in the case of a specific bequest or devise. The parties here are agreed on that point.

1. (1964) 112 C.L.R. 12; [1965] A.C. 694. 2. (1964) 112 C.L.R., at pp. 18, 26-27; [1965] A.C., at pp. 708, 717.

The question in Livingston was whether succession duty was payable upon a deceased estate in respect of the deceased's interest in another, unadministered, deceased estate. That interest was under a devise of the first testator's real estate and a bequest of the residue of his personal estate. It was sought to levy duty against the second deceased estate on that part of the real and personal property situated in Queensland. The administrator of that estate contended that the deceased's interest in the unadministered estate was simply a chose in action, situated where she had been domiciled, in New South Wales, and hence was not liable to duty.

In holding that an executor holds the whole property of the deceased "for the purpose of carrying out the functions and duties of administration, not for his own benefit" [3] , Viscount Radcliffe, speaking for the Judicial Committee, stated [4] :

What equity did not do was to recognize or create for residuary legatees a beneficial interest in the assets in the executor's hands during the course of administration. His Lordship went on to consider earlier authority which had expressed seemingly inconsistent ideas as to the position of a beneficiary of an unadministered estate, remarking upon the range of "meanings which can be conveyed by the words "interest" and "property" " [5] . But it is significant that his Lordship approved [6] the view of the law expressed by Fullagar, Kitto and Menzies JJ. in this Court: Livingston v Commissioner of Stamp Duties (Q.) [7] . 1. (1964) 112 C.L.R., at p. 17; [1965] A.C., at p. 707. 2. (1964) 112 C.L.R., at p. 18; [1965] A.C., at p. 707. 3. (1964) 112 C.L.R., at p. 22; [1965] A.C., at p. 712. 4. (1964) 112 C.L.R., at p. 27; [1965] A.C., at p. 717. 5. (1960) 107 C.L.R. 411.

Fullagar J. considered that the residuary beneficiary had an equitable interest in the entire mass of the testator's estate and that it may be that she had an equitable interest in every part of that mass, an interest which could be described as a proprietary interest or "property", though there was a problem in justifying the accuracy of these descriptions as precise descriptions of the nature of the interest [8] . Kitto J. acknowledged that the residuary beneficiary in an unadministered estate was not the legal or beneficial owner of the assets in that estate. However, his Honour described the interest of the residuary beneficiary in assets of such an estate as consisting of rights "with respect to, or "in", or ad each specific asset for the time being in the estate" [9] . Menzies J., agreeing with Fullagar J., in speaking of the residuary beneficiaries' chose in action, concluded [10] that they had "no separate or separable property in the specific items or assets of which the estate is made up", in the words of this Court in Smith v Layh [11] . And Dixon C.J., who was in the minority, spoke [12] of the residuary beneficiary being entitled at her husband's death to "an equitable interest in the Queensland property forming part of his estate", that interest being incapable of definition in terms appropriate to legal estates or chattels real.

1. (1960) 107 C.L.R., at p. 438. 2. (1960) 107 C.L.R., at p. 451. 3. (1960) 107 C.L.R., at pp. 458-459. 4. (1953) 90 C.L.R. 102, at p. 108. 5. (1960) 107 C.L.R., at p. 426.

The right which any beneficiary has in an unadministered estate springs from the duty of the executor to administer the estate, to preserve the assets and to deal with them in the proper manner. Each beneficiary has an interest in seeing that the whole of the assets are treated in accordance with the executor's duties. In that sense, the beneficiaries as a class may be said to have an interest in the entire estate. But it does not follow that each piece of property which goes to make up the estate is held on a particular trust for the beneficiary named as its intended recipient upon completion of administration: Horton v Jones [13] . Whether or not the estate is held on a trust for the beneficiaries as a class in the usual sense in which the word "trust" is used, so as to confer a specific proprietary interest, as distinct from a general, non-specific interest, upon all beneficiaries, is not something which arises for consideration in this case.

Nevertheless, Mrs. Schultz acquired upon the death of Mrs. Pereira a right to have the deceased estate administered in accordance with the duties of the executors. Though not the legal or equitable owner of the assets which were the subject of the devise and bequest in her favour, she had, by virtue of the chose in action created by that devise and bequest, an expectation that the assets would pass to her upon completion of the administration, subject to their being realized to meet any outstanding liabilities and to defray the costs of administration, and an interest in respect of those assets. That interest was derived from and dependent upon the chose in action. The interest is of such a kind that, when a beneficiary transmits a chose in action (or part thereof), or that chose in action passes by operation of law, such as under the Bankruptcy Act, that transmission naturally encompasses not only the chose in action but also the expected fruits of that chose in action: Horton v Jones; In re Leigh's Will Trusts [14] .

Mrs. Schultz's right to due administration arose from cl. 3(a) and (g) of the will. That right vested in the Official Receiver as soon as it vested in Mrs. Schultz, since it was clearly "property" as defined in s. 5(1) of the Bankruptcy Act: Re Pevsner; Ex parte Trustee in Bankruptcy [15] ; Silvia v Thomson [16] . It follows, from what has been said above, that the interest derived from that right also passed to the Official Receiver at that time. Moreover, at all times Mrs. Schultz possessed but one right by virtue of cl. 3(a), whatever the effect of the subsequent court orders in relation to cl. 3(g).

1. (1983) 68 F.L.R. 254, at p. 256. 2. (1989) 87 A.L.R. 695, at p. 696.

The next question is whether the orders made under s. 41 of the Succession Act gave rise to new rights in Mrs. Schultz or simply brought about changes in the fruits which she anticipated would flow from her continuing right to enforce the duty of due administration. The order of Moynihan J. presents no difficulty in this respect. On any view of its theoretical operation, its effect was to deny Mrs. Schultz, and consequently the Official Receiver, the benefit which she would otherwise have expected to receive in virtue of her character as the named beneficiary under the will of the house at 43 Renton Street and its contents. Had it not been for the later order of the Full Court, that would have been the end of the matter as far as Mrs. Schultz and the Official Receiver were concerned.

It should be noted in passing that this appeal does not raise for consideration the question whether the Official Receiver could have objected to the order of Moynihan J. on the ground that it was allegedly inconsistent with the Bankruptcy Act and therefore inoperative to that extent by virtue of s. 109 of the Constitution. The appellant contended only that there would be an inconsistency in the event that the order actually deprived Mrs. Schultz, and hence the Official Receiver, of any property in the chose in action.

The order of the Full Court could bear upon the outcome of this appeal in either of two ways. First, the Official Receiver would succeed in the appeal if the order had an operation, prior to the discharge of Mrs. Schultz from her bankruptcy, by varying the fruits which Mrs. Schultz could expect to receive from the performance of the executors' duty of due administration, without changing her right to enforce such performance by virtue of her appearance in the will as a named beneficiary. Secondly, even if the order gave rise to new rights in Mrs. Schultz independent of her right to due administration, it could nonetheless have had retroactive operation from a point during her bankruptcy.

Section 41(1) of the Succession Act provides that the Supreme Court may, in its discretion and upon proper application being made, "order that such provision as the Court thinks fit shall be made out of the estate of the deceased person" for a spouse, child or dependant of the deceased person. The Court may attach conditions to the order or direct that the provision consist of a lump sum or periodical or other payment: s. 41(2). The Court may direct upon what part of the deceased estate the order shall fall: s. 41(3) and (4). Moreover, s. 41(10) provides:

Upon any order being made, the portion of the estate comprised therein or affected thereby shall be held subject to the provisions of the order.

The wide powers conferred by s. 41 and the manner in which sub-s. (10) is expressed strongly suggest that the effect of an order under the section is not to change the benefits to be expected from the right to due administration arising pursuant to the will, but to superimpose upon the duty of due administration a judicial order made pursuant to statute. In other words, a new and independent obligation is created which has an impact upon the way in which the executor administers the estate pursuant to his or her existing duty, by compelling him or her to comply with the terms of the court's order. Each beneficiary's right to due administration is made subject to the terms of the order in the sense that the order governs the executor's actions to the exclusion of any inconsistent direction contained in or derived from the will. But the respective rights to due administration are themselves unchanged, notwithstanding the impact upon their value. Such a result should not be surprising, bearing in mind that the right to due administration as discussed in Livingston is a continuing right of uncertain ultimate worth. It remains a right belonging to each of the named beneficiaries, in relation to the whole of the assets of the estate and the management of the estate, the concomitant of the duty of the executor to perform his or her functions in a proper manner. Viewed in this way, the making of an order under s. 41 gives rise to a new right in a person in whose favour the order is made, corresponding to the new obligation imposed upon the executor. That right is derived from statute and is independent of the right conferred by the will. Of course, an order under s. 41 may simultaneously render a beneficiary's chose in action largely worthless by depriving the beneficiary of any right to expect property from the estate, while at the same time creating the new right we have described. But, as we have seen, that was not the result in Mrs. Schultz's case.

The order did not alter the will; nor did the order directly affect the existence of the chose in action itself, even though it may have affected the benefits which the holder of the chose expected to receive. The order is expressed by s. 41(10) to take effect "[u]pon any order being made". Moreover, the order's force is derived from s. 41(10), not from its terms being somehow incorporated into the will. Although it may be convenient to frame an order in terms of an alteration to the will, the statute does not permit the order to have that legal effect.

Accordingly, unless perhaps an order made pursuant to s. 41 denies a beneficiary the benefit of appearing in the will as a beneficiary, it can only affect the value of a beneficiary's chose in action. It does not destroy the right itself. Conversely, the person to whom a benefit flows following the making of such an order receives that benefit as the result of the creation of rights pursuant to the making of the order and not by way of variation to any pre-existing rights which that person may have possessed pursuant to the will. It should be observed that the same result has been reached in relation to legislation providing that the order should take effect as if it had been made by codicil: Re Bishop [17] ; Union-Fidelity Trustee Co. of Australia Ltd. v Montgomery [18] ; McLeod v Johns [19] .

1. [1952] V.L.R. 543, at pp. 546-547, 552. 2. [1976] 1 N.S.W.L.R. 134, at p. 141. 3. [1981] 1 N.S.W.L.R. 347, at p. 349.

The new right conferred by an order made pursuant to s. 41 is not dissimilar to the right to due administration arising under the will. Each is subject to the availability of assets in the estate to satisfy the right, and in each case the holder of the right expects to receive a particular payment or piece of property. But the two rights are nonetheless fundamentally different. A right derived from an order under s. 41 may displace the benefit of rights conferred by the will and hence confer an entitlement of a special kind beyond that of an ordinary beneficiary. The two kinds of right spring from different sources and remain distinct, despite their similarities. That this is so appears from s. 41(11) of the Succession Act, which stipulates that the right conferred by an order under s. 41, there described as the "provision", may not be mortgaged, assigned or charged without the permission of the Court. This provision is inconsistent with the notion that the right conferred by an order under s. 41 is absorbed into the subsisting right to due administration of the estate.

The result in this case is that the order of Moynihan J. gave rise to a new right in Mr. Pereira and took effect from the date on which it was made. The next question is whether the subsequent order of the Full Court, which gave rise to a new and different right in Mr. Pereira, operated from the date on which it was made or from the date of the order of Moynihan J. If the order of the Full Court operated from the date on which it was made, it will become necessary to consider whether it created a new right in Mrs. Schultz or restored, subject to Mr. Pereira's life estate, the fruits which she had previously expected to receive pursuant to the chose in action. In the latter case, the interest created would be referable, not to the court's order, but to the chose in action.

The Full Court's order was made by way of appeal. It was not made pursuant to the statutory power to vary an order, which is enlivened upon the making of an application under s. 42 of the Succession Act. In form, the order of the Full Court effected a variation to the order of Moynihan J. by deleting its operative words and substituting the preferred words of the Full Court. But in substance, while still granting the application for provision, the Full Court set aside the order of Moynihan J. and substituted a new order of its own. In so doing, the Full Court was acting pursuant to O. 70, r. 11 of the Rules of the Supreme Court (Q.), which provides in part:

The Court, upon the hearing of an appeal, shall have power to give any judgment and make any order which ought to have been given or made in the first instance, and to make such further or other order as the case may require. Moreover, O. 66, r. 4 states: Every order, when drawn up, shall be dated of the day of the week, month, and year, on which the same was made, unless the Court or Judge otherwise directs, and shall take effect accordingly. It is clear enough that an order made on appeal is an order within the meaning of this rule.

Rules providing in similar terms have been considered in various cases. In Borthwick v Elderslie Steamship Co. [No. 2] [20] , Collins M.R. said of an order made on appeal:

The judgment is not ipso facto antedated by reason that it is substituted for the judgment in the Court below. Romer L.J. took the same view [21] , stating that the judgment had to be "treated as of the date on which it was given in the Court of Appeal". This approach has been endorsed by this Court, in Nicol v Allyacht Spars Pty. Ltd. [No. 2] [22] , and by the House of Lords, in Nitrate Producers Steamship Co. Ltd. v Short Brothers Ltd. [23] . 1. [1905] 2 K.B. 516, at p. 519. 2. [1905] 2 K.B., at p. 521. 3. (1988) 165 C.L.R. 306, at p. 311. 4. (1922) 127 L.T. 726; [1922] All E.R. Rep. 710.

A distinction has been drawn between the case where a judgment at first instance has been restored by a second appellate court after having been reversed at the first appeal: Nitrate Producers [24] . Of course, that is not the present case. Nor, for the reasons already given, can it be said that the Full Court order effectively gave back to Mrs. Schultz that which she had possessed under the will before the making of the order of Moynihan J. The most that can be said is that the order revived Mrs. Schultz's full rights under the will and then immediately granted Mr. Pereira a life interest.

1. (1922) 127 L.T., at p. 727; [1922] All E.R. Rep., at p. 712.

Although the presumption is that the order of the appellate court takes effect from the date on which it is made, it will sometimes be possible to infer from the terms of the order an intention that it operate with effect from the date of the order at first instance. On this basis, this Court held in Gould v Vaggelas [25] , that an appellate court's order varying the amount of a judgment and ordering payment of interest "from date of judgment" necessarily referred back to the date of the original judgment.

In the present case, the terms of the order of the Full Court do not reveal that any consideration at all was given to the date as at which the order should take effect. In these circumstances, it is not possible to infer that the Full Court's order took effect any earlier than the date on which it was made.

The appellant in this Court then contends that Mrs. Schultz could not have taken any benefit under the order of the Full Court because, not having been an applicant for provision under s. 41(1) of the Succession Act, she could not take the benefit of such provision as was ultimately made. Accordingly, it is suggested, her interest in remainder must flow from the will and hence be attributable to the chose in action.

Regardless of the answer to the question whether the court acting under s. 41 can confer any sort of benefit upon a person who is not an applicant for provision, it is clear that the making of the order of the Full Court in this case required first of all the setting aside of the order of Moynihan J. and consequently the revival of Mrs. Schultz's full expectation pursuant to the chose in action, which of course remained vested in the Official Receiver. That does not mean that, during the period between the order of Moynihan J. and the Full Court's order, the chose in action carried with it an unfettered entitlement to expect an absolute interest in the house and its contents. At that time, the chose in action was subject to the limitation imposed by Moynihan J.'s order. The removal of that limitation did not take effect retroactively. But what it does mean is that, at the same time as the Full Court made its order in favour of Mrs. Schultz, the chose in action was unfettered. The crucial question is then whether the Full Court's order reimposed the limitation of Moynihan J. and conferred a new kind of interest upon Mrs. Schultz, or simply imposed a new and different limitation, leaving Mrs. Schultz with part of her former interest, attributable not to the order but to the chose in action.

Mr. Pereira's life interest is but a segment carved out of the absolute interest in the property. Accordingly, although the Full Court by its order conferred upon Mr. Pereira a life interest which constituted a limitation upon Mrs. Schultz's absolute estate, no new estate or interest was conferred upon Mrs. Schultz. So, as soon as it had removed the limitation imposed by Moynihan J., the Full Court at once imposed a new limitation upon the efficacy of the chose in action by conferring upon Mr. Pereira the right to receive the life interest described in the order. But that limitation left intact Mrs. Schultz's interest in remainder derived from the chose in action. The source of that interest being the chose in action, it was an interest held by the Official Receiver.

The appeal should be allowed. The questions raised by the appeal are important to the administration of the deceased estate and the Official Receiver has been successful. The costs of this appeal should therefore be borne by the deceased estate.