PIR Newsletter - September 2021

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The Personal Insolvency Regulator (PIR) is a quarterly newsletter from AFSA.

Changes to AFSA’s approach to transferring matters

AFSA has changed the way we distribute bankrupt estates to registered trustees (RTs) working in the private sector.

Our main priority as the Official Trustee (OT) is to focus on matters that are in the public interest and build confidence in the personal insolvency system – even if the administration may not result in a financial return to creditors or cover our administration costs. Other estates will be offered to RTs to administer.

When the new system for distributing bankrupt estates to RTs was introduced, changes were made to the Bankruptcy Form. This included asking those applying for bankruptcy to opt-out if they do not want their estate managed by an RT. The new form went live at the end of July as part of a trial and since the launch we have had feedback that the opt-out option causes unnecessary confusion. It also created the false perception that the OT must retain a matter indefinitely if an applicant opts out. We sought legal advice and have decided to remove the opt-out provision from the form. This more closely aligns with the intent of the Bankruptcy Act 1966 and the Bankruptcy Regulations 2021.

The revised form will be live from the end of September and the process will come into effect on that date. It will also apply retrospectively to forms that reference the opt-out clause. We will continue to monitor the roll out of the new distribution system and further changes may be made during the trial period which runs until January 2022.

For more information please email RTNationalTransfers@afsa.gov.au.

Tell us what you think about our guidance resources

AFSA is seeking your feedback on proposals to improve the accessibility of our guidance resources including Inspector-General Practice Statements, Inspector-General Practice Directions, Official Receiver Practice Statements and Official Trustee Practice Statements.

We are committed to ensuring that we provide our stakeholders with purposeful, current and accessible resources and content.

To provide your feedback, visit AFSAsandpit. Consultation closes on 1 October 2021.

Australia’s personal insolvency laws now apply to Norfolk Island

From 2 August 2021, Australian personal insolvency laws have applied to Norfolk Islanders. These laws are outlined in the Bankruptcy Act 1966 and the Bankruptcy Amendment Regulations 2020.

Norfolk Islanders can contact AFSA through our National Service Centre on 1300 364 785. Practitioners with questions about operating on Norfolk Island or particular cases relating to Norfolk Islanders can email PractitionerSupervision@afsa.gov.au.

IGPS 14 updated

AFSA has updated IGPS 14 - Referring offences against the Bankruptcy Act 1966 to the Inspector-General to reflect a change in our approach to dealing with alleged compliance-related offending where the circumstances also relate to an objection under section 149D. This update went live on 1 July 2021.

Virtual creditor meetings: amended webpage

AFSA recognises that creditor meetings can be held virtually, and we published guidance on 3 April 2020 in light of the COVID-19 pandemic:

Meetings of Creditors

Noting that proposals can be put to creditors without a meeting being convened under s.75-40 of Schedule 2 to the Bankruptcy Act 1966, trustees should only convene meetings if absolutely necessary. If meetings of creditors are to occur it is expected that they be held electronically and in accordance with the provisions of the Insolvency Practice Rules and particularly, Rules 75-30 and 75-35. The place of the meeting would be the technology used to facilitate the meeting (e.g. by teleconference or video conferencing).

We have now amended our webpage about creditor meetings to make clear that such a meeting may be at a physical location, by phone conference, a web-based video conferencing facility or a combination. The expectation published above still applies during the pandemic.

Mental health first aid training for financial service professionals

A new online course is available for financial service professionals that focuses on how to help co-workers and clients experiencing mental health concerns, particularly those with financial difficulties. The course is suitable for a range of professionals working in financial services settings, including insolvency professionals, accountants and financial counsellors. It is based on the previous Mental Health First Aid (MHFA) course for insolvency professionals and the MHFA guidelines on helping individuals who experience financial difficulties. The training is delivered via a self-paced eLearning component followed by a face-to-face, instructor-led session. 

For more information visit the MHFA website.

Proper treatment of rental receipts

Sometimes bankrupt individuals own investment properties which are leased at the date of bankruptcy and therefore vest in their trustee. This raises the question of how the rental receipts should be treated. The definition of property in Section 5 of the Bankruptcy Act 1966 includes any profit derived from a property. The Act also provides the trustee with the capacity to exercise powers in respect of the property. This means that the bankrupt individual’s share of the rental income will also vest in their trustee and should not be regarded as income for contributions purposes. When dealing with investment properties, it is AFSA's practice to put the managing agent on notice that the lease should not be renewed, and that the rental income should be paid to the mortgagee. Allowing the mortgage to be serviced ensures that the equity in the property is maintained and possibly increased. In a typical scenario, without the rental income being used to pay the mortgage, the mortgage may fall into arrears which will allow the mortgagee to take possession. This may deny the bankrupt individual and any co-owners an opportunity to either annul the bankruptcy or for the co-owner to buy the trustee’s interest. It can also shorten the time available to deal with the property.

While trustees may be able to claim the rent and receipt it into the estate bank account, it is AFSA's expectation that the approach outlined above should be followed before claiming the rent. More information can be found on the website.

Section 254 of the Income Tax Assessment Act 1936 also requires trustees to lodge a trust tax return when they receive income in their capacity as a trustee in bankruptcy. When in receipt of rental income, trustees should consult with a tax agent or the ATO about their tax obligations.

For more information, please email PractitionerSupervision@afsa.gov.au

After-acquired property or income? Di Cioccio revisited

It is the Inspector-General’s position that income earned post-bankruptcy does not vest in the trustee, including where it is held in a financial institution account or a standard term deposit account, although the bankrupt may have an income contribution liability. However, while such income does not vest, property bought with non-vesting post-bankruptcy income will vest.

The purpose of this article is to set out the basis for that position.

It is now over 6 years since the Full Federal Court delivered its judgment in  Di Cioccio v Official Trustee in Bankruptcy (as Trustee of the Bankrupt Estate of Di Cioccio) [2015] FCAFC 30 (11 March 2015) and it is instructive to consider the decision again in the light of  a couple of subsequent decisions.

In this case, the bankrupt, Mr Di Cioccio, acquired shares during his bankruptcy with income  previously derived during the bankruptcy that was below the actual income threshold amount. When the trustee claimed the shares as an asset that vested as after-acquired property the bankrupt rejected that claim.

The bankrupt contended that when a bankrupt acquires property using money or a credit to a bank account representing such income there is a conflict between the operation and effect of Div 4B of Pt VI of the Act (the income regime) , and s 58(1)(b) in Div 4 of Pt IV and s 116 in Div 3 of Pt VI of the Act (the provisions governing vesting of property including after-acquired property).

Mr Di Cioccio submitted that the conflict should be resolved by ss 58 and 116 “giving way” to Div 4B of Pt VI with the result that the Shares he acquired were not “after-acquired property” which vested in the Official Trustee under s 58(1) of the Act.

Judicial consideration prior to Di Cioccio

The issue has been adverted to in previous cases but had not been decided authoritatively. One such reference was that of French J in Re Gillies; Ex parte Official Receiver in Bankruptcy:

Despite the absence of an equivalent of s 101 of the 1924 Act or s 131, the scheme of Div 4B rests upon the continuing assumption that the income of the bankrupt does not vest in the trustee. The liability to contribute is limited to half the excess of assessed income over the actual income threshold amount. Before it arises, a process of assessment is required to be undertaken by the trustee. It is true that the after-acquired property to which ss 58 and 116 apply is defined widely enough to encompass income. However, in my opinion, the legislative scheme now in place is quite inconsistent with the application of those provisions to after-acquired income. This follows from the comprehensive scheme embodied in Div 4B which approaches a code for dealing with after-acquired income of the bankrupt. There is nothing in the extrinsic material to support a change in the approach to after-acquired income which would bring it within after-acquired property vesting in the trustee. In my opinion such income does not vest in the trustee.

In Di Cioccio, the Court decided the matter as a question of statutory construction.

Section 58 is in Div 4 of Pt IV of the Act contains the general rule for the vesting of property when a debtor becomes a bankrupt. The general rule is “[s]ubject to this Act”. The section deals with the property of a bankrupt at the time of becoming bankrupt (subs (1)(a)) as well as “after-acquired property of the bankrupt” (subs (1)(b)). As s 58(1)(b) states, after-acquired property of the bankrupt vests in the Official Trustee (or the trustee of the bankrupt’s estate) as soon as it is acquired by, or devolves on, the bankrupt.

After-acquired property is defined in s 58(6) for the purposes of s 58 to mean “property that is acquired by... the bankrupt on or after the date of the bankruptcy, being property that is divisible amongst the creditors of the bankrupt”:

The property that is divisible amongst the creditors of the bankrupt is described at subsection 116(1) while property that is excluded is described at subsection 116(2).

As the judgment states:

The nature of the property (whether it is divisible amongst creditors or not) determines whether or not the property vests in the trustee. If an item of property is of a kind which is divisible amongst the creditors of a bankrupt (s 116(1)), it vests in the trustee. If it is property of a kind which falls within one of the categories listed in s 116(2), it is entitled to be retained by the bankrupt

The effect of the decision in Di Cioccio was (as had been generally understood to be the case) if property whether owned by the bankrupt at the start of the bankruptcy or acquired prior to discharge, such as shares, is not listed in s 116(2) then it is caught by s 116(1) and is divisible amongst the bankrupt’s creditors. This is the case even if the property is purchased with income.

An issue referred to in the judgment that was not a matter  before the Court for direct determination to decide,  and is therefore obiter was whether an amount standing to the credit of a bank account in the name of the bankrupt would be after-acquired property:

During the course of argument, counsel for Mr Di Cioccio submitted that if this construction of the Act was adopted, it would create an anomaly. An anomaly was said to arise because an amount standing to the credit of a bank account in the name of the bankrupt would be property (see Foley v Hill [1848] EngR 837(1848) 2 HL Cas 28 and [9]-[10] above) that would immediately vest in a trustee (s 58) and be divisible amongst the creditors of the bankrupt (s 116(1)) even if the amounts standing to the credit of the bank account were in fact income derived by the bankrupt below the actual income threshold amount applicable to that bankrupt.

In response to the appellant’s argument, the Court pointed to s 134(1)(ma) of the Act, which permitted a trustee to make allowance out of the estate to the bankrupt, as providing relief in that situation. The supervised account regime in Div 4B permitted the trustee to determine whether the bankrupt could make withdrawals; the relevant provision suggested that the section 134 “safety valve” operated regardless of whether the account balance was below the actual income threshold amount.

Charlesworth J addressed this particular issue in Gittins v Field (Trustee) [2018] FCA 976 (29 June 2018) observing

 If the Act were to operate so as to vest in the trustee of a bankrupt’s estate an amount standing to the credit of a bank account in the bankrupt’s name comprised of money in the nature of income payments (and so confer proprietary rights in the money as income) it is difficult to comprehend what meaningful work the income contribution scheme would have to do….The closing paragraphs of the judgment in Di Cioccio appear to be an unexplained departure from the historical position that the income of a bankrupt does not vest in the trustee. The trustee in Di Cioccio laid no claim to the amount credited to the bankrupt in the bank account into which the bankrupt’s income was deposited. Accordingly, the latter part of the reasoning in Di Cioccio is properly to be regarded as obiter.

Furthermore as was said by Holmes CJ in Devine v State of Queensland [2020] QSC 229 (31 July 2020) the Di Cioccio decision does not seem to have been treated in case law or commentary as authority for the proposition that after-acquired income not subject to a s 116(2) exception is property divisible among creditors.

Conclusion

The correct position adopting the ratio in Di Ciocco and previous decisions such as Gillies would seem to be:

  1. Property acquired by the bankrupt during the bankruptcy (even with income earned during the bankruptcy)  is after-acquired property divisible among creditors unless excluded under subsection 116(2)
  2. After-acquired income (for example, deposited to a bank account) is retained by the bankrupt (subject to the contribution regime) unless used to acquire property prior to discharge, not being property excluded from divisible property under s.116(2)

Do you have feedback on AFSA’s analysis and conclusion on this issue? If so, please send that to PractitionerSupervision@afsa.gov.au

Three new regulatory publications released

In July 2021, AFSA released the Personal Insolvency Compliance Program 2021-22, Regulatory Charter, and Regulatory Cooperation and Support Policy. These three documents underpin AFSA’s regulatory and enforcement responsibilities in relation to personal insolvency and the Personal Property Securities Register.

The Personal Insolvency Compliance Program outlines focus areas for AFSA to maintain confidence in the personal insolvency system and support debtors and creditors by making compliance easier.

The 2021-22 program has three key focus areas:

  1. Support vulnerable users of the insolvency system
  2. Drive willing compliance and engagement
  3. Strengthen trust and confidence in the profession

AFSA’s Regulatory Charter outlines our approach to regulation in respect of our roles within the financial services sector. It guides the regulatory strategies for insolvency and the Personal Property Securities Register (PPSR) by explaining how priorities are set, measured and reported, as well as the compliance framework and methodology.

The Regulatory Actions Cooperation and Support Policy outlines how we will support those who cooperate in an investigation and prosecution where it is suspected that more than one person is involved in misconduct, fraud or other alleged criminal conduct.

These documents are available on our website.

ATO update – online services for business

The ATO Business Portal was officially decommissioned at the end of July. Its replacement, Online services for business, is now available.

This service delivers most of the functionality of the Business Portal as well as a range of new features including the:

  • capability to switch between different ABNs with the same login
  • ability to make payments
  • ability to obtain copies of historical income tax returns
  • ability to send secure mail messages.

Improved navigation means meeting tax and super obligations will be easier.

Online services for business are accessible on a range of devices, including a smart phone or tablet. Simply log in using your myGovID, the same way you would with the Business Portal.

To access these services, login using the myGovID; guides and videos are available at ato.gov.au/OSB. For more information, please email InsolvencyPractitionerServices@ato.gov.au

For general information refer to the insolvency practitioners’ section on ato.gov.au/insolvency.

Section 77A and associated entities

AFSA receives a significant number of offence referrals relating to non-compliance of trustee notices issued under the provisions of section 77A of the Bankruptcy Act 1966 (77A notice). Non-compliance of a 77A notice is a complex area where we need to establish that a respondent of the notice is in possession of the books of the associated entity.  

Associated Entities

Associated entities are a common factor in the ongoing administration of any bankrupt estate. Associated entity, in relation to a person, is defined in the Act as

  1. an entity (other than a company) that is, or has been, associated with the person; or
  2. a company that is, or has been, associated with the person at a time when the company is, or was, as the case may be, a private company)

These definitions relate to past and present associations.   

The investigative powers conferred on trustees under the Act extend to associated entities of the bankrupt individual. Section 77A(2) allows a trustee access to books or specified classes of books of an associated entity of the bankrupt individual which are held by the receiver of the 77A notice and relevant to the trustee’s investigation.

Example 1: The extending line of associations

Recently, the provisions of 5C(2) had come into question in terms of the line of association. 

In this example, a bankrupt individual transferred their property to their defacto spouse. The defacto spouse subsequently sold that property to a third party. A trustee then issued a 77A notice to the legal representative of the third party, seeking books associated with the purchase of that property. There was no known or identifiable association between the third party and the bankrupt individual. There was also no identifiable association between the third party legal representative and the bankrupt individual. 

The third-party legal representative failed to comply with the provisions of the 77A notice.

The wording of the associated entity provisions suggest that it extends to the person who acquired or disposed of property because of dealing with the bankrupt individual. The most obvious and clearest interpretation is that this would be the person who acquired the property directly from the individual (i.e. the defacto spouse). Therefore, the associated entities are clearly only those that have some form of direct dealing with the bankrupt individual. In the above example, the 77A notice could not be enforced as there was no association between the bankrupt individual and the legal representative of the third party.  

This example would also extend to situations that involve companies, partnerships and trusts. 

Example 2: Associated entities, their agents or representatives

In another recent example, a trustee issued a 77A notice on a law firm acting for an associated company.

In this example, the bankrupt individual was the former director for a series of companies. Property was transferred between the associated companies that was relevant to the trustee’s investigations. A 77A notice was issued to the law firm acting for those companies, seeking books of the companies and books of the law firm. The law firm was a partnership and not a company, and did not comply with the provisions of the 77A notice.

There was a clear association between the bankrupt individual and the series of companies, however there was no identifiable association between the bankrupt individual and the law firm (specifically S5D). The 77A notice sought books of the companies, as well as books of the law firm in the single notice. It could not be adequately determined if the law firm held the books of the company and, as there was no association between the bankrupt individual and the law firm, the books of the law firm could not be requested under the notice provisions. Therefore, the 77A notice could not be enforced for non-compliance.  

It was recommended that the trustee reissue 77A notices to each specific company seeking the required books, which may, on response from the companies, confirm that those books are in the possession of the law firm. Once that occurred, a new 77A notice could be issued to the law firm to obtain the books of the associated entity.

Example 3: A third party has the required books

In another example of the complexity of associated entities and 77A notice requirements, a trustee had correctly issued a 77A notice to an associated company for that company’s financial records. The proper officer of the company informed the trustee that the books were held by their accountant and not in the actual possession of the company (77A(3)(b)). 

The trustee subsequently asked the accountant for the required books of the associated company. The accountant acknowledged that the proper officer had sent them a copy of the 77A notice and confirmed with the trustee that they had possession of the associated company books. The accountant did not comply with the 77A notice. 

77A(2) provides the power for the Trustee to obtain books in the possession of the person of whom the requirement is made. If the evidence demonstrates that the respondent to the 77A notice does not have possession of the books and they provide where the books were last or can be located, then the respondent has complied with the notice. In this example, the notice could not be enforced against the associated entity for not providing the books.  

The accountant had confirmed possession of books belonging to an associated entity of the bankrupt individual. However, the offence referral related to the non-compliance of the company because the accountant would not provide the books. The 77A notice was issued against the associated entity and not the accountant, therefore despite acknowledging the receipt of the 77A notice as given to them by the proper officer of the company, and confirming they had the required books, non-compliance of the 77A notice could not be enforced against the accountant.

In this example, the recommendation was that the trustee issue a new 77A notice to the accountant in the knowledge that the accountant had possession of the required books of the associated entity. 

Where there is no association – section 77C is the solution

There is no doubt that books of and/or held by third parties may be relevant to a trustee’s investigation into the administration of a bankrupt estate. In the first two examples, the most appropriate way the trustee could obtain the required books is through a section 77C notice issued by the Official Receiver under the provisions of 77C(1)(c) to ‘produce all books in the person’s possession relating to any matters connected with the performance of the functions….of a trustee under this Act.’

This is a commercial decision for the trustee in the administration of the bankrupt estate. 

77A Offence referrals – recommendations

It is important that all trustees ensure that they have a clear understanding of the associated entity provisions and the application this has on the enforceability of any 77A notice. AFSA will continue to assess all offence referrals related to non-compliance with 77A notices. Importantly, where there is no confirmed association in accordance with the associated entity provisions of the Bankruptcy Act 1966, or the provisions of section 77A(2) cannot be substantiated, then these offence referrals will be rejected as being unenforceable with recommendations to review the notice provisions or to seek a section 77C notice.   

Key tips:

  1. Understand who associated entities are and be sure of the link between the respondent and the bankrupt individual
  2. Seek only books from the associated entity in accordance with section 77A(2)
  3. Where it is evident that an associated entity’s books are located elsewhere, issue a new 77A notice to the respondent in possession of those required books
  4. Where there is no association, a section 77C notice can be used.  

For more information, please email enforcement@afsa.gov.au

Case notes

Barranbali Pty Ltd v Pioneer Australia Pty Ltd [2021] FCAFC 100

This case addresses whether a single joint creditor has standing under s 90-20 of the Insolvency Practice Schedule (Bankruptcy), Schedule 2 of the Bankruptcy Act 1966 (Cth) to apply for an order to remove and replace a trustee pursuant to s90-15. It also considers whether a proof of debt is capable of being lodged by one only of joint creditors.

Background

In this case a loan was guaranteed by the bankrupt (the sole director) and her husband. The company defaulted. Judgment was awarded in the sum of $7,146,275. A trustee was appointed to the bankrupt estate and subsequently a single joint judgment creditor of the bankrupt (the Second Respondent) brought an application to the Court to remove and replace the existing trustee, despite the First and Second Respondents being named joint creditors. The primary judge made orders that the trustee be replaced.

The bankrupt challenged the replacement and argued that ‘joint creditors can only act together, and anything done without the authority and agreement of them is invalid’. At first instance the primary judge held that ‘there is nothing in the Act which suggests that the making of an application to ensure the proper administration of the bankrupt estate is one which cannot be made alone’ [42]. The primary judge recognised that the definition of ‘creditor’ under s5-30 of the Insolvency Practice Schedule was ‘very wide’ and confirmed that ‘there is nothing in the scope or purpose of s5-30 or of s90-15 and 90-20 which suggests that the word creditor should be given any narrow construction’.

The Appellants appealed this decision.

Consideration

The Court dismissed the appeal.

The Court unanimously agreed with the primary judge that the Second Respondent had the necessary standing. Greenwood J, with whom Perry and Anastassiou JJ agreed, observed that ‘…the proper construction … is such that one of two joint creditors of a debtor… has standing under s90‑20(1) to apply to this Court (s27) for orders under s90‑15(1)… without applying jointly with the other joint creditor; or having the authority of the other joint creditor to apply; or joining the other joint creditor as a respondent to the application’ [3].

Greenwood J found that standing to apply for such orders is conferred by s90-20(1) on ‘a person with a financial interest in the administration of a regulated debtor’s estate’ [4], and that a person with ‘financial interest’ is defined in section 5-5 of Schedule 2 by reference to s5-30 of Schedule 2, which confirms that a ‘creditor’ has such an interest [4].

Perry and Anastassiou JJ confirmed the primary judge’s view that ‘the distinction of relevance between a single creditor and joint creditor flows from the nature of the obligation itself’ [61]. They went on to add that ‘the meaning of the word “creditor” remains uniform and consistent throughout the Act, it is merely that the rights of a single joint creditor in relation to the administration of the bankrupt’s estate vary depending on the nature of the obligation.’ [63]

Perry and Anastassiou JJ rejected the submission that to allow a joint creditor to act independently in seeking a s90-15 order is antithetical to the common law constraint against joint creditors acting independently in relation to the recovery of a single obligation, which, the Appellant argued, defines the rights of joint creditor for all purposes [62]. The Court highlighted the distinction between Division 90, which is ‘concerned with the proper administration of estates’, and applications concerned with the enforcement of debts or judgments, which raise different considerations with respect to standing.

Lodging proof of debt by single joint creditor

Finally, while the lodging of a proof of debt by a single joint creditor was not an issue the Court was required to decide, and hence the views expressed were obiter, Perry and Anastassiou JJ, opined that the orthodox position was correct: if a [hypothetical] trustee permitted a proof of debt lodged by one only of joint creditors ‘it would be inconsistent with the principle articulated by the High Court in Bowen’ [Australian Workers’ Union v Bowen [1946] HCA 24; (1946) 72 CLR 575]  [70]. However, Greenwood J disagreed and argued that one of two joint creditors should still be able to lodge a proof of debt notwithstanding the reluctance or unwillingness of a joint judgment creditor to assist or participate in such a process [31].

Donoghue v Russells (A Firm) [2021] FCA 798

Issues

Whether the debtor “was carrying on business in Australia” under s43(1)(b)(iii); whether the debtor “had a place of business in Australia” under s43(1)(b)(ii); whether servicing a debt in Australia constitutes “carrying on business in Australia”

Background

From 2011, the appellant (‘the debtor’) had been engaged in litigation with the Commissioner of Taxation. The creditor was a firm of solicitors that acted for the debtor in much of that litigation. The litigation ended in May 2018 when judgment was entered against the debtor for an amount in excess of $48 million.

The debtor was able to obtain certificates which allowed him to temporarily leave Australia. However, the debtor had not returned to Australia since July 2014. A bankruptcy notice was issued which was not complied with. To satisfy the various tests for making a sequestration order the creditor contended that the debtor had a ‘dwelling house’ in Australia, had a ‘place of business in Australia’, and was ‘carrying on business in Australia’ at the time when the relevant oct of bankruptcy occurred [12 June 2018].

The primary judge was not satisfied that the debtor had a dwelling house in Australia at the time the notice was issued. The debtor had resided in a Brisbane property (‘the property’) with his wife but he had left after separating in 1998. His family continued to continue to reside at the property. In 2008 the debtor borrowed between $4m and $5m from the Commonwealth Bank (CBA). In her capacity as trustee of the family trust the debtor’s wife agreed to be the borrower of the funds and for the property to be used for security for the loan, which was advanced over a period of time. The debtor was responsible for repaying the loan secured over the property. He personally guaranteed that loan. The monthly repayments of that loan were in the order of $45,205. The primary judge agreed it was reasonable to infer that the substantial monthly repayments were made from the debtor’s business activities.

The debtor listed the property as the address for service of notices under his personal guarantee with the CBA. He also gave to the CBA the property as his residential address. The primary judge concluded the evidence indicated that it was borrowed by the debtor for business purposes adding that the debtor’s wife stated that he continues to use that facility for his business.

The primary judge found that the debtor “had a place of business in Australia” and “was carrying on business in Australia” at the time when the act of bankruptcy was committed. Accordingly, his Honour held that the Court had jurisdiction to make a sequestration order. In the appeal, the debtor contended that the primary judge erred in making both findings.

Consideration

Whether the primary judge erred in finding that the debtor was carrying on business in Australia

The Court looked at the scope of s43(1)(b)(iii) and the debtor’s submission that it ‘requires a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis in Australia’. The creditor contended that all that is required is that some part of a business, not necessarily direct trading activity, be carried on in Australia. The Court found no authority that addressed the competing submissions.

After a comprehensive review of case-law the Court distilled six propositions [50]:

(1)  Whether a company is “carrying on business in Australia” is a question of fact.

(2)   The words “carrying on” imply the repetition of acts and activities which possess something of a permanent character; and it is generally insufficient for there to be a single transaction or a number of isolated transactions.

(3)  A single transaction in Australia may be enough if it has been made in the course of business which the debtor is carrying on overseas.

(4) A debtor may carry on business “in” Australia even though the bulk of his or her business is conducted overseas.

(5)  It may be sufficient that there are acts done in Australia ancillary to activities or transactions that make up a business. ..it is not essential that a business engage in actual trading activity in Australia. Examples of such ancillary acts may include the raising of capital in Australia for use by a business overseas… and the payment of debts after a business has ceased to actually trade in Australia.

(6)  A person may carry on business in Australia without necessarily having a place of business in Australia.

The Court rejected the debtor’s submission that for the debtor to carry on business in Australia, it is essential that a going concern exist in Australia, stating that:

It is not essential to demonstrate actual trading activity in Australia. It may be enough for the creditor to demonstrate that the debtor engages in acts or transactions in Australia which are ancillary to trading activity conducted overseas. Whether it is enough will depend upon the particular facts of the case. [51]

The Court placed considerable weight on the ‘direct and unequivocal’ evidence of the debtor’s wife, (in evidence led by the debtor), that ‘the debtor borrowed and used, and continues to use, the money for the debtor’s business.  The references to “his business” must, on their face, be understood as referring to the debtor’s own business. Mrs Donoghue’s evidence does not suggest that the money was borrowed for and used by a business operated by some person or entity other than the debtor.’ [66]

The Court then considered the fact that the debtor had not given evidence and had provided no explanation for his failure to give evidence. The primary judge had relied on the rule in Jones v Dunkel; that the unexplained failure by a party to call a witness may in appropriate circumstances support an inference that the uncalled evidence would not have assisted the party’s case. The Court endorsed that approach noting that:

The absence of evidence from the debtor also allowed a more confidently drawn inference that the debtor’s business was the source of the funds for the repayments. It was unnecessary for there to be evidence about the nature and extent of the debtor’s business. [73]

The Court rejected the debtor’s argument that he was not ‘carrying on a business’ at the time of the act of bankruptcy by making monthly repayments on the loan. The Court accepted that ‘if the raising of loans in a country is capable of constituting the carrying on of business in that country, so too must be the repayment of such loans’ [77]. Further supporting the conclusion that the debtor was carrying on a business the Court noted the salient facts:

The debtor borrowed the money from the family trust for use in his business, which is based overseas. The debtor continues to use the funds in his business. The debtor makes regular and ongoing repayments of approximately $45,000 per month to Mrs Donoghue in Australia. The debtor, it should be inferred, makes the loan repayments from the capital or income of his business. The making of the loan repayments is part of the carrying on of the debtor’s business. [78]

While that was sufficient to dispose of the appeal the Court went on to consider whether the debtor had ‘a place of business in Australia’. The creditor had argued that the criteria in s 43(1)(b)(ii) and (iii) of the Act were disjunctive, that is that the criterion of “place of business in Australia” can be satisfied even if the criterion of “carrying on business in Australia” was not. If the debtor was not carrying on a business this raised the question whether the jurisdictional requirement to make a sequestration order would be satisfied if a person could have a place of business in Australia without carrying on business in Australia.

Whether the primary judge erred in finding that the debtor had a place of business in Australia

The primary judge concluded that at the date of the act of bankruptcy [12 June 2018] the debtor had a place of business in Australia. The first reason was that the debtor was carrying on business in Australia by servicing the debt to the family trust in Australia. The second reason was that the debtor provided the property as his address for his personal guarantee. Finally, the debtor remained a director and his address for the directorship remained the property. The primary judge concluded that as the debtor did not give evidence about these matters this gave rise to a Jones v Dunkel adverse inference.[83]

The appeal Court disagreed with that conclusion, indicating that the unchallenged evidence of the debtor’s daughter was that the company had never traded nor operated any business, and that the only thing it had done was purchase a car for the debtor’s wife. [88] It concluded that the facts did not support an inference that the debtor had a place of business in Australia at the date of the act of bankruptcy.

The appeal court concluded that if the ‘primary judge was wrong in concluding that the debtor was carrying on business in Australia, his Honour was also wrong to conclude that the debtor had a place of business in Australia.’ [89] The Court left open the question whether a person may have a place of business in Australia without carrying on business in Australia (the converse of the last proposition the Court derived from the authorities listed above - a person may carry on business in Australia without necessarily having a place of business in Australia). The appeal was dismissed with costs

 

Davidson v Official Receiver [2021] FCAFC 73

Issue

This case addresses whether a notice issued by the Official Receiver pursuant to s 139ZQ of the Bankruptcy Act (the ‘Act’) to recover a transfer at undervalue pursuant to s120(1) of the Act is valid, despite the expiration of the limitation period in s127(3) before the notice has been complied with or sought to be enforced.

Background

In this case, the Bankrupt became bankrupt on the filing of a debtor’s petition on 16 December 2013 and was automatically discharged on 16 December 2016. On 6 December 2019, the Official Receiver (First Respondent) issued a notice to the Appellant pursuant to s139ZQ of the Act requiring payment of $12,507,025.84 to the Trustee (Second Respondent) (‘the Notice’). This amount represented the aggregate of payments made by the Bankrupt to the Appellant, which the Trustee claimed were transfers of property for less than market value and void within the meaning of s 120(1) of the Act. 

Action under s120(1) of the Act voiding a transfer of property must be commenced by the trustee before the expiration of six years from the date of bankruptcy, pursuant to s127(3) of the Act. The Notice was issued 10 days prior to the expiration of the limitation period for the commencement of a proceeding pursuant to s120.

On 14 May 2020 the FCC dismissed the Appellant’s application for summary judgment and a s 139ZS(1) order setting aside the Notice on the grounds that it was issued out of time (see MLG 319 of 2020).  The Appellant sought leave to appeal to the FCAFC and orders setting aside the Notice and a declaration pursuant to s30(1) of the Act that the trustee is barred by s127(3) from commencing s139ZQ(8) action.

Consideration

The Court granted leave to appeal but dismissed the application.

Whether the s139ZQ Notice was statute barred by s 127(3)

The Court rejected the Appellant’s argument that the claim was statute barred as the Notice had to be not merely issued, but ‘either complied with or sought to be enforced, within the six-year limitation period in s127(3) in order to be valid’ (see [40]).

The Appellant argued that the issuing of the Notice did not constitute an ‘action under section 120’ pursuant to s 127(3) of the Act, and that in the absence of a definition within the Act, ‘action’ should be interpreted to mean ‘civil proceedings’. In rejecting this argument, the Court considered the meaning of ‘action’ under s127(3):

[42] there is no basis to interpret the phrase “an action” in s127(3) as being limited to a proceeding… [A]n action must be understood as conduct by the trustee to recover money pursuant to a transaction at undervalue, not only by commencing proceedings but also by the taking of other steps…

The Court observed the administrative nature of s139ZQ, noting that it ‘creates an alternative pathway and separate cause of action to the curial process under s 120 of the Act’ and for this reason, ‘once a s 139ZQ notice is validly issued (including within the limitation period in s127(3)), it does not cease to be valid merely because it has not been complied with, or sought to be enforced, before the expiry of that limitation period’ (see [43]).

The Court rejected the submission that the issuing of a s139ZQ notice has the effect of extending the limitation period contained in s127(3) ‘indefinitely’ for the commencement of action in respect of a transfer at undervalue under s120 (see [27], [44]). It noted that s127(3) should be construed as abolishing a trustee’s right to bring a claim if not issued within the limitation period, and not just the right to obtain a remedy. As such, the issuing of a notice pursuant to s139ZQ is contingent on the notice being provided within the s127(3) limitation period.

The scope of ‘trustee of a bankrupt’ in s139ZQ(1)

Finally, the Court rejected the Appellant’s argument that the term ‘trustee of a bankrupt’ in s139ZQ(1) does not include the trustee of a discharged bankrupt, confirming that the trustee has an ongoing function in relation to the bankrupt estate even after the bankrupt has been discharged (see [50]).

Legislation summary

Family Law Amendment (WA De Facto Superannuation Splitting and Bankruptcy) Act 2020

The measures bring Western Australia into line with the federal approach to splitting superannuation for de facto couples and extend federal bankruptcy jurisdiction to the Family Court of Western Australia. It enables bankruptcy and family law proceedings to be brought together in the Family Court of Western Australia, thereby ensuring property issues are dealt with simultaneously and provide greater certainty to bankruptcy trustees, creditors and non-bankrupt partners. The bill passed both on Houses 3 December 2020 and received Royal Assent on 8 December 2020.

The amendment will commence on a date to be fixed by proclamation. A Proclamation must not specify a day that occurs before the day section 4 of the Commonwealth Powers (De Facto Relationships) Act 2006 (WA) commences.

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