Hawkins, Re; Ex Parte Worrell

(1996) 71 FCR 371

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(Judgment by: SPENDER J) Court:

Judge:
SPENDER J

Subject References:
BANKRUPTCY
administration of property
property available for payment of debts
property divisible amongst creditors
after acquired property
income of bankrupt
right of bankrupt to retain moneys paid pursuant to a maintenance agreement under the Family Law Act 1975
whether "property of the bankrupt" under s 5 Bankruptcy Act 1966
whether "income" under s 139L Bankruptcy Act 1966

Legislative References:
Bankruptcy Act 1966 L - Part VI Division 4B; 5; 116; 139
Family Law Act 1975 - 87A

Case References:
Re Buckle - (1969) 15 FLR 460
Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies - (1993) 42 FCR 571
In Re Landau; Ex parte Trustee - [1934] Ch 54
In re Tennant's Application - [1956] 1 WLR 87
Nette v Howarth - (1935) 53 C.L.R. 55
Re Blair and Inspector General in Bankruptcy - 34 ALD 258
The Commissioner of Taxation of the Commonwealth of Australia v The Myer Emporium Ltd - (1987) 163 CLR 199
Weissova v The Official Trustee in Bankruptcy - (1986) 12 FCR 106

Hearing date: 23 SEPTEMBER 1996
Judgment date: 20 DECEMBER 1996

BRISBANE

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Judgment by:
SPENDER J

This is an application filed on 5 September 1996 by Ivor Worrell, the trustee of the estate of Connie Hawkins (also known as Connie Murray) ('the trustee') for a declaration that payments in the sum of $100.000.00 made pursuant to a maintenance agreement dated 7 February 1995 between Ms Hawkins and her former husband, John Watson Hawkins, are property divisible among the creditors.

Clause 2 of the deed provided:

"The Husband and Wife agree that the Husband shall pay to the Wife a total sum of $200,000.00 as follows:-

(a)

an amount of $50,000.00 on or before 30 June 1995;

(b)

an amount of $50,000.00 on or before 31 December 1995;

(c)

an amount of $50,000.00 on or before 30 June 1996;

(d)

an amount of $50,000.00 on or before 31 December 1996. "

A sequestration order was made against Connie Hawkins on 8 February 1996 and Mr Worrell became the trustee of her estate on that day. The two payments made pursuant to the deed before 30 June 1995 and before 31 December 1995 preceded the bankruptcy.

The question presently in issue is whether the third and the fourth instalments, which became payable after the bankruptcy, could be regarded as property divisible amongst creditors pursuant to the provisions of the Bankruptcy Act 1966 ('the Act'), or payments assessable under the income contribution provisions pursuant to Part VI Division 4B of the Act and, if so, on what basis they should be assessed.

It is asserted on behalf of the trustee that the final two payments due in June and December 1996 are not payments of income but capital sums paid in lieu of maintenance and constitute property divisible amongst the creditors. The trustee claims to be entitled to receive the final two payments in the total amount of $100,000.00. The first payment due on 30 June 1996 has in fact been made and the sum of $50,000.00 is held in a trust account under an agreement between the trustee and the solicitor acting for both Mr Hawkins and his former wife.

Clause 27 of the deed provided:

"The Husband and Wife agree that this is a Maintenance Agreement to which Section 87A of the said Act applies and the proportion of the value of the property retained by the Husband for his maintenance is $10,000.00 [and] that the proportion of the value of the property transferred pursuant to the Agreement to the Wife for her maintenance is $100.000.00."

Clause 29 of the deed provided:

"The Wife agrees that at the date of the approval of this Deed and having regard to the terms and effect of this Deed, she is able to support herself without the assistance of any income tested pension, allowance or benefit and that she has no entitlement to claim or receive maintenance for herself from the Husband."

Section 116(1) of the Act provides that:

"Subject to this Act:

(a)

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;

...

is property divisible amongst the creditors of the bankrupt."

Section 116(2) of the Act provides exceptions to the general proposition but there is no exception in relation to property obtained pursuant to a matrimonial settlement.

Counsel for the trustee submitted that the present right to receive money in the future is a chose in action constituting property under the definition of property in s 5 of the Act. It was contended on behalf of the bankrupt that the first two $50,000.00 payments made before the bankruptcy were in respect of the property portion of the settlement, and the two later payments the subject of the present proceedings are in respect of the maintenance proportion referred to in cl 27.

Section 87A of the Family Law Act 1975 provides:

"87A(1)

Where:

(a)

a maintenance agreement (whether or not registered under section 86 or approved under section 87) has the effect of requiring:

(i)

payment of a lump sum, whether in one amount or by instalments; or

(ii)

the transfer or settlement of property; and

(b)

the purpose, or one of the purposes, of the payment, transfer or settlement is to make provision for the maintenance of a party to a marriage or a child or children of a marriage;

the agreement shall:

(c)

state that the agreement is an agreement to which this section applies; and

(d)

specify:

(i)

the person or persons for whose maintenance provision is made by the payment, transfer or settlement; and

(ii)

the portion of the payment, or the value of the portion of the property, attributable to the provision of maintenance for that person or each of those persons, as the case may be.

(2)

Where a maintenance agreement of a kind referred to in paragraph (1)(a):

(a)

does not state that the agreement is an agreement to which this section applies; or

(b)

states that the agreement is an agreement to which this section applies, but does not comply with paragraph (1)(d);

any payment, transfer or settlement of a kind referred to in paragraph (1)(a), that the agreement has the effect of requiring, shall be taken not to make provision for the maintenance of a party to the relevant marriage or of a child of the relevant marriage."

Ms Hawkins deposes in an affidavit that the first payment of $50,000.00 was utilised by her to reduce her indebtedness to the National Australia Bank in relation to housing and business loans that were secured over her house property at 93 Hume Street, Toowoomba. She says that this amount was paid to the National Australia Bank at the request of the bank to create sufficient equity in a house to secure the business loan. The home has after the commencement of her bankruptcy, been sold by the trustee and the surplus proceeds from the sale of the house property, after payment of the secured amount owing to the National Australia Bank, were paid to the trustee for the benefit of the creditors of her estate.

Ms Hawkins says that the second payment of $50,000.00 was paid directly to various creditors of a Dymocks franchise operated by Ms Hawkins in Toowoomba, with the exception of an amount of $1,770.00 which was spent for plants and landscaping of the property at 93 Hume Street, Toowoomba.

That the payments were made as Ms Hawkins deposes is confirmed in an affidavit by Mr Hawkins. Counsel for the trustee submitted that it is irrelevant whether the money when received was applied or is intended by the bankrupt to be applied for one purpose or another. It was submitted that the payments were not payments of income but capital sums in lieu of a right to future maintenance, and as such the property is divisible amongst her creditors. Reliance is placed on Re Buckle (1969) 15 FLR 460.

In that case, s 63 of the Public Service Act 1958 (Vic) provided that in certain circumstances an employee was entitled to be granted by the Public Service Board long service leave with pay, and that where an employee dies, he shall be deemed to be entitled to be granted by the Board certain long service leave with pay, and the Board shall grant to the legal personal representative of the deceased employee, a lump sum payment in lieu of long service leave calculated by reference both to the employee's years of service and his rate of pay.

Gibbs J (as he then was) held that a lump sum payment in lieu of long service leave payable under s 63 of that Act to the legal personal representative of the deceased employee is a capital receipt and, accordingly, is not income within the meaning of s 131(2) of the Bankruptcy Act. His Honour held that the right to long service leave which a bankrupt employee is deemed to have had before his death under s 63 of the Act with pay, and which carries with it the incident that pay in lieu shall be granted to the legal personal representative of the deceased employee, is property acquired by the bankrupt after the commencement of his bankruptcy and before his discharge and, accordingly, the lump sum payment payable to the legal personal representative of the bankrupt employee is property divisible amongst his creditors under s 116(1)(a) of the Act. However, the trustee in bankruptcy is not the legal personal representative of the bankrupt employee and has no right to demand payment from the Board.

At 464 Gibbs J said:

"The question that arises whether the amount of $1,474.10 which under s. 63(6) of the Public Service Act 1958 (Vic.) is payable to the legal personal representative of the deceased is properly regarded as 'income of the bankrupt' in relation to which the Court may make an order under s. 131(2). I shall later deal with the question whether the sum is the property of the bankrupt, but whatever the answer to that question it seems to me that the payment is not income. It is true that s. 63(6) of the Public Service Act describes the amount as 'pay'. However the amount is not paid periodically, but once and for all in a lump sum. In Nette v Howarth (1935) 53 C.L.R. 55 the High Court held that a lump sum to which a bankrupt became entitled under s. 38 of the Superannuation Act , 1916-1930 (N.S.W.), was not 'pay, pension, salary, emoluments, profits, wages, earnings or income' within the provisions of s. 101 of the Bankruptcy Act 1924-1933, the section replaced by the present s. 131(2). At p. 65 Dixon J. (as he then was) said: 'The words of s. 101 refer to the character in which money is paid or received. The character in which an accumulated fund is received is not determined by the source of the accumulations. The sum now in question is not in truth even an accumulation of income, salary or the like. It is a sum payable pursuant to statute, which is ascertained by a calculation of the amount contributed in the past from income by deductions from salary. It comes into the hands of the retiring contributor simply as money. It is, as it appears to me, a capital receipt.'

In the present case also the sum in question is not an accumulation of income, but is a sum payable pursuant to statute, calculated by reference both to the years of service and the rate of pay of the deceased employee and it is paid and received simply as a lump sum. In my opinion it is a capital receipt, and s 131(2) of the Bankruptcy Act 1966-1968 has no application to it."

It was submitted on behalf of Ms Hawkins that the last two payments, to the extent that they are for maintenance, are "income" for the purposes of Division 4B of Part VI of the Act. That Division constitutes a code, it is submitted, as to the treatment in bankruptcy of income of the bankrupt. Insofar as the payments are income, the trustee's rights are exhaustively defined by its provisions.

In Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies (1993) 42 FCR 571, French J was concerned with the repeal of s 131 of the Bankruptcy Act 1966 by the Bankruptcy Amendment Act 1991, which Act inserted Division 4B into the Act. That Division establishes a liability on the part of a bankrupt who derives income during the bankruptcy to contribute towards her estate one half of any excess of her income over a threshold amount, but before a liability to contribute arises, a process of assessment of the bankrupt's income and contributions was required to be undertaken by the trustee of her estate. His Honour held that, despite the absence of an equivalent of the repealed s 131 of the Act, the scheme of Division 4B rests upon the continuing assumption that after acquired income of a bankrupt does not vest in the trustee, and the comprehensive scheme embodied in Division 4B, which approaches a code for dealing with after acquired income of a bankrupt, is inconsistent with the application of ss 58 and 116 of the Act to after acquired income.

Section 139L of the Act defines "income" in these terms:

"In this Division:

'income', in relation to a bankrupt, means any amount derived by the bankrupt that is income according to ordinary usages and concepts, and includes:

(a)

an annuity or pension paid to the bankrupt from a provident, benefit, superannuation, retirement or approved deposit fund; and

(b)

a payment to the bankrupt in consequence of a termination of any office or employment; and

(c)

an amount of annuity or pension received by the bankrupt under a policy of life insurance or endowment insurance; and

(d)

an amount received by the bankrupt as a beneficiary under a trust to the extent to which the amount was paid out of income of the trust; and

(e)

the value of a benefit that is, or if it were provided by an employer would be, a fringe benefit for the purposes of the Fringe Benefits Tax Assessment Act 1986, being that value as worked out in accordance with the provisions of that Act but subject to any modifications of those provisions made by the rules; and

(f)

the amount of any money, or the value of any other consideration, received by a person other than the bankrupt from another person as a result of work done or services performed by the bankrupt, less any expenses (other than expenses of a capital nature) necessarily incurred by the first-mentioned person in connection with the work or services;

but does not include:

(g)

an amount that is not income for the purposes of the Social Security Act 1991 because of subsection 8(8) of that Act (other than paragraph (a), (b), (h), (ha), (j), (k), (ka), (m), (z), (za) or (zb) of that subsection); or

..."

In In Re Landau; Ex parte Trustee [1934] Ch 549, maintenance ordered to be paid by the Divorce Court to the bankrupt during the joint lives of herself and her former husband was held to be income within the meaning of s 51(2) of the Bankruptcy Act 1914, which section commenced:

"Where a bankrupt is in receipt of salary or income...the court, on the application of the trustee, shall from time to time make such order as it thinks just for the payment of the salary, income...or any part thereof, to the trustee, to be applied by him in such manner as the court may direct."

In In re Tennant's Application [1956] 1 WLR 874, monthly payments of £ 50 in consideration for which the wife agreed to accept such provisions in satisfaction of all rights or claims in respect of maintenance to which she would otherwise be entitled to enforce under the provisions of the Judicature (Consolidation) Act 1925, was held to be income within the meaning of s 51(2) of the Bankruptcy Act 1914.

In Nette v Howarth (1935) 53 CLR 55, the High Court held that a payment pursuant to s 38 of the Superannuation Act 1916-1930 (NSW) as a lump sum equal to the contributions paid by him under that Act was a capital receipt which vested in the Official Receiver. Dixon J at 65 said:

"'Profits', 'earnings' and 'income' are wide words. They cover the fruits of labour and much more besides. For example, 'income' in the analogous sec. 51(2) of the English Bankruptcy Act 1914 includes maintenance payable under an order in divorce ( In re Landau; Ex parte Trustee [1934] Ch. 549. Decisions interpreting expressions reproduced in the Australian section which occur in sec. 51 and corresponding previous British enactments will be found in that case and in Hollinshead v. Hazleton [1916] 1 A.C. 428. But the English and Australian provisions alike appear to be directed at revenue receipts. Indeed, they are reminiscent of the rule long established in bankruptcy, that the personal earnings of a bankrupt do not pass to his trustee except to the extent that they are not required for the support of himself and his family.

The words of sec. 101 refer to the character in which money is paid or received. The character in which an accumulated fund is received is not determined by the source of the accumulations. The sum now in question is not in truth even an accumulation of income, salary or the like. It is a sum payable pursuant to statute, which is ascertained by a calculation of the amount contributed in the past from income by deductions from salary. It comes into the hands of the retiring contributor simply as money. It is, as it appears to me, a capital receipt."

The Administrative Appeals Tribunal in Re Blair and Inspector General in Bankruptcy 34 ALD 258 concluded at 263 that child maintenance payments pursuant to orders of the Family Court fell within the terms of s 139L of the Act as income of the bankrupt, as being payment pursuant to para (j) of s 8(8) of the Social Security Act, being one of the paragraphs in the 'other than' category at the foot of the definition of 'income' in s 139L of the Act.

The payments in question here are non-recurring. That quality does not necessarily exclude them from the concept of "income" in s 139L of the Act.

'Income, according to ordinary usages and concepts' in s. 139L of the Act does not necessarily require recurrence or periodicity. In The Commissioner of Taxation of the Commonwealth of Australia v The Myer Emporium Ltd (1987) 163 CLR 199, Mason ACJ, Wilson, Brennan, Deane and Dawson JJ said at 218:

"If the lender sells his mere right to interest for a lump sum, the lump sum is received in exchange for, and ordinarily as the present value of, the future interest which he would have received. This is a revenue not a capital item - the taxpayer simply converts future income into present income: see Commissioner of Internal Revenue v P G Lake Inc. (1958) 356 U.S. 260, at pp. 266-267. By a transaction consisting in the making of a loan and a sale of the right to interest on the money lent, the lender acquires at once a debt and the price which the sale of the right has fetched. The price of the right is the lender's compensation for being kept out of the use and enjoyment of the principal sum during the period of the loan and, like the interest for which it is exchanged, it is a profit. It is immaterial that the lender receives the profit not from the borrower but from the other party to the transaction, and it is immaterial that the profit is received immediately and not over the period of the loan. "

Section 139L of the Act contemplates that some lump sums in the hands of a bankrupt will be income: see s 139L(b) and 139L(d) of the Act.

It is necessary to identify the 'character in which the money is paid or received'.

In Weissova v The Official Trustee in Bankruptcy (1986) 12 FCR 106 at 111, Beaumont J adopted the words of Dixon J from Nette v Howarth (supra) earlier set out.

The character of maintenance is money for the provision of current needs. It is conventionally paid periodically while the need for it exists. But maintenance can be provided for by the payment of a lump sum in lieu of other rights. Such an arrangement does not destroy the fundamental character of the payments of maintenance as payments in the nature of income to meet recurrent needs.

It is consistent with 'the common law of bankruptcy' that an entitlement to payment on account of maintenance should be treated as income.

To the extent that the latter two payments are payments for the maintenance of Ms Hawkins, in my opinion they are income for the purposes of Part VI Division 4B of the Act.

Notwithstanding that the first payment was applied by Ms Hawkins in a way consistent with it being a payment by way of property settlement, and notwithstanding that the same might be said (but with less conviction) with respect to the second payment, it seems to me that it is not possible to conclude that the first two payments made under the agreement were payments in satisfaction of her entitlement as to property and the last two payments were in respect of her maintenance. Equally, one cannot say the reverse.

It seems to me that it was the intention of the parties in executing the deed that one half of the sums to be paid pursuant to it were in respect of the property rights of Ms Hawkins and one half in respect of her claims as to maintenance. In those circumstances, it seems to me that of the $100,000.00 to be paid pursuant to the agreement subsequent to her bankruptcy, $50,000.00 of it would constitute property of the bankrupt within s 5 of the Act and $50,000.00 of it is provision for her maintenance, which in my opinion is 'income' within s 139L of the Act. I will make declarations to that effect.