FEDERAL COURT OF AUSTRALIA
Lockwood v Vince [2007] FCA 1946
BANKRUPTCY–
failure to disclose income – whether payments to a bank account over
which the bankrupt has no control are income – whether trustee may rely
on evidence not referred to in notice of objection to discharge –
withdrawal of notice of objection
WORDS AND PHRASES – income
Bankruptcy Act 1966 (Cth) ss 5, 139L, 139U, 149A, 149C, 149D
Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589
Commissioner of Taxation (Cth) v Myer Emporium Ltd (1987) 163 CLR 199
Cummings v Claremont Petroleum NL (1996) 185 CLR 124
Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47
James v Oxley (1939) 61 CLR 433
National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251
Prentice v Wood (2002) 119 FCR 296
Re Hall (1994) 14 ACSR 488
Scott v Federal Commissioner of Taxation (1966) 117 CLR 514
Squatting Investment Co Ltd v Federal Commissioner of Taxation (1953) 86 CLR 570
VID 791 of 2007
FINKELSTEIN J
7 DECEMBER 2007
MELBOURNE
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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VID 791of 2007
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BETWEEN:
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DAVID NEIL LOCKWOOD
Applicant
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AND:
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PETER ROBERT VINCE (AS TRUSTEE OF THE PROPERTY OF DAVID NEIL LOCKWOOD, A BANKRUPT)
Respondent
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FINKELSTEIN J
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DATE OF ORDER:
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7 DECEMBER 2007
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WHERE MADE:
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MELBOURNE
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THE COURT ORDERS THAT:
2. The costs of this application be reserved.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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VID 791 of 2007
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BETWEEN:
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DAVID NEIL LOCKWOOD
Applicant
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AND:
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PETER ROBERT VINCE (AS TRUSTEE OF THE PROPERTY OF DAVID NEIL LOCKWOOD, A BANKRUPT)
Respondent
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JUDGE:
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FINKELSTEIN J
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DATE:
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7 DECEMBER 2007
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PLACE:
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MELBOURNE
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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.
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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.
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Associate:
Dated: 7 December 2007
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Counsel for the Applicant:
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G T Bigmore QC
M J Galvin
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Solicitor for the Applicant:
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Madgwicks
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Counsel for the Respondent:
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P Cawthorn
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Solicitor for the Respondent:
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Serry White & Co
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Date of Hearing:
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19 and 20 November 2007
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Date of Judgment:
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7 December 2007
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