Case notes

Valder & Saklani [2021] FamCAFC 142

Issue

The effect, if any, of the second respondent’s discharge from bankruptcy and whether, after discharge s79A of the Family Law Act 1975 (Cth) should be construed so that only the trustee in bankruptcy had standing (the right to appear) or whether it is possible for both a creditor and the trustee to both be ‘a person affected by an order made by a court under section 79 in property settlement proceedings’ and, hence, ‘the’ person affected for s79A(1).

Background

In 2009 Ms Valder (the appellant) unsuccessfully sued Mr Saklani (the second respondent), seeking a declaration that she held an equitable interest in properties owned by him (the Suburb W properties) and the payment of equitable compensation. The claims were subsequently dismissed on appeal in 2012. However, in 2013 a successful appeal saw the matter remitted for assessment of appropriate equitable compensation. Later in 2013, the Family Court made consent orders dividing all property of Ms Saklani (first respondent) and Mr Saklani (second respondent). The effect was to transfer the second respondent’s interests in the Suburb W properties to the first respondent. Notice was not served on the appellant before that order was made.

In 2014, the Supreme Court found that the appropriate amount of equitable compensation to be paid by the second respondent to the appellant was $594,028, plus costs of the proceedings (in excess of $250,000). In 2016, the Federal Court of Australia gave the appellant leave pursuant to s58(3)(b) of the Bankruptcy Act 1966 (Cth) to bring proceedings in the Family Court.

In 2016, the appellant filed an Initiating Application in the Family Court of Australia seeking to set aside property settlement orders made by consent between the first respondent and the second respondent, who were married to each other at that time. The appellant asserted that she was an unpaid creditor of the second respondent and therefore, ‘affected by the orders’ for the purpose of s79A of the Family Law Act, entitled to apply to have the consent orders set side.

The application was dismissed at first as the second respondent had become bankrupt on 6 March 2015 and was discharged from that bankruptcy on 7 March 2018. The primary judge found that upon that discharge, the second respondent was released from the debt he owed the appellant, who thereby ceased to become a person affected by the consent orders.

Consideration

The court started by noting that the precise meaning of a word such as “creditor” may vary according to the proper construction of the particular provision in question. The label “creditor” may not always be assigned to a person who has all of the rights of a creditor attributed to them by law. The court concluded that, “for some purposes at least, a reference to a creditor in the Bankruptcy Act includes a creditor whose debt has been released by the operation of s153 of the Bankruptcy Act. They continue to be described as a creditor. It follows that the release of a debt, by way of the bankrupt being discharged from their bankruptcy, does not mean that their creditors cease to be “creditors” for all purposes, especially where the relevant statute points in a different direction.” [20-21]

The Court observed that since 2005, s79A(4) of the Family Law Act has provided that a creditor of a party is taken to be a person whose interests are affected by the order if the creditor may not be able to recover their debt because the order has been made. [23]

The Court also explained that s79A(5) of the Family Law Act does not give the trustee standing at the expense of a creditor and noted that the possibility of competing claims by a creditor and the trustee is avoided by the need for a creditor to obtain leave under s58(3)(b) of the Bankruptcy Act before proceedings can be taken under s79A of the Act.[39]

Where the Bankruptcy Act allows either a creditor with leave or the trustee to take proceeding under s79A of the Act, a sensible reading of s79A(4) and (5) would permit both to be regarded as a person affected. This conforms with the natural meaning of the words used in the subsections and the Explanatory Memorandum. [40]

The Court then considered the effect, if any, of the second respondent’s discharge from bankruptcy. The Court considered the effect of the discharge of the second respondent in 2018 and noted that the bankrupt estate continues until it is annulled because the debts have been paid in full, by court order or because the creditors have accepted a payment under a composition or arrangement. The implication is that even after discharge the appellant remains a creditor for several purposes and provisions of the Bankruptcy Act.

The Court rejected a contention based on utility; that the effect of any varied or substituted s79A order would be to revest property in the former bankrupt individual. The Court considered that is by no means the necessary outcome as an appropriate variation or substituted order could see the provision for the payment of those creditors, either directly or indirectly. [47]

The Court set out its reasoning justifying its conclusion briefly as follows:

So long as her right to receive a dividend remained on foot, the appellant remained a person affected by the consent orders. Similarly, the leave granted by the Federal Court remained. We see no reason at all to limit the word “creditor” in s58 of the Bankruptcy Act to a creditor whose debt has not been released by the operation of s153 of the Bankruptcy Act. That would unduly restrict the operation of the Bankruptcy Act for no good purpose.[45]

Decision

The appeal was successful and the case has been remitted for further hearing.

Ambrose v Badcock, in the matter of Badcock [2021] FCA 1647

The application concerned only one issue: whether income transferred to an interest-bearing bank account becomes an after-acquired property to which s58 and 116 of the Bankruptcy Act 1966 (Cth).

Background to proceedings

The application was heard by a single judge (White J) in the General Division of the Federal Court of Australia (in the South Australia registry) and decided on the papers.

The applicant, Mr Ambrose was a trustee in bankruptcy. The respondent was an undischarged bankrupt (Mr Badcock). Mr Badcock became bankrupt on 21 December 2001 and was not discharged from his bankruptcy because he never provided his Statement of Affairs to the Trustee.

There was a history of litigation between Mr Badcock and the Trustee concerning the sequestration order made against Mr Badcock and the appointment of the Trustee. White J considered Mr Badcock’s bankruptcy and the Trustee’s appointment had been satisfactorily determined in earlier proceedings.

The Trustee applied for a declaration that certain assets of Mr Badcock were after-acquired property to which the Bankruptcy Act refers, together with consequential relief. Mr Badcock opposed that application.

The Trustee and Mr Badcock each prepared written submissions and affidavits and waived their right to cross-examine the makers of the affidavits or object to the contents.

Property in contest

In October 2018, Mr Badcock received $73,433.21 into a ‘Complete Freedom’ account (opened by himself) at the Bank of South Australia. Mr Badcock received the money from a former employer in response to a claim for underpayment of wages made by Mr Badcock.

On 15 August 2019, Mr Badcock transferred $73,000 from the Complete Freedom account to an ‘Incentive Saver’ account which was also held by him at the same bank. The Incentive Saver account terms paid interest to Mr Badcock. Upon being moved from one account to the other, the funds were ‘frozen’ by the bank.

The Trustee (through the Official Receiver) issued a notice to the bank requiring payment of $31,279 to the bankrupt estate as income contributions under s139ZL of the Bankruptcy Act. The bank made that payment to the estate and this left a balance of $44,937.31 in the Incentive Saver Account.

Next, the Trustee filed a statement of claim seeking (among other things) a declaration that the balance of funds remaining in the Incentive Saver account (plus accrued interest) represented after-acquired property which vested in the bankrupt estate and was divisible amongst Mr Badcock’s creditors.

Considerations in decision

The Trustee’s submissions relied on the judgment of the Full Court (Edmonds, Gordon and Beach JJ) in Di Cioccio v Official Trustee in Bankruptcy [2015] FCAFC 30; (2015) 229 FCR 1 at [6]-[23] to say that the bankrupt individual’s act of moving funds to an account which paid interest was essentially creating an investment and as a consequence, the funds became an after-acquired property which vests in the bankrupt estate. The argument follows the reasoning from Di Cioccio where the court held a bankrupt individual’s use of after-acquired income to purchase shares became a form of property which would vest in the bankrupt estate.

Mr Badcock’s defense was that the funds remaining in the Incentive Saver account were not after-acquired property to which the Bankruptcy Act would apply.

Decision

White J dismissed the application for Mr Ambrose to have a declaration that bankrupt estate be paid the monies. The Court’s reasoning was that:

  • a change in the account in which the monies were held could not reasonably be regarded as changing the character of the monies from income to another form of property
  • changing the contractual terms between banker and customer did not alter the nature of the property
  • it was not realistic to regard a transfer of monies to a bank account which carried interest as the making of an investment. The court considered the Complete Freedom and Incentive Saver were accounts used for holding income in a secure place while retaining accessibility and that earning some interest on monies deposited there was simply incidental [at 74-75].

Utility of decision in insolvency practice

The decision:

  • is authority for the proposition that movement of monies between accounts owned by a bankrupt individual within a single bank will not necessarily cause an acquisition of property to take place
  • maintains the acceptance of the reasoning of French J in Re Gillies; Ex parte Official Trustee in Bankruptcy v Gilles [1993] FCA 289; (1993) 42 FCR 571 (a decision which preceded Di Cioccio) that the income of a bankrupt individual does not vest in a trustee and their liability is confined to making income contributions under Division 4B of the Act.