Balance between the rights of bankrupts and those of creditors: characterizing the property subsequently acquired by bankrupts
Badcock (the Respondent) was an undischarged bankrupt, and Mr. Ambrose (the Applicant) was the trustee in his bankruptcy. The main issue to be decided was the definition of property under the Bankruptcy Act and whether the respondent’s transfer of funds into an interest-bearing account was sufficient to alter the character of the property income acquired subsequently that would devolve to the estate of the trustee. .
This case concerns the delicate balance between the rights of bankrupts and those of creditors. In this case, Mr. Badcock (the Respondent) was an undischarged bankrupt, and Mr. Ambrose (the Applicant) was his trustee in bankruptcy. The trustee sought a declaration that certain assets of the respondent were subsequently acquired assets to which sections 58(1)(b) and 116(1)(a) of the Bankruptcy Act 1966 (Cth) (Bankruptcy law) refer, as well as consecutive measurements.
In this case, the Respondent transferred $73,433.21 from an employment-related underpayment claim from the Complete Freedom account to his “Incentive Saver” account #108445640, both held with BankSA. Notably, the latter account is an interest-bearing account.
The trustee sought relief that $37,437.31 of the balance held in BankSA “Incentive Saver” account No. 108445640, plus accrued interest, was after-the-fact property that belonged to the trustee of the bankrupt estate of respondent and are divisible among the respondent’s creditors.
The Court noted that the critical consideration is to characterize the nature of ownership under the Bankruptcy Act. If it meets the s116(1)(a) definition of property, which states that all property that belonged to or vested in a bankrupt at the commencement of the bankruptcy, or that was acquired after the commencement of the bankruptcy, are assets divisible between creditors, then the funds are subject to the requirement of s. 58(1)(b) for the vesting of assets in the trustee in the event of bankruptcy.
Assets classified as income are subject to the rules of the Division 4B regime of Title VI of the Bankruptcy Act, which stipulates that beyond a certain threshold, bankrupts must pay a portion of these funds to the trustee of bankruptcy assets. It is very relevant that the Pt VI Div 4B scheme is that the bankrupt pays, not his income, but a contribution the amount of which is, by definition, a part of the income exceeding the applicable threshold
In this case, the funds were below this statutory threshold. Therefore, if the property qualified as income, the respondent would be entitled to retain the funds. While the term “income” is defined very broadly in Sections 139K and 139L of the Bankruptcy Act, the Court noted that it is not customary in common English usage to refer to income as of property which is “acquired” and there does not appear to be any indication in Section 139L of the Bankruptcy Act that the term “income” is used in the sense of property acquired.
Two competing case lines were relevant, taking distinct approaches to the interpretation of bankruptcy law and the Title VI Division 4B regime. In Re Gillies; Trustee in bankruptcy ex parte c Gilles (1993) 42 FCR 571 (Re Gilles) French J concluded that where assets are classified as income, liability is limited to cases under the scheme where only funds above a certain threshold are due to the estate of the trustee. However, in Di Cioccio v official trustee in bankruptcy (2015) 229 FCR 1 (Di Coccio) a strict interpretation has been adopted that any property not specifically excluded in section 116 is subject to the Bankruptcy Act. This would mean that income that becomes another form of property, even if it is below the Part VI Division 4B threshold, is rightfully the property of the trustee’s estate. In this particular case, income below the threshold used to purchase shares was deemed to belong to the trustee.
In this case, the plaintiff (the trustee) argued that the income transferred to an interest-bearing bank account represented the acquisition of property in that incentive savings account which therefore immediately vested as property subsequently acquired (for example, investment capital) and was therefore the property of the estate of the trustee. This argument was based on the principle adopted in Di Coccio.
The Court concluded that simply changing the account in which the monies were held cannot reasonably be considered to alter the character of the monies as income. The Bank continued to hold the funds, and the modification of the contractual terms between the banker and the client under which the funds were held did not change the nature of the assets held by the respondent.
The respondent’s transfer of the substantial portion of his income to the incentive savings account did not constitute the acquisition of a form of subsequently acquired property to which paragraphs 58(1)(b) and 116(1)(a) refer. ) of the Bankruptcy Act.
The transfer of funds into an interest-bearing account was insufficient to change its character from income (property legitimately retained by the bankrupt) to property subsequently acquired (which would devolve to the estate of the trustee).