IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY ) ) BANKRUPTCY DISTRICT OF THE STATE ) No. NSW 392 of 1977 ) ) RE: BRUCE HARRY MORRISON EX PARTE: THE OFFICIAL RECEIVER Trustee of the estate of the bankrupt. JUDGE MAKING ORDER: Riley J. DATE OF ORDER: 18 April 1978 WHERE MADE: Sydney ORDER: 1. Application dismissed The Official Receiver to pay the costs of VACC Insurance Co. Limited. Authorise him to add his own costs to that amount and retain the total out of the estate. a cee nea A RN ter aD po mine a Ee ante ern a oe eam we malls Se eet re ee liens Salt G CATCHWORDS Bankruptcy ~ Income of bankrupt - Person convicted of larceny as servant - Recognizance conditioned on payment to Clerk of Peace of compensation for employer - Employer indemnified by insurer - Clerk of Peace authorized by employer to pay insurer - Offender becomes bankrupt - Application by trustee for order that Clerk of Peace pay him money paid by bankrupt to Clerk of Peace since bankruptcy - Bankruptcy Act 1966, s. 131. Re - BRUCE HARRY MORRISON, Ex Parte THE OFFICIAL RECEIVER CORAM: Riley J. 18 April 1978 SYDNEY. By this application the Official Receiver specifically seeks an order under s. 131 of the Bankruptcy Act 1966. That section, so far as is material to this case, provides as follows:- "(1) Subject to this section, a bankrupt who is in receipt of income 1s entitled to retazn it for his own benefit. (2) The Court may, upon the application of the trustee, order that all, or such part as the Court thinks fit, of the income of the bankrupt shall be paid by the bankrupt to the trustee for the benefit of the bankrupt's creditors". The history of the matter is this. On 17 May 1976 Bruce Harry Morrison pleaded guilty before a Stipendiary Magistrate to a charge of larceny as a servant. On 18 August 1976 a District Court judge sitting at Penrith ordered him for that offence to enter into a recognizance in the sum of $500. There were two conditions to the recognizance. One was that the accused be of good behaviour for a period of three years and appear for sentence at any time during that period if called upon. The other was "that he pay the Clerk of the Peace the sum of $8,887.40 as compensation for Max Wright Motors Pty. Limited, by instalments of $100.00 per month the first of such instalments to be paid on or before 1 September, 1976, and thereafter on or before the lst day of the ensuing months. On or before the lst March, 1977, pay the balance of the compensation. Pay fine of $500.00 within 6 months of this date" (i.e. 18 August 1976). Morrison paid $100.00 to the Clerk of the Peace in (but not always on the first day of) each of the five months from September 1976 to January 1977, both inclusive; but he has never paid the balance ($8,387.40) of the compensation, or the fine of $500.00. The Clerk of the Peace duly paid out the first payment of $100.00 to Max Wright Motors Pty. Limited, but he paid out the other four to VACC Insurance Co. Limited pursuant to an authority given him on 23 September 1976 by Max Wright Motors Pty. Limited -2- which authorised him to forward any future payments to VACC Insurance Co. Limited on behalf of Max Wright Motors Pty. Limited. On 12 July 1977 Morrison became bankrupt on his own petition. The Official Receiver is the trustee of his estate. On 2 September 1977 Morrison was called up to appear again before the District Court judge who had ordered him to enter into the recognizance. At the hearing of this application the only information before the Court as to what happened on that day was contained in a letter dated 14 December 1977 from the Clerk of the Peace to the Official Receiver the receipt of which was deposed to by the Official Receiver in an affidavit of 10 January 1978. According to that letter, the learned District Court Judge on 2 September 1977 "directed no action, providing the offender undertook ... to continue payments of that compensation in accordance with the terms of his recognizance". Having in mind the terms of the recognizance, which I have set out above, I expressed doubt as to the correctness of the information given by the Clerk of the Peace, and requested that the Official Receiver should enquire further. He has now obtained a copy of the relevant transcript. Copies have been sent to counsel, and I understand from them that they do not wish to submit further argument and are content that I should treat the transcript as being in evidence before me and as a correct record of the proceedings of 2 September 1977. The transcript shows that on that day Morrison appeared in person, having been called up on breach of his recognizance by failure to observe its conditions as to payment of compensation, and admitted the breach. The Crown Prosecutor told His Honour, amongst other things, that Morrison was now a bankrupt, and suggested that he should be required to make further payments, but deferred dealing with the breach of the recognizance on the accused's undertaking to put himself for a specified period under the supervision and control of the Probation and Parole Service. VACC Insurance Co. Limited, (which I shall call "VACC"), lodged a proof of debt, sworn by one R. H. Pickett on 16 November 1977, alleging that on 12 July 1977 Morrison was justly and truly indebted to VACC in the sum of $8,654.40 "in accordance with the particulars specified in the account annexed ... marked ... A". Those particulars show: "Date: 17 May 1976 Consideration: Order of Court of Petty Sessions Penrith dated 17 March 1976. Amount: $8,887.40 Vouchers (if any): Order for payment of compensation following conviction of charges in matter No. 76/5619". The Official Receiver's application, as amended by leave, is for: "An order under section 131 of the Bankruptcy Act 1966 that such part of the income of the bankrupt as has been paid or will be paid by the bankrupt to the Clerk of the Peace at Sydney since the 12th July 1977 be paid by the Clerk of the Peace at Sydney to the applicant for the benefit of the bankrupt's creditors until such time as the order is varied or the bankrupt obtains an order of discharge pursuant to either the provisions of section 149 or section 150 of the Bankruptcy Act or sufficient funds have been received by his trustee to pay 100 cents in the dollar to proved creditors". The application was duly served on the bankrupt, on the Clerk of the Peace and on VACC. Only VACC appeared, and it was represented by counsel and opposed the application. The Official Receiver was also represented by counsel. The application is somewhat ambiguously worded, but in fact the Official Receiver seeks an order only that the Clerk of the Peace pay him any part of the bankrupt's income that the -4- bankrupt since 12 July 1977 has paid or will pay to the Clerk of the Peace, and does not seek an order in respect of any money which the bankrupt paid to the Clerk of the Peace before 12 July 1977. The Official Receiver submits that unless the order sought is made the Clerk of the Peace will pay to VACC any income of the bankrupt received by him after 12 July 1977, whereby VACC will receive an advantage over other creditors: but that if the order is made, that income will be dealt with in the administration of the bankrupt's estate in the manner prescribed by the Act, so that all creditors will share in it according to their statutory rights and priorities. The evidence before me, however, does not establish that VACC is, as it claims to be, a creditor of the bankrupt. There is no evidence of any order, such as is alleged in the particulars of the proof of debt, for payment of compensation. It 1s true that the recognizance of 18 August 1976 was conditional on payment by Morrison to the Clerk of the Peace of an amount of compensation for Max Wright Motors Pty Ltd. But it was for Morrison himself to decide, in the light of the fact that non- payment would result in his being called upon to come up for sentence on his offence of larceny, whether or not he would, if able, pay that amount. He was at no time under any legal obligation to pay it, and the condition of the recognizance established no legal relationship between him and VACC. It is true also that the evidence enables me to conclude that it was Max Wright Motors Pty Ltd whose servant the bankrupt was and from whom he stole, and that that company was indemnified to the extent of $8,887.40 by VACC under a fidelity guarantee policy. Therefore so far as was necessary to ensure that Max Wright Motors Pty Ltd received no more than a full indemnity in respect of its loss -5- (A.F.G. Insurances Limited v. City of Brighton (1972), 126 C.L.R. 655, 664), VACC became subrogated to the advantage of every right of Max Wright Motors Pty Ltd by the exercise of which the loss against which that company was insured could be diminished: Castellain v. Preston (1883), 11 Q.B.D. 380, 388. But, though it appears that Max Wright Motors Pty Ltd has requested and authorised the Clerk of the Peace to pay to VACC any money (up to $8,887.40) that he may receive from Morrison for Max Wright Motors Pty Ltd, the evidence does not establish that there is any legal relationship between Morrison and VACC. Cf. In re Blackburne (1892), 9 Morr. 249, 251. Be that as it may, in my opinion the orders sought cannot be made. The enactment in s. 131(1) of the general principle that a bankrupt is entitled to retain for his own benefit income of which he "is in receipt" resolved an existing doubt: see e.g. Federal Commissioner of Taxation v. Official Receiver (1956), 95 C.L.R. 300, esp. per Fullagar J. at 318-9. An order having the effect of retrieving income which, in accordance with that general principle,the bankrupt has already spent cannot be made under s. 131(2); and in so far as the application seeks such an order it must fail. It must also fail in so far as it seeks an order operating on future income of the bankrupt. The power to make such an order "is discretionary, and whether an order will be made must depend on all the circumstances of the case": Re Buckle (1969), 15 F.L.R. 460, 464 per Gibbs J; and in deciding what order to make the Court will have regard to the long-standing principle that the bankrupt is not to be deprived of income reasonably necessary for the maintenance of himself and his family: see the authorities collected in Re McLachlan (1975) 8 A.L.R. 162, 165-6. In the present case -6- there is no evidence before the Court that would enable it to determine whether by the making of the order sought the bankrupt would be so deprived. It is for the bankrupt to show what is reasonably necessary for his maintenance: Re Robertson (1931), 4 ABC 133 at 142 (the decision was affirmed sub nom. Stuart-Robertson v. Lloyd (1932), 47 C.L.R. 482); but where the Court is without any evidence whatsoever as to the bankrupt's circumstances it should, in my opinion, exercise its discretion by declining to make an order. That seems to have been the view of Gibbs J. in Re Buckle, supra. A further reason why the order sought cannot, in my opinion, be made is that there is no evidence that the payments by the bankrupt to which the application refers have been or will be made out of income of the bankrupt (which 1s all that an order under s. 131(2) may affect), and to make the order applied for would be to impose upon the Clerk of the Peace the burden of determining whether any money he received from the bankrupt after 12 July 1977 was income of the bankrupt. It was submitted that that burden would be more apparent than real, because if money that he so received were not income of the bankrupt then it would be property of the bankrupt which had vested in the Official Receiver and should be paid to him in any event: the result being that, 1f the order were made, all the Clerk of the Peace would have to do on receiving any money from the bankrupt would be to pay it, without any enquiry, to the Official Receiver. The fallacy in the foundation of that submission can be exposed by reference to no more than s. 116(2)(d)-(g), read in conjunction with s. 58(1) and the definition in s. 5(1) of "the property of the bankrupt". It is for the applicant to show that the bankrupt is in receipt of income on which an order under s. 131(2) can operate, and the burden I have mentioned cannot be imposed on the Clerk of the Peace. For those reasons I decline to make the order sought. A problem is posed by the fact that s. 131(2) provides only for the making of an order for payment "by the bankrupt" and makes no provision for an order, such as is sought here, directed to a person other than the bankrupt. The matter was referred to in Re Buckle (supra) at 463-4, where Gibbs J. held that, in view of s. 63, an order under s. 131(2) could be made after the bankrupt''s death with respect to income due to but not received by the bankrupt at the date of his death, and remarked that although the income could no longer be "paid by the bankrupt" it could be paid by his personal representative. No doubt His Honour contemplated the calling in aid of some other provision of the Act such as s. 30({1)(b). On the evidence before him, however, His Honour declined to make the order: thus the point cannot be said to have been clearly settled. It is a point that would arise if the Court felt 1t proper not only that income should be acquired under s. 131(2) for the benefit of the creditors but also that it should be intercepted at itssource - for example, the bankrupt's employer, or the trustee of a will under which the bankrupt was entitled to income; but in the view which I take of the present case it does not arise for decision. The order I make is that the application be dismissed. I shall hear submissions as to costs.