Edelsten Re Donnelly

(1988) 18 FCR 434

---

(Judgment by: Burchett J)

Re: Geoffrey Walter Edelsten; Max Christopher Donnelly as Trustee of the Bankrupt Estate of Geoffrey Walter Edelsten
And: Geoffrey Walter Edelsten; Health Insurance Commission and Deputy Commissioner of Taxation

Court:

Judge:
Burchett J

Subject References:
Bankruptcy

Judgment date: 30 November 1988

---

Judgment by:
Burchett J

These reasons form yet another chapter in the complicated story of the litigious war between Dr. Edelsten and the Commissioner of Taxation, in which the trustee of Dr. Edelsten's bankrupt estate has from time to time wavered between a stance resembling armed neutrality and combatant status. On 10 November 1988 , I announced my decision that s.118 of the Bankruptcy Act 1966 applied to certain moneys received by the Commissioner of Taxation from the Health Insurance Commission (being "bulk-billed" medical fees) as a result of the attachment under s.218 of the Income Tax Assessment Act 1936 of debts due by the Commissioner to Dr. Edelsten. Section 118(4) of the Bankruptcy Act provides:

"Where-

(a)

a creditor has, in pursuance of sub-section (1), paid to the trustee of the estate of a bankrupt the proceeds of the sale of property or other moneys that were received as a result of execution having been issued by him, or on his behalf, against property of the bankrupt or of the attachment by him, or on his behalf, of a debt due to the bankrupt; and

(b)

that property or debt would not have been property divisible amongst the creditors of the bankrupt if the bankrupt had become a bankrupt immediately before the execution was issued or the debt was attached, as the case may be,

the trustee shall pay those proceeds or other moneys to the bankrupt or to a person authorized by the bankrupt in writing for the purpose."

As I had earlier held that the moneys representing the fees earned by Dr. Edelsten in his medical practice, paid by the Health Insurance Commission pursuant to its "bulk billing" arrangements, constituted income of the bankrupt (Knight v. Deputy Commissioner of Taxation (NSW) (1987) 79 ALR 347 at 354 -355; cf. Nette v. Howarth (1935) 53 CLR 55 ; Federal Commissioner of Taxation v. Official Receiver (1956) 95 CLR 300 at 316, 322), s.118(4) has the effect of entitling the bankrupt, or a person authorized by him in writing, to receive the moneys payable under s.118(1) by the Commissioner of Taxation to the trustee: s.131(1). But this entitlement is subject to the power of the court to make orders in respect of income under s.131(2), which extends to deferred income earned prior to bankruptcy though received after it: Nette v. Howarth (supra) at 60, 68.

The question now before the court is whether an order should be made in respect of moneys to be received by the trustee, in consequence of my earlier ruling as to the effect of s.118(1), from the Commissioner of Taxation or directly from the Health Insurance Commission. This question is confined to amounts which were earned prior to the sequestration order, there being no issue concerning current income. In respect of that, I have already made by consent an order that, until further order, the bankrupt contribute to his estate 25 per centum of his income whilst such income is greater than $750 per week.

The figures are in doubt, but not presently in dispute. What I mean by that cryptic statement is that the parties have co-operated to compile figures showing just over $404,000 as due, nearly half of it from the Commissioner of Taxation, and the balance from the Health Insurance Commission; but that the Commission has very recently discovered, as it thinks, an error in its assessments of payments due, possibly of the order of $70,000. Until it clarifies its position, there must be a shadow of uncertainty cast over the figures.

Another complicating factor is the position, in relation to Dr. Edelsten, of the company Rylejazz Pty Limited (Rylejazz), by which he is now employed. Dr. Edelsten has no interest in this company, the shares in which are owned beneficially by an accountant with long experience in the organization of medical practices, Mr. K.J. Thurtell. I refused Rylejazz leave to intervene in this application. It attempted to do so only at the eleventh hour, and even then without formulating any precise claim or providing any evidence. In those circumstances, I considered it should be left to the remedy of such independent proceedings against the trustee as it might choose to bring.

However, Dr. Edelsten himself gave evidence concerning his contract with the company, and called Mr. Thurtell in his case. From this evidence, it appears that Rylejazz, as a commercial venture, took over from 1 February 1988 the leases of the medical centres where Dr. Edelsten practises medicine, paying about $3600 in respect of outstanding rent, and entering into an agreement with Dr. Edelsten, as well as agreements with some forty-odd other doctors practising at the centres. On 1 April 1988 , after the annulment of Dr. Edelsten's bankruptcy upon his debtor's petition, and the making of a sequestration order against him upon a creditor's petition, a fresh agreement was concluded between Rylejazz and Dr. Edelsten. By that agreement, Rylejazz has, since then, been entitled to all fees earned by Dr. Edelsten, to whom it has paid a salary of $2000 per week, less certain deductions. Rylejazz's entitlement, according to its agreement with Dr. Edelsten, includes "ALL the outstanding Medicare money which is currently subject to court proceedings;" but that must be understood as subject to the rights of the trustee in bankruptcy, or there would be a collision with the provisions of the Bankruptcy Act. It may be accepted that a medical practitioner's current income may be measured, where fees in respect of treatment given by him are payable to a service company, by what the company pays the practitioner, and not by the gross fees: see Re McLachlan (1975) 8 ALR 162 at 164; Lyford v. Levit (1984) 2 FCR 264 at 265; In re Shine. Ex parte Shine [1892] 1 QB 522 . But that does not mean that a bankrupt can effectively bargain away an existing right to receive moneys already earned, so as to deprive his trustee of the statutory rights preserved by s.131 of the Bankruptcy Act.

I should note here that the evidence discloses no claim by the previous service companies to any priority over the claim of the trustee, nor did they seek to maintain any charge or other right in equity in respect of the moneys payable by the Health Insurance Commission as against the rights of the Commissioner of Taxation pursuant to the notices served under s.218 of the Income Tax Assessment Act (cf. Deputy Federal Commissioner of Taxation v. Lai Corporation Pty Ltd 86 ATC 4085 ).

A term of the agreement between Rylejazz and Dr. Edelsten envisages the payment by Rylejazz of "further legal expenses in respect of legal proceedings currently in existence excepting any family law court proceedings", but it may be this term leaves the content of the obligation unquantified. In any case, assuming it is presently enforceable in some amount, it may not survive a termination of the employment agreement in which it is contained. Other terms oblige Rylejazz, if it receives the moneys the subject of the present proceedings, to pay the previous service companies any amounts outstanding to them under the arrangements applicable at the time when the fees were earned.

Dr. Edelsten's affairs are frightfully tangled. Apart from the bankruptcy, he has very serious litigation pending in the Medical Tribunal, in the criminal courts, in the High Court of Australia, and probably also in the Court of Appeal division of the Supreme Court of New South Wales. Without objection, a letter from his solicitors was put into evidence, which showed he has already paid in excess of $150,000 in respect of committal proceedings and Medical Tribunal proceedings, and owes a further amount of nearly $25,000 to his solicitors. The solicitors estimate the costs of his trial, assuming a bill is filed for Dr. Edelsten's prosecution, and further proceedings in the Medical Tribunal and on appeal from it, including a High Court appeal if special leave is granted, are likely to total a sum of well over $200,000. Orders for costs are being sought against Dr. Edelsten in the Medical Tribunal in a sum approaching the same figure.

Dr. Edelsten, who appeared in person, and did so very capably, argued that the onus is on the trustee. This is correct, though there is an evidentiary onus borne by a bankrupt in respect of his reasonable requirements: Lyford v. Levit (supra) at 269. Dr. Edelsten put forward the legal expenses which he had incurred, and which he anticipated, as justification for the refusal of the trustee's application.

Counsel for the trustee accepted that it might turn out to be appropriate to allow part of the money to be used in meeting Dr. Edelsten's large legal expenses. But he contended the uncertainties which surround the areas of litigation in question (whether special leave will be granted by the High Court, whether a bill will be filed, what the Medical Tribunal will decide, and what appeals may follow, etc.) make it undesirable to attempt to assess the bankrupt's needs now. When particular needs become clear, he submitted the first step should be for the bankrupt to seek legal aid, or the assistance (which he has been promised in general terms) of his family or of Rylejazz. If none of these should satisfy all his requirements, counsel points to s.135(1)(j) of the Bankruptcy Act, which reads:

"The trustee may, with the permission of the creditors granted by resolution passed at a meeting of the creditors with the permission of the committee of inspection or with the leave of the Court, do all or any of the following things:-

...

(j)

make such allowance out of the estate as he thinks just to the bankrupt, the spouse of the bankrupt or the family of the bankrupt; and

..."

Were the trustee to refuse an application under s.135(1)(j), the matter could be brought before the court under s.178. Applications of this kind have been granted in appropriate cases: Clyne v. Deputy Commissioner of Taxation (1985) 61 ALR 487 ; Re Hepburn v. Dickens (Foster J., unreported, 18 October 1988 ). Those decisions offer some points of similarity to the circumstances of the expenditure proposed by the bankrupt in the present case. One aspect of the problem, which should not be overlooked, is that an allowance paid under s.135(1)(j) could be directed precisely to the area of the bankrupt's need, whereas any amount, permitted by the terms of an order made under s.131 to remain in the hands of Dr. Edelsten, will be subject to his agreement with Rylejazz. By that agreement, it will be liable to be handed over to the company. At the same time, Dr. Edelsten has, it appears, incurred substantial expenses in recent months, quite apart from the litigation in which he is entangled, and these have been met by Rylejazz. Though significant, those expenses have not, to this point, prevented the company making a profit from Dr. Edelsten's services. The medical fees he earns return it, clear of outgoings, about $1700 per week, except when Mr. Thurtell chooses to divert him to work associated with the setting up of new medical centres or other activities which may conceivably bring prodigious returns.

These considerations may go several ways, depending on where the balance tilts. On the one hand, if Dr. Edelsten is unable to refund at least some part of the expenses paid on his behalf by Rylejazz, it may be suggested he may lose his employment. On the other hand, to secure repayment to Rylejazz may merely unreasonably prefer it to other creditors, if Dr. Edelsten's value to the company is in reality unimpaired.

In balancing the various factors, importance should be attached both to the significant current earnings of Dr. Edelsten and to the fairly substantial contribution he is making from those earnings to his estate. It should also be remembered that, if it had not been for the s.218 notices, the moneys now in question would have been received, and would probably have been represented in the estate by assets, or by a reduction of the bankrupt's debts. This is not a decisive factor, since the legislature has specifically provided, by s.118(4), against any automatic retention of the money by the trustee, but it is a factor bearing on the exercise of discretion, to the extent that I have a broad discretion.

However, Lyford v. Levit (supra, at 270) and the authorities which preceded it, make the discretion depend essentially on this court's view of what is reasonably required for the needs of the bankrupt. Beyond that, perhaps liberally assessed (see, per Lord Esher M.R., in In re Shine (supra) at 532), the trustee should receive an order.

I have come to the conclusion that the bankrupt has shown a present need for a substantial sum in respect of his legal expenses, which I assess, on the evidence, at $30,000, but I think that in all the circumstances, and particularly having regard to the terms of the agreement with Rylejazz, it is more appropriate he should receive this sum under s.135(1)(j) than under s.131. Should he be able to establish a further need in respect of legal expenses in the future, over and above what can be provided by legal aid or by his family, it would be open to him to make a further application under s.135(1)(j). On such an application, the full circumstances, as then revealed by events, can be examined to see whether any further allowance is justified. That question cannot be prejudged, if only because what circumstances may unfold cannot be predicted.

For these reasons, if the trustee sees fit to make an application under s.135(1)(j) in respect of a lump sum allowance of $30,000 to meet legal expenses, to be disbursed as accounts for reasonable legal fees are submitted, I shall make an order under s.131 that the whole of the moneys payable by the Commissioner of Taxation to the trustee under s.118(1), together with all moneys to be received from the Health Insurance Commission in respect of fees earned prior to the making of the sequestration order, be paid to and received by the trustee for the benefit of the creditors, and I shall also make an order under s.135(1)(j) granting leave in respect of the provision of the sum of $30,000 as an allowance for legal expenses. I direct the trustee to bring in appropriate short minutes on a date to be fixed.