Stankovic v Van Der Velde

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 626 of 2012

JUDGE: EMMETT J DATE: 14 December 2012 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 This proceeding is concerned with the extent to which proceeds of the sale of a property jointly owned by the applicant, Mr Stankovic, and his wife, Ms Dordevic, the second cross-respondent, are distributable among the creditors of the bankrupt. The specific question is whether compensation for personal injury received by the applicant was paid by him for the purchase, or used by him in the acquisition of, a parcel of land situated at President Avenue, Kellyville, New South Wales (the Kellyville Property) or whether the proceeds of realising the Kellyville Property can fairly be attributed to that compensation. 2 Under s 116(1) of the Bankruptcy Act 1966 (Cth) (the Act), all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy is property divisible amongst the creditors of the bankrupt. However, under s 116(2)(g), s 116(1) does not extend to any damages or compensation recovered by a bankrupt in respect of personal injury or wrong done to the bankrupt. Further, under s 116(2)(n), s 116(1) does not extend to property to which, by virtue of s 116(3), s 116(2)(g) applies. Under s 116(3), where the whole or substantially the whole of the money paid for the purchase, or used in the acquisition, of particular property is protected money, s 116(2)(n) applies to the property. Protected money includes damages or compensation of the kind referred to in s 116(2)(g). In addition, under s 116(4), where, at the time when the trustee realises a particular property to which s 116(2)(n) does not apply, the outlay in relation to the property is in part protected money and in part other money, the trustee must pay to the bankrupt so much of the proceeds of realising that property as can fairly be attributed to that protected money. 3 On 12 May 2009, a sequestration order was made in respect of the estate of Mr Stankovic. Messrs Terry Van Der Velde and Jason Cronan (the Trustees) were appointed trustees in bankruptcy of Mr Stankovic's estate. At the time of the making of the sequestration order, Mr Stankovic and his wife were the joint owners of the Kellyville Property. Mr Stankovic's wife and the Trustees were appointed as trustees for sale of the Kellyville Property, which was subsequently sold. The proceeds of sale, net of commission and costs, amounted to $6,229,795. 4 It is common ground that, between 1989 and 1991, Mr Stankovic received the sum of $250,000 by way of compensation for personal injury within the meaning of s 116(2)(g) of the Act (the Compensation Moneys). The Compensation Moneys were protected money. The question in this proceeding is whether any part of the proceeds from the sale of the Kellyville Property: is subject to s 116(2)(n), on the basis that the Compensation Moneys constituted the whole, or substantially the whole, of the money paid for the purchase, or used in the acquisition, of the Kellyville Property; or should be paid to Mr Stankovic under s 116(4), on the basis that such part can fairly be attributed to that protected money. 5 In 1972 or 1973, Mr Stankovic and his wife purchased the parcel of land situated at 77 Terry Road, Eastwood, New South Wales (77 Terry Road), using a combination of their joint savings and a loan secured by a mortgage over 77 Terry Road. In November 1991, Mr Stankovic and his wife became the sole directors and equal shareholders of Iron Base Pty Limited (Iron Base). In December 1991, Iron Base purchased the parcel of land situated at 79 Terry Road, Eastwood, New South Wales (79 Terry Road). The purchase price paid for 79 Terry Road was $315,000. That purchase price was provided, as to the sum of $80,000, by a loan from the Commonwealth Bank of Australia (the Bank), secured by a mortgage over 79 Terry Road. The balance of the purchase price was contributed by Mr Stankovic from the Compensation Moneys. In July 1994, Mr Stankovic and his wife sold 77 Terry Road for $570,000 and Iron Base sold 79 Terry Road for $360,000. 6 In August 1994, Mr Stankovic and his wife purchased the Kellyville Property, as joint owners in equal shares, for a purchase price of $850,000. The purchase price was provided as to part by loan from the Bank, secured by a mortgage over the Kellyville Property. The balance of the price was provided from the proceeds of sale of 77 Terry Road and 79 Terry Road. More particularly, the source of funds for the purchase of the Kellyville Property was as follows: Proceeds from the sale of 77 Terry Road paid as deposit 28,500 Proceeds from the sale of 77 Terry Road paid on completion 463,313 Proceeds from the sale of 79 Terry Road paid as deposit 14,000 Proceeds from the sale of 79 Terry Road paid on completion 241,826 Thus, the total price paid for the Kellyville property of $850,000 was provided, as to $491,813, from the proceeds of the sale of 77 Terry Road, as to $255,826, from the proceeds of the sale of 79 Terry Road and, as to the balance of $102,361, by loan from the Bank, secured by a mortgage of the property. There is no evidence to suggest that any part of the sum of $102,361 was referrable in whole or in part to the Compensation Moneys. 7 Mr Stankovic contended that the whole of his share of the proceeds of the sale of the Kellyville Property was protected money. It was submitted that, in so far as the funds contributed for the purchase of 79 Terry Road in the name of Iron Base came from the Compensation Moneys, the whole of the proceeds of sale of 79 Terry Road, apart from the loan from the Bank, should be treated as being fairly attributable to the compensation. That gave rise to two questions. 8 Iron Base was jointly owned by Mr Stankovic and his wife. The first question is whether the contribution of the Compensation Moneys for the purchase of 79 Terry Road in the name of Iron Base should be treated as a gift to Mr Stankovic's wife on the basis of a presumption of advancement. No evidence was adduced to rebut such a presumption. It is clear, therefore, that, while Mr Stankovic provided funds to Iron Base for the purchase of 79 Terry Road, there was no constructive trust in his favour in respect of the interest in Iron Base acquired by his wife. 9 The second question concerns the absence of evidence as to the financial affairs of Iron Base, which has long since been liquidated and struck off. There is no evidence as to the financial affairs of Iron Base. Submissions were made on behalf of an unsecured creditor of Mr Stankovic's estate that, in those circumstances, s 116(4) could not be called in aid of a conclusion that any part of the proceeds of realising the Kellyville Property could fairly be attributed to the Compensation Moneys. It was contended that there was no material upon which it could be concluded that Mr Stankovic is entitled to any payment under s 116(4) because, in the absence of evidence as to the financial affairs of Iron Base, no inference could be drawn in favour of Mr Stankovic to the effect that the proceeds of the sale of 79 Terry Road were in any way attributable to the part of the purchase price provided to Iron Base by Mr Stankovic from the Compensation Moneys. 10 In considering whether s 116(4) applies to any part of the proceeds of the realisation of the Kellyville Property, a fair assessment needs to be made of the part that the payment of the Compensation Moneys played in the achievement of the final realisation. That task may require an apportionment or dissection of expenditure, or the making of allowances or adjustments, to arrive at a sum that fairly reflects the significance of the expenditure of the Compensation Moneys in relation to the overall expenditure in the acquisition of the Kellyville Property (Re Manivilovski; ex parte Official Trustee in Bankruptcy (1993) 45 FCR 358 at 364). 11 However, there is no evidence or suggestion that Iron Base engaged in any other activity other than the purchase, holding and sale of 79 Terry Road. Absent such evidence, I consider that the appropriate conclusion to be drawn is that the proceeds of realising 79 Terry Road can fairly be attributed to the funds that were provided to Iron Base by Mr Stankovic from the Compensation Moneys. However, one half of the amount provided should be presumed to have been the subject of a gift by way of advancement to Mr Stankovic's wife. The part of the proceeds of the sale of 79 Terry Road attributable to that half cannot be treated as attributable to the Compensation Moneys. The part of the proceeds of that sale that can be attributed to the funds that were provided to Iron Base that were not the subject of the presumption of advancement to Mr Stankovic's wife, on the other hand, can fairly be attributed to the Compensation Moneys. It follows that, in so far as the proceeds of the realisation of 79 Terry Road were applied in the acquisition of the Kellyville Property, part of the proceeds of the realisation of the Kellyville Property can fairly be attributed to the Compensation Moneys. 12 The appropriate approach in order to determine what part of the proceeds of realising the Kellyville Property can fairly be attributed to the Compensation Moneys is pro-rata apportionment. Such an apportionment entails the following steps: (a) The purchase price for the Kellyville Property, apart from the loan from the Bank, was provided as to $255,826 from the proceeds of the sale of 79 Terry Road, and as to $491,813 from the proceeds of the sale of 77 Terry Road. (b) $255,825.54 represents 30.10 per cent of $850,000, the total price paid for the Kellyville Property. (c) Of the $255,825.54 that was provided from the proceeds of the sale of 79 Terry Road, 50 per cent can fairly be attributed to the Compensation Moneys. (d) Thus, of the total purchase price paid for the Kellyville Property of $850,000, $127,912.82 can fairly be attributable to the Compensation Moneys. (e) $127,912.82 represents 15.05 per cent of the total purchase price of $850,000 paid for the Kellyville Property. (f) On that basis, 15.05 per cent of the net proceeds from the realisation of the Kellyville Property can fairly be attributed to the Compensation Moneys. 13 The Trustees have expended time and effort and have incurred costs in realising the one half of the proceeds of the sale of the Kellyville Property that do not belong to Mr Stankovic's wife. Those costs include the costs of participating in this proceeding in order to determine the entitlement of the respective parties to the proceeds of the realisation of the Kellyville Property. The costs of the Trustees in realising the Kellyville Property and the cost of the Trustees in relation to the determination of that entitlement should be treated as a charge on the one half of the proceeds of the realisation of the Kellyville Property that do not belong to Mr Stankovic's wife. 14 On 6 March 2012, the Trustees made a decision that no protected money formed part of the outlay for the Kellyville Property so as to require any payment to Mr Stankovic under s 116(4) of the Act. This proceeding was commenced by Mr Stankovic by application filed on 3 May 2012. Mr Stankovic claimed an order that the decision of the Trustees of 6 March 2012 be set aside, a declaration that Mr Stankovic's interest in the Kellyville Property was purchased substantially with protected money and an order that the proceeds of the sale of the Kellyville Property do not vest in the Trustees and do not constitute property divisible amongst the creditors of Mr Stankovic's bankrupt estate. 15 The Trustees filed a cross claim in which they sought declarations as to the various entitlements to the proceeds of the realisation of the Kellyville Property. In the course of the argument of the cross-claim, the Trustees conceded that their decision would not have been made had there been provided to the Trustees, as they requested, information concerning the dealings with the properties described above that support the conclusion just reached. The Trustees accept, therefore, that their decision of 6 March 2012 should be set aside. 16 Accordingly, there should be an order that the decision of the Trustees made on 6 March 2012 be set aside. In lieu of that decision, there should be a decision that the proceeds of the realisation of the Kellyville Property be distributed as follows: One half of the net proceeds of the realisation of the Kellyville Property should be paid to Mr Stankovic's wife. The Trustees' costs and remuneration reasonably incurred in realising the Kellyville Property and in conducting the cross-claim in this proceeding should be charged on the other half of the net proceeds of the realisation of the Kellyville Property. 30.10 per cent of the balance of the other half of the proceeds of the realisation of the Kellyville Property, after deducting such costs and remuneration, should be paid to Mr Stankovic under s 116(4). 69.9 per cent of that balance should be distributed to the unsecured creditors of Mr Stankovic's bankrupt estate. There should be declarations accordingly. 17 The determination of the cross-claim has resolved the issues raised by the original application. Mr Stankovic has been partially successful, in that the Trustees' decision should be set aside. However, he has not been totally successful. In the circumstances, apart from orders and declaration along the lines indicated above, there should be an order that Mr Stankovic's application and the Trustees' cross-claim be otherwise dismissed. 18 Had Mr Stankovic provided to the Trustees the information that was provided after the commencement of the proceeding, it is highly unlikely that the decision made by the Trustees on 6 March 2012 would have been made in those terms. There is every reason to conclude that the Trustees would have reached the conclusion reflected in the declarations just proposed. In the circumstances, there should be no order as to the costs of the proceeding or the cross claim. 19 There has been litigation between Mr Stankovic and his wife in the Family Court of Australia. In the course of that litigation, the Trustees apparently gave undertakings to the Family Court not to distribute any part of the estate without the leave of the Family Court or the Federal Court. Subject to the interests of Mr Stankovic's former wife in relation to the Family Court proceedings being protected, there is no reason why the Trustees should continue to be bound by an undertaking not to administer the bankrupt estate. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.