Rankin v Official Trustee in Bankruptcy

Federal Court of Australia|2005-08-08|Before: Heerey J

REASONS FOR JUDGMENT 1 This proceeding concerns a property at 100 Lamprill Circle, Gagebrook in Tasmania (the property). The property is the matrimonial home of the applicants Mr Malcolm Rankin and his wife Mrs Barbara Rankin. When this proceeding was commenced on 26 April 2004 the applicants sought a declaration that the property was not property which vested in the trustee of their bankrupt estate or alternatively a declaration that their trustee had by his conduct disclaimed any interest in the property. 2 The property has recently been sold and funds amounting to some $60,000 being the residue of the net proceeds of sale are held in trust by PWB Lawyers for the parties pending the determination of this proceeding. 3 The applicants had entered into a contract (the contract) to purchase the property from the Director of Housing (the Director). They became bankrupt. It is now accepted that their interests as purchasers under the contract vested in their trustee in bankruptcy (the trustee - an expression which where appropriate refers to the Official Trustee in Bankruptcy or Insolvency and Trustee Service Australia) pursuant to s 58 of the Bankruptcy Act 1966 (Cth) (the Act). After the recent sale the Director has been paid out and the applicants have settled the debt of their only secured creditor GE Capital Finance Limited (GE Capital), the successor to Avco Financial Services Limited (Avco). 4 The trustee claims to be entitled to the proceeds of sale insofar as they are necessary to pay out unsecured creditors and the costs, charges and expenses of administration amounting in total to approximately $30,000. The applicants claim to be entitled to the whole of the proceeds. They say: (1) The trustee has by his conduct disclaimed any interest in the contract; (2) A new contract with the Director came into existence as a result of the conduct of the parties and the provisions of the Homes Act 1935 (Tas) (the Homes Act); or alternatively; (3) The trustee is estopped from asserting any title to the property or the proceeds of sale.

The facts 5 In 1981 the applicants entered into a tenancy agreement with the Director in respect of the property at a rental of about $60 per week. The agreement was subject to the provisions of a scheme designed to allow low income earners to buy homes on favourable terms. 6 On 12 December 1985 the applicants entered into the contract. The purchase price was $34,080 payable by weekly instalments of $66.10, such instalments to include interest on the balance outstanding at the rate of 14.5 per cent per annum or such other rates as might be determined by the Director from time to time. The instalments were approximately equivalent to the rent which the applicants had been paying. 7 On 6 April 1992 the applicants presented a debtors' petition and became bankrupt pursuant to s 57 of the Act. Their statement of affairs disclosed the contract. Its value was stated to be $38,500 and the sum owing $35,000. Avco was stated to be a secured creditor for the sum of $20,722, its debt being secured by a bill of sale and an equitable charge over the property. The applicants notified their bankruptcy to the Department of Housing (the Department). Their payments were reduced to $64.00 and the Department wrote off $101.00. Mr Rankin deposed that he thought at this time that "the contract was at an end". 8 The applicants were also aware at the time of their bankruptcy that the trustee had taken their interest in the contract. On 13 April 1992 the trustee wrote to the applicants advising that he had retained an agent to appraise the house. The agent valued the property at $43,000 - $45,000. In May 1992 Avco's solicitors advised the trustee that the sum owing to their client was $20,000 which was secured over the property. 9 Mr Rankin says that in mid 1992 the trustee told him that he was not going to sell the house as the sale would not realise any money apart from what was owed to the Director. 10 In April 1993 the trustee undertook a calculation of the equity position and concluded that the property was worth less than the sums owing to the Department and Avco. On 13 April 1993 the trustee wrote to the Department advising that any interest the applicants had in the property now vested in the trustee. The trustee noted that he could not transfer the title because it was not held by the applicants and that it was also difficult to lodge a caveat. He sought the written acknowledgement of the trustee's interest subject to the right of the Director and of any secured creditor. He requested an assurance that the contract not be finalised or terminated without being advised in order to claim the chattels. 11 On 4 June 1993 the trustee wrote to the applicants noting that they had a long term purchase contract with the Director. He understood that they were maintaining payments. The letter noted the charge to Avco and the trustee's understanding that the applicants were not maintaining any payments to that company. The letter advised that any interest that the applicants may have in the property now vested in him subject to the rights of the Director and Avco. The letter continued: "There are a number of options open to you: 1. After your discharge you make me an offer for my interest in the property. This will allow the title to be transferred in your name after the contract with the Director of Housing is finalised. This means that you have to come to an arrangement with Avco with respect to their equitable charge. 2. You request the Director of Housing to cancel the contract. If the Director of Housing accedes to this request, he may either repurchase the property, in which case you may be allowed to continue living in the property, or he may put the house on the market and you may be able to rent another property from the Housing Department. Any surplus over and above the Director of Housing's entitlements will go to Avco, except the chattels, which will be claimed by me. However, I make it clear that [the] Director of Housing may decide to follow another option and I am not in a position to dictate to the Director of Housing." The letter concluded with a suggestion that the applicants discuss the matter with the Department and possibly obtain legal advice. The trustee indicated his willingness to discuss matters. 12 Mr Rankin deposed that on receipt of that letter he was of the view that he and his wife had already arranged with the Department to cancel the contract. On 7 June 1993 he telephoned the trustee's office. The officer's internal minute records Mr Rankin as saying that he did not like Avco to have any money at all. He realised he would never own the house. He would think about surrender to the Director and advise the trustee when a decision had been made. He said it made no difference to him because the rental would be the same as the present repayments ($102 per week). He wanted to know about the debt to Avco. The officer advised he would try to find out the size of the debt. 13 On 8 June 2003 Mr Rankin telephoned the trustee's office and advised that he had discussed the matter with the Department and had decided at present not to surrender the property to the Director. 14 The applicants' statutory discharge was due to come into effect on 7 April 1995. On 17 February 1995 the trustee wrote to the applicants stating that fact and noting that their interest in the property had vested in the trustee. The letter requested the applicants to come to the trustee's office to discuss the matter. 15 On 24 February 1995 the applicants attended the office of the trustee and spoke to Mr A Dekker. Mr Dekker's minute notes Mr Rankin as saying he was unemployed and not likely to get another job. Mr Dekker explained to them the options. First, do nothing and continue paying the contract with the Department. The amount needed to pay out would increase each year and the equity may decrease. At a certain stage the property would be sold either by the Department or the trustee. The trustee would only sell if the debt to the Department and to Avco was less than the net sale price. The second option was surrendering the property to the Department which could either sell it or retain it for valuation price. If the Department sold the property the applicants could not continue living in the property. If the Department retained it they may rent it from the Department. The applicants agreed that they would never own the house and it may be best for them to surrender it. Mr Rankin said he would discuss the matter with the Department. 16 Mr Rankin deposed that at the time he had thought that he had cancelled his contract with the Department when they reduced the rent. He thought that the contract had come to an end and that he and his wife were now paying the amount of rent needed to rent the home. He thought the trustee was confused as to what was the position with the Department but it did not need to be immediately sorted out as they were able to continue living in the house. 17 Mr Rankin deposed that "shortly before" his discharge, but on a date he cannot otherwise remember, he went to the Department and spoke to a Mr Dodge. Mr Dodge told him that his tenancy was not under threat and that he was "back into the instalment purchase scheme". Mr Rankin further deposed that later he "had to pay arrears of deferred interest from the time they reduced my payments following the bankruptcy". 18 The Department's file was produced. It includes a minute dated "27/2" signed "BD" noting that Mr Rankin called at the Glenorchy office of the Department "to request termination of PC [presumably purchase contract] due to pressure from Avco when his bankruptcy is discharged 7 April 1995". The minute continues: "Advised we could not respond over the counter & to satisfy all legal parties he would need to make approaches via legal counsel. To phone late [sic]." 19 On 28 February 1995 Mr Rankin telephoned the trustee's office and said that he had been to the Department. They had advised him to keep the contract. He didn't know what to do and would receive advice from Legal Aid. 20 On 27 March 1995 the trustee's officer telephoned Mr Rankin who advised that he had contacted Legal Aid and would phone back. He needed some papers from his solicitors. He also said that the Department did not want to take the house back. 21 On 7 April 1995 the applicants received their statutory discharge. They had no further contact with the trustee's office until 23 February 2004 when Mr Rankin telephoned the Trustee's office and advised that the applicants had signed a contract of sale for $120,000 and approached GE Capital to withdraw the caveat. The creditor was only prepared to withdraw the caveat if $28,000 were paid. The trustee's officer said that somebody would call Mr Rankin back as she wasn't sure that he could legally sell the property as it "possibly could still vest in the trustee". Mr Rankin said he hoped somebody would call as soon as possible as he said that if the sale falls through he will be "looking at bankruptcy again". 22 After the statutory discharge from bankruptcy the applicants continued to make payments to the Department at the same amounts and in the same manner as they had done following their telling the Department of their bankruptcy. From about this time they began to make improvements to the property. In about 1997 they enclosed the front porch. For this work they bought materials which cost about $1500 and Mr Rankin paid $100 to a neighbour who did some labouring work. A little later they erected a prefabricated garden shed as well as improving the garden. The shed cost about $500. Levelling and paving cost $500 and further garden work $1000. In 2000 they built a three car carport and replaced the external guttering. The cost of materials was about $2500 and cash payments to helpers came to $500. In about 2002 they replaced the carpets and the stove and repainted the interior for a cost of about $6000. All these costs total $12,600. Mr Rankin deposed: "I undertook these works being of the belief that the purchase contract with the Director of Housing was progressing unaffected by my and my wife's prior bankruptcy. I understood that ITSA had disclaimed their interest in the property." 23 In February 2004 the applicants purported to enter into a contract for the sale of the property. On 24 February 2004 the trustee wrote to the applicants' solicitors referring to a telephone conversation that morning in which, it may be inferred, the trustee had been advised of the proposed sale. The letter asserted that the applicants' interest in the property had vested in the trustee upon their bankruptcy. The trustee's interest in the property remained and the applicants had no legal capacity to sell the property or sign any documentation in relation thereto. The trustee was now obliged to undertake responsibility for the contract. There appeared to be no impediment to the trustee executing it and facilitating the sale. The solicitors were asked to forward the contract as soon as possible. It was said that after sale of the property there would be sufficient funds to pay creditors 100 cents in the dollar and return "a substantial surplus " to the applicants. 24 On 26 February 2004 the applicants' solicitors wrote to the solicitors for the trustee. In the letter it was asserted that title to the property had not vested in the trustee and that if it were alleged that "at equity" the title had vested in the trustee then "equity will defeat the Trustee's claim to any benefit that has accrued following the discharge of the bankruptcy whereby payments have been made by my client under the belief that they were purchasing the property from the Director General of Housing and Construction". A meeting to inspect the files of the trustee and the Department was proposed. 25 On 2 March 2004 the trustee's solicitors replied stating that the contract to purchase from the Director was a chose in action which vested in the trustee under s 58 of the Act. The benefit of the contract was held by the trustee and a discharge did "not override that initial vesting". The writer could see no benefit in viewing the Department's files. 26 On 5 March 2004 the trustee's solicitors wrote noting that the Avco interest was secured by equitable charge. As only approximately $10,000 was owing payment of that sum to finalise this estate was "not unrealistic". 27 On 9 March 2004 the applicants' solicitors replied advising that "without concession that the equitable estoppels of O'Brien v Sheahan [2002] FCA 1292 would not apply", they had posted the contract "for carriage by the trustee". Particulars of the allegation that only approximately $10,000 was owing to Avco were sought. (The parties still, it seems, referred to Avco rather than its successor GE Capital.) 28 The contract was redrawn with the trustee as vendor and sent to the purchasers. However they decided not to proceed. 29 On 19 April 2004 the trustee wrote advising that, given the extent of equity in the property, he was obliged to re-list it immediately and to sell for the best available price. The applicants were advised they could remain in the premises until settlement. In the interim they were requested to "continue payment of the mortgage", maintain the house property and grounds and co-operate with the selling agent. 30 Mr Rankin deposed that his physical and emotional health has been detrimentally affected by the proceedings. He has elevated blood pressure, difficulty sleeping and feels tense and on an "emotional rollercoaster". 31 Following further negotiations the property was finally sold on 2 February 2005 and settlement was completed on 16 March 2005. Neither the sale price nor this contract itself were disclosed in evidence. I assume it was made with the consent of the trustee. Presumably under some arrangements with the purchaser the applicants are still in possession, or at least were at the date of the hearing. As previously mentioned, the real dispute is over approximately $30,000 which remains out of the proceeds. It is a contest between the applicants on the one hand and unsecured creditors and the trustee (in respect of his costs, charges and expenses of administration) on the other.

Vesting, disclaimer and revesting 32 It is not now in dispute (although it was initially) that upon bankruptcy the applicants' interest in the contract vested in the trustee pursuant to s 58 of the Act. 33 Under s 133(1A) the trustee could have disclaimed the contract. The statute requires that any disclaimer be in writing signed by the trustee. It is not suggested that this occurred. 34 Discharge from bankruptcy did not cause the contract, as property of the bankrupts, to revest in them. The property of the applicants divisible among their creditors remained vested in the trustee. Their entitlement was to any surplus remaining after payment in full of the costs, charges and expenses of the administration, all debts that had been proved in the bankruptcy and interest on interest bearing debts that had been proved: Re Balhorn; ex Parte Balhorn and Official Trustee (1981) 39 ALR 223 at 226; Gosden v Dixon (1992) 107 ALR 329 at 331.

Has there been a disclaimer of the contract by the trustee? 35 Counsel for the applicants submitted that there had been a "disclaimer by conduct". The conduct relied on was the trustee's inactivity while "allowing the applicants to continue to pay amounts by way of reduction of the purchase price of the property" and making the improvements. 36 Disclaimer is a statutory power which can only be exercised in writing signed by the trustee. This has not occurred.

Has there been a new contract with the Director? 37 There is said to have been a new contract entered into after discharge. Quite apart from the lack of any note or memorandum in writing (see s 36 of the Conveyancing and Law of Property Act 1884 (Tas)), the evidence does not support a conclusion that a new contract was entered into between the applicants and the Director. Any new contract would need to be a tri-partite transaction involving the trustee as well as the Director, either by way of the assignment of the trustee's interest as purchaser in the existing contract back to the applicants or by the cancellation of the existing contract and the making of a new contract between the Director and the applicants. 38 At most, at the meeting of 27 February 1995 with the Department's officer the applicants agreed to consider their position. At this stage Mr Rankin was not in a position to "keep the contract", as he claims he was told by the Department, because the contract had vested in the trustee. It was not his contract to keep. Moreover it is more probable than not that he was told, as the minute of 27 February 1995 records, that the matter could not be settled over the counter and that he should get legal advice. No concluded agreement was reached, still less one that involved the trustee. 39 Nor does the Homes Act provide any assistance. It was pointed out that the definition of "purchaser" in s 3 includes a person who "has purchased" from the Director and that the definition was thus sufficiently broad to encompass a person who has had an interest as purchaser but is no longer a purchaser and such a person is able to occupy as a tenant. Then it is said s 29(2) provides that deposits and interest accumulated to the credit of a purchaser shall be available for payment of any instalments or arrears of instalments or other payments due to the Director by the purchaser. Section 17(7) provides that the amount standing to the credit of a purchaser by way of deposits paid in pursuance of s 29(2) shall be deemed to be money paid in reduction of the purchase price. 40 It was then put that it would have been open for the Director to transfer title to the applicants and take into account the payments that had been made. No doubt that is true, but for the reasons mentioned there was never an agreement in fact reached between the applicants, the Director and the trustee.

Is there any estoppel operating against the trustee? 41 In rejecting the application for special leave in Sheahan v O'Brien [2003] HCATrans 308 Gummow and Hayne JJ made it clear that the decision of the Federal Court the subject of the application should not be understood as establishing that the law relating to estoppel was generally applicable in the administration of bankrupt estates. This point was not argued in the present case, except to the extent that counsel for the trustee cited Dixon v Riquero [2004] FMCA 173 in which reference is made (at [19]) to their Honours' statement. I shall therefore deal with the estoppel argument on the assumption that principles of estoppel are applicable in a bankruptcy context and without any consideration whether this is so as a matter of law. 42 To give rise to an estoppel, any representation must be clear and unequivocal: Legione v Hateley (1983) 152 CLR 406 at 436-437. There is no evidence of any representation by the trustee which could have led Mr Rankin to believe that "the purchase contract with the Director of Housing was progressing unaffected by my and my wife's prior bankruptcy". The belief asserted is in any case inconsistent with his own evidence that, at the time of receipt of the trustee's letter of 4 June 1993, he believed that he and his wife had already arranged with the Department to cancel the contract and realised he would never own the house. Further, at the meeting with the Department on 27 February 1995 he thought the contract had come to an end and that he and his wife were now paying the amount of rent needed to rent the home. This was indeed the true legal position; the contract had come to an end as far as the applicants were concerned because their interest as purchasers had vested in the trustee and they were in possession of the property as tenants. 43 Moreover, the communications of the trustee by letter on 4 June 1993 and at the meeting of 24 February 1995 did not make any representations to Mr Rankin. On both occasions options for his considerations were put to him. 44 O'Brien v Sheahan is distinguishable from the present case. Carr J upheld the Magistrate's finding that the trustee had not expressly represented to the bankrupts that they could keep their house if there was no equity in it. Nevertheless his Honour held that by not making a decision as to the realisation of the property and not informing the bankrupts, for a period of over four years, of what other course he proposed to take, the trustee represented that he did not propose to assert any entitlement to the net proceeds of sale of the property (see at [45] - [46]). In the present case there could be no finding of implied representation by way of inactivity on the part of the trustee because the trustee clearly put to the applicants the options that were available to them. The inactivity was on their part. If the doctrine of estoppel is applicable at all, its essential elements have not been established in the present case. In any case, I must say with respect that it is difficult to see how mere inactivity on a trustee's part could overcome the clear rule that property of a bankrupt does not revest in the bankrupt upon discharge. 45 Moreover in the present case the element of inactivity, which on its face is substantial, from 1995 to 2004, has to be seen in the light of the circumstance that for many years it was apparent that any sale of the property would not realise enough to pay out the Director and the secured creditor. There was therefore no imperative for the trustee to sell, and for him to do so would have resulted in the applicants losing their home. The Director for his part was presumably content for the applicants to remain in possession as long as they kept paying rent. It is only the recent sharp increase in property values in Tasmania that has brought about the realistic possibility of sale, and with it the prospect of the applicants actually receiving some money for themselves. So the delay has worked in their favour.

Should the applicants have a constructive trust over the proceeds for the cost of their improvements? 46 Although their case was not, as I understand it, put in this way, I think I should consider whether the applicants have a claim in respect of the $12,600 expended by them on improvements to the property. In this context it might be noted that on the application for special leave in O'Brien v Sheahan counsel for the trustee complained, with some justification one might think, that the bankrupts, having spent some $67,000 on payments of principal and interest due under a mortgage over their property, had by the Federal Court's order received an asset in which the equity was some $170,000 without any contribution to the unsecured creditors. At most, counsel argued, Carr J should have done no more than reverse the detriment by imposing a constructive trust to the extent of the expenditure. 47 In the present case, however, the expenditure by the applicants was not made on the basis of any "substratum of a joint relationship or endeavour" as between themselves and the trustee: see Muschinski v Dodds (1985) 160 CLR 583 at 620. The expenditure was as a result of their unilateral decisions. There is no suggestion that the trustee was aware of the improvements being carried out by the applicants. At the time it would have seemed likely that their occupation would continue indefinitely (although subject to the risk of whatever action Avco might take) and thus they would get the benefit of the extra amenity created by the improvements. In the events that have happened, they have enjoyed those benefits for some time and also such increase in the value of the property as may have resulted. It does not seem to me unconscionable for the trustee to assert, for the benefit of unsecured creditors and his statutory costs, charges and expenses, the title to the property conferred on him by the operation of the Act.

Orders 48 Evidence was given by Mr Jonathon Spinner, an officer of the trustee, that the total amount to pay out the bankruptcy would be approximately $30,000. There are two estates, the separate estate of Mrs Rankin and the joint estate. In the case of the former unsecured debts are $2970 and estimated remuneration and other charges totalling "six to seven thousand". In the case of the joint estate although the remaining unsecured creditor is only $1170, but costs, charges and remuneration bring the total to something in the vicinity of $24,000. All told Mr Spencer estimates a payout figure of $30,000. The trustee's figures take into account that all creditors with interest-bearing debts have indicated that it is not generally their policy to claim interest after the date of bankruptcy. 49 I see no alternative to an order that the applicants pay the trustee's costs of this proceeding. Any calculation of the trustee's costs, charges and expenses should not include any double counting in respect of legal costs. 50 The trustee should proceed to a final figure as soon as possible. This should be simply a matter of calculating the statutory charges. Any dispute should be resolved by the District Registrar. 51 There will therefore be orders that: (1) The applicants pay the respondent's costs of this proceeding, including reserved costs, such costs to be taxed in default of agreement; (2) In default of agreement of the parties, the costs, charges and expenses of the respondent under the Bankruptcy Act 1966 and associated legislation be fixed by the District Registrar; (3) The funds held in trust for the parties by PWB Lawyers be disbursed as follows: · The sum of $30,000 to the respondent; · The costs of this proceeding, taxed or agreed as aforesaid, to the respondent; · The balance, if any, to the applicants. (4) The application is otherwise dismissed; (5) Liberty to apply is reserved.

I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey.

Homes Act 1935(Tas)ss 3, 29(2), 17(7)

Bankruptcy Act 1966(Cth)ss 58, 133

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