Qs ' CATCHWORDS Bankruptcy - Income of bankrupt - Court's discretion to order payment of income to trustee - Bankrupt a beneficiary of a discretionary trust - Power of advancement in trust deed - Bankrupt liable-fex, special and non-recurring expenses - Whether 7M. Court can have regard' to other funds which may be available to the bankrupt. Bankruptcy Act 1966, s.131 Trustees Act 1962 (W.A.), 3.43. MAURICE HODGSON LYFORD v JOSEPH LEVIT W.A. Gll of 1984 CORAM: Bowen C.J., Toohey and Fisher J.J. 19 July 1984 Perth ' 4 IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION No. WA Gll of 1984 ON APPEAL FROM THE SUPREME COURT OF WESTERN AUSTRALIA BETWEEN : MAURICE HODGSON LYFORD Appellant AND: JOSEPH LEVIT Respondent ORDER JUDGES MAKING ORDER: Bowen C.J., Toohey and Fisher J.J. DATE OF ORDER: 1A July 1984 WHERE MADE: Perth THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The order of Rowland J. made on 26 January 1984 be varied with effect on and from the payment falling due on 26 July 1984 by substituting the sum "$1,250.00" for the sum "$833.33". e IN THE FEDERAL COURT OF AUS IA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION No. WA Gll of 1984 www ww ON APPEAL FROM THE SUPREME COURT OF WESTERN AUSTRALIA BETWEEN : MAURICE HODGSON LYPORD Appellant AND: JOSEPH LEVIT Respondent CORAM: Bowen C.J., Toohey and Fisher J.J. 19 July 1984 REASONS FOR JUDGMENT THE COURT: The appellant is the trustee of the bankrupt estate of the respondent. On 26 January 1984, in the Supreme Court of Western Australia, an order was made that from the income of the bankrupt the sum of $833.33 be paid each month to the trustee for the benefit of the bankrupt's creditors. The appellant challenges the adequacy of the amount so ordered to be paid and in this appeal seeks an order that the amount be increased to $1,666.66 a month, alternatively that there be anew trial of the issues between-the parties. Sub-section 131(1) of the Bankruptcy Act 1966 provides that, subject to the section, "a bankrupt who is in receipt of income is entitled to retain it for his own benefit". Sub-section 131(2)} empowers the Court, upon the application of the trustee, to order that "all, or such part as the Court thinks fit, of the income of the bankrupt shall be paid to the trustee for the benefit of the bankrupt's creditors". The section vests in the Court a broad discretion though of course one that must be exercised judicially. The respondent is an ear, nose and throat surgeon, described by the learned primary Judge as a_ successful surgeon who works extremely long hours. In 1982 he was divorced from his wife who is also a medical practitioner and who was, at the time of the hearing in the Supreme Court, a psychiatric registrar at Royal Perth Hospital. They have six children to whom some more detailed reference will be necessary later. The respondent carries on practice through a company structure, the existence and efficacy of which were not challenged by the appellant. He is employed by J. & P. Levit Pty. Ltd. at a weekly salary of $1,500, or such other sum as may be agreed, in addition to which he receives a sum described as "the bonus salary". Clause 3.1 of the employment agreement defines the bonus salary as a sum "equal to the net income of the Company for that financial year as calculated pursuant to the provisions of section 95 of the Income Tax Assessment Act 1936 less the base salary, the superannuation contributions referred to in clause 3.6 and any payroll tax payable on that salary". In effect then the respondent receives by way of salary his earnings less outgoings of the company including provision for his superannuation. J. & P. Levit Pty. Ltd. leases consulting rooms and the equipment necessary for the conduct of the practice from Double Doc Pty. Ltd., a company which is trustee for the Levit Family Trust. The operations of the company and of the trust are dealt with later in these reasons. The profit and loss statement for J. & P. Levit Pty. Ltd. for the year ended 30 June 1983 shows that for that year the respondent received a total salary of $92,432.59. An amount of $78,000 was paid to Double Doc for rent and service fees. For the year ended 30 June 1983 the respondent was assessed by the Commissioner of Taxation on a taxable income of $91,105 for which tax was assessed in the sum of $45,369.67. It should perhaps be said at this point that the respondent's bankruptcy was brought about because of substantial debts he incurred, together with a large liability for tax and penalties, consequent upon commercial ventures upon which he embarked at the hands of one Moll, a man who has' received considerable adverse publicity in Western Australia over recent years. The resulting loss was in excess of $600,000. There are some unsatisfactory and to some extent unexplained features of the way in which the Levit family conduct their affairs. The balance sheet of Double Doc for the year ended 30 June 1983 shows fixed assets to the value of $451,066.40. Of this amount, $400,000 is attributed to a property in Ventnor Avenue, West Perth and $43,000 to land at Rockingham. Whether these values are commercially realistic did not appear. The current assets of the company include a sum of $54,653.89, described as "right of indemnity from the Levit Family Trust". This item was not explained. Three amounts are listed as deferred liabilities of the company. They are: Unsecured loans $ 56,979.78 Parktown Holdings Pty. Ltd. $445,332.00 dg. & P. Levit Pty. Ltd. § 10,000.00 $512,311.78 These items were not explained although it is apparent from the evidence that all the shares in Parktown Holdings Pty. Ltd. are held by Double Doc as trustee for the Levit Family Trust, these shares having been purchased for $18,600. The liability of $445,332 arising from the previous purchase of assets of Parktown can therefore be ignored in attempting to assess the net worth of the assets in the Family Trust. In his reasons for judgment, the learned primary Judge commented: "It is stated that the bankrupt had control of a share in Parktown Holdings Pty. Ltd. and that during the time that he was subject to the deed of arrangement the special powers given by the Memorandum and Articles of Association to that share which enabled the bankrupt to control the ultimate destiny of income and assets amounting to some $450,000 was relinquished by the bankrupt. It is also suggested that it is within the power of the bankrupt to regain control of those assets and make them available to the creditors". His Honour treated these matters as irrelevant to the application before him which was an application for contribution from income. The appellant challenges this conclusion and contends that his Honour should have had regard both to the respondent's relinquishing of his interest in Parktown Holdings and his capacity to regain that interest, at any rate to the extent that the interest was productive of income. The Levit Family Trust was established by deed dated 24 January 1979. The respondent's brother Myer Martin Levit is the settior and Double Doc the trustee. The deed identifies as "primary beneficiaries" the six children, Colin, Marcus, Karen, Rochelle, Barbara and Robyn. The deed identifies as "general beneficiaries" the primary beneficiaries and their issue; the spouses, widows and widowers of the primary beneficiaries and of their issue; the respondent and his former wife; the trustee of any trust or settlement under which any of the beneficiaries already mentioned has an interest; and any corporation nominated in writing by the trustee prior to the vesting date, at least one share in which is owned by a beneficiary. The general beneficiaries do not presently extend beyond the primary beneficiaries and respondent and his former wife. As from the vesting date the trustee is required to hold the capital and income of the trust fund upon trust for all or any of the general beneficiaries in such proportions as it may determine, with power in its absolute and uncontrolled discretion to apply the "contingent presumptive or vested share of any beneficiary in the capital of the Trust Fund to such beneficiary for the use and benefit of such beneficiary..." (cl.6(a)(i)). The respondent is thus contingently entitled to a share in the capital of the trust fund and to an advancement of this share prior to the vesting date. The significance of the distinction between a primary and general beneficiary is that the trustee is required to hold so much of the income of the trust fund, as has not been applied in favour of the general beneficiaries or accumulated before the last day of the year of income, for the benefit of such of the primary beneficiaries as are living on the last day of the year of income and if more than one as tenants in common in equal shares (cl.4(b)). The respondent has therefore a contingent interest in the income of the trust fund, which is conditional upon a proper exercise of the discretion of the trustee to apply or pay to him. The children would not be entitled to a more favourable exercise of the trustee's discretion than the respondent under clauses 4(a), 5(a) or 6 merely because they are designated as "primary beneficiaries". The balance sheet for the Levit Family Trust as at 30 June 1983 shows net assets of only $50. Two things should be said about this. The first is that Double Doc holds its assets on behalf of the trust. The second is that the beneficiaries' loan accounts include debit items of $4,417.07 against the respondent and $34,257.78 against Mrs. Levit. Again, the origin of these debts and the basis of their repayment were not precisely explained, although some mention was made of loans from Double Doc before the primary Judge. The accounts reveal that the trustee lent Mrs. Levit in excess of $34,500 during the year ended 30 June 1983. But counsel for the appellant submitted that it could not be said that Mrs. Levit lacked capacity to repay the debt if called upon to do so for in July 1983 she bought a house in City Beach for $90,000 of which about $70,000 came from her own resources including some money loaned by Double Doc, the balance of $20,000 being secured by mortgage to a bank. The profit and loss statement for the Levit Family Trust for the year ended 30 June 1983 shows a distribution of so called profit of $7,421.24 to two of the children and $7,421.25 to four of them, consequent upon the decision of the trustee in their favour under clause 4(a&) or possibly by operation of clause 4(b). In this year the loan account of five of the children increased each by approximately $4,000, being the amount of income which at that stage had not been expended for their benefit. The gross income of the trust was $96,437.24 and it is neither profitable nor possible to pursue all the items that constitute the very substantial expenses of the trust of $51,909.76. The gross income is derived largely from the $60,000 and $18,000 paid for service fees and rent by J. & P. Levit Pty. Ltd. The income includes an amount of $14,400 (previous year $4,314) described as "interest earned". We find it quite extraordinary that when Mr. Putnin, the trust's accountant, was questioned about this item in the Supreme Court, the most he could say was: "I would say that it is interest earned on deposits ina bank account. I do not have the details here at this stage". Since the interest earned would indicate a capital sum of $150,000 or thereabouts, Mr. Putnin's nebulous answer was most unsatisfactory. The significance of the Levit Family Trust for the purposes of the present appeal is, we think, twofold. First, it provides a source of income for the respondent's children. To that extent it relieves the respondent of the need to provide for them; in turn the salary paid to him by J. & P. Levit Pty. Ltd. is to that extent uncommitted. Second, the respondent is himself a potential beneficiary, being contingently entitled under the trust deed to an interest in both capital and income so that regard must be had to the trust when determining the financial position of the respondent. It is necessary to look at each of those matters in turn. At the time of the hearing in the Supreme Court the children ranged in age from 20 to 13. Three were still at school and three were at tertiary institutions. For the most part they lived with the respondent at 16 Seymour Avenue, Dianella, the matrimonial home which was owned by Mrs. Levit and leased to the respondent at a monthly rental of $520. The children spent quite a lot of time with their mother, particularly on weekends, and to that limited extent they were provided for by her. In the Supreme Court the respondent tendered what was described as an estimated cash flow budget for the period 1 July 1983 to-30 June 1984. The document lists the respondent's income and expenditure for the period in question, ending with an 10. estimated shortfall of $113. The expenses include rent, food, housekeeping and items referable to the maintenance of the household as well as an amount of $10,000 being "payments to trustees". There must be, in these items, a_ substantial component attributable to the care of the children. The finding of the learned primary judge was in these terms: "It is clear that each child is in receipt of income and in my opinion it has not been established by the bankrupt that they require any contribution from his income to their clothing, educational requirements or transport requirements. Whether they should make some contribution to him for his housing and feeding them is not for me to decide. That involves moral and other considerations outside my jurisdiction. In the end one relevant and perhaps practical consideration may be the amount of any order that I make". Having regard to the income which the children receive or are entitled to receive from the trust fund and the general contribution made to their upkeep by their father and mother, we are satisfied that a consideration of the appropriate order to be made under s.13l1 of the Bankruptcy Act should exclude any need for a direct contribution by the respondent for the support and upbringing of the children. It is true, as his Honour said, that it is not for the Court to determine whether the children should make some contribution to the respondent for the board and lodging he provides. At the same time, we do not think that it should exclude from consideration the fact that the outgoings of the respondent include items to which some contribution might reasonably be expected from the children. ll. The relevance of the position of the respondent asa potential beneficiary under the deed of trust arises in this way. At the time of the hearing in the Supreme Court the respondent was making a voluntary payment to the appellant from his income of the sum of $10,000 a year. Having considered the evidence, the learned primary Judge said: "IT have reached the conclusion that based on his past commitments and his prospective income it would not inconvenience the bankrupt to an unreasonable extent to contribute the sum of $15,000 per annum from his income. That however does not take into account his commitment or probable commitment for legal fees for the future". It should be mentioned in passing that notwithstanding the reference in this passage to "inconvenience" to the bankrupt, it is apparent from his judgment as a whole that his Honour sought to apply the test laid down in Re McLachlan, infra. At the time the matter was heard, criminal charges were pending against the respondent and other persons arising out of certain transactions in which the respondent had been involved. His Honour was told that, if the charges proceeded to committal and to trial, the respondent would incur legal fees up to $40,000. His Honour's judgment was delivered in January 1984. The appeal came before this Court in May. On the hearing of the appeal we admitted additional evidence in the form of an 12. affidavit by the respondent that, since the proceedings in the Supreme Court, a committal hearing of 9 days had been completed in respect of certain conspiracy charges against him and that a further committal hearing was to take place within the next two months. Thus the likelihood of legal expenses to which his Honour adverted had become a reality, at least to the committal stage. Committal expenses to date amount to nearly $19,000. The respondent must face the costs of further committal proceedings and, in all probability, of a trial. It was the likelihood of this expense that prompted his Honour not to increase the payment being made voluntarily. Instead he gave the appellant liberty to apply for an increase to $15,000 "in the event of such charge not proceeding further". Counsel debated the power and propriety of the trustee of the Levit Family Trust applying income or capital for the benefit of the respondent particularly to alleviate this additional expense to which he has been and will be put. They discussed the position of the respondent as "Guardian" and whether it might be possible to remove the existing trustee and replace him with another trustee who might be disposed to apply income from the trust fund for the benefit of the respondent. It should be stressed that these submissions were hypothetical in the sense that there was no evidence of the present trustee's willingness or otherwise to include the respondent in any 13. distribution from the trust fund, nor was there any suggestion that it had been approached to do so. In our view, it is unnecessary for the Court to pursue these questions. It is enough to note that it is within the power of the trustee to make a distribution of income or advancement of capital in favour of the respondent byt that any substantial reduction in the income or, <= of the children™:--would make them more dependent upon the respondent. This was not an aspect to which his Honour had regard in reaching the conclusion he did. We have already referred to the generality of the language in which sub-s.131(2) is cast. In Re McLachlan (1975) 8 A.L.R. 162 at p. 165 Riley J. said: "The burden of proof of what is required or reasonably necessary is borne by the bankrupt: Emden v Carte (1881) 17 Ch.D. 768 at 769; Re Robertson (1931) 4 ABC 133 at 142 (affd (1932) 47 CLR 482)." In the matter now before this Court the learned primary Judge described that onus as evidentiary, saying that "in the long run the burden of establishing that an order should be made and the quantum of that order lies on the trustee". With respect, we agree with his Honour's view. Sub-section 131(1) begins with the assertion that a bankrupt is entitled to retain income for his own benefit. It is true that the assertion is prefaced with the words "Subject to this section". But where, as 14. in sub-3.131(2), a statute permits someone to approach the Court for an order against another, commonsense and logic dictate that it is for the applicant to satisfy the Court that an order should be made. Of the application before him, the learned primary Judge said: "The inquiry is aimed at ascertaining proper distribution of actuul income". His Honour elaborated this statement by saying that if a trustee is of the view that a bankrupt has entered into transactions with a view to defeating his creditors, there is appropriate machinery in the Bankruptcy Act available to the trustee. In his Honour's view, the hearing of an application under sub-s.131(2) is not the appropriate place for such an inquiry. We agree with his Honour, so long as the reference to "actual income" is not confined to income in the hands of the bankrupt. If there is a source of income or capital available to the bankrupt, the Court is entitled to and indeed should consider the extent to which the bankrupt may benefit therefron. The existence of the trust deed constituting the Levit Family Trust is a good illustration of a situation in which this principle may operate, So too is the respondent's relationship with Parktown Holdings though, since the respondent's interest in that company 15. found its way into the Levit Family Trust, one must be careful not to duplicate sources of income. The power of the Court to order that all of the Dbankrupt's income be paid to the trustee suggests that the Court may have regard to and take into account the bankrupt's capacity to draw on income or other funds which he is not actually receiving but which could be made available consequent upon an exercise of discretion in his favour. The legislature having conferred a discretion on the primary Judge, the question for this Court must be whether it is satisfied that his Honour's exercise of discretion miscarried in some way. It is open to the appellant to show this by establishing that the primary Judge proceeded on a wrong principle, that he took irrelevant matters into account or left relevant matters out of account or that the very order made demonstrates on its face that the exercise of discretion miscarried. There is in some of the 19th century decisions a notion that the Court should look at the conduct of the bankrupt and "where the bankrupt has behaved badly he should be made to feel the pinch of having less to live on...". (Re Lawson (1892) 2 B.C. 78 at p.79. See also Re Bailey (1892) 2 B.C. 79). But that philosophy is not evident in later decisions. The question is one of ascertaining what is reasonably necessary for the maintenance of the bankrupt and his family, regard being 16. had to the bankrupt's occupation and station in life; Re McLachlan, supra. In making that assessment, the Court may bring into account not only the income in the hands of the bankrupt but also income or other funds which are reasonably available to hin. On the information available for the financial year ended 30 June 1983, the respondent had an income by way of salary in the sum of $90,000 or thereabouts. The amount distributed to the children or credited to their loan accounts was nearly $45,000. In the appellant's submission, it would be reasonable to approach the matter of an order under sub-s.131(2) by applying the respondent's own income to the payment of his income tax (about $45,000) and tax payable on the income from the trust (about $20,000). This would leave about $25,000 from the respondent's income plus the trust income of $45,000, a total of $70,000 for the support of the family. Mrs. Levit may be left out of account as she is self-supporting. If the respondent was ordered to pay $20,000 a year to the appellant, there would still be an amount of $50,000 for the family, a little more on the appellant's calculations. It may not be justifiable to blend the income of the respondent and the children in this way. But the precise approach is not crucial. From the respondent's own income he has about $45,000 a year after tax and the children an income of 17. $25,000 after tax. on those figures it would not be unreasonable, as his Honour said, to order the respondent to pay $15,000 a year. But, in the respondent's submission, such an order would not permit him to cope with the legal expenses he now faces and will face in connection with the charges against hin. This may well be so if he is compelled to meet those expenses from his income. But the expenses are of a special and non-recurring nature. In the circumstances in our opinion (contrary to the approach of the learned primary Judge) it is relevant to look at the position of the respondent as a potential beneficiary under the trust deed. Any substantial distribution of trust income to the respondent at this stage will reduce the income available to the children and may require a reassessment of their dependency. But it is within the absolute and uncontrolled power of the trustee to apply the contingent, presumptive or vested share of the respondent in the capital of the trust fund for his use and benefit. The vesting date under the trust deed is 30 June 2057 or such earlier date as the trustee may appoint. It would be unreal not to recognise the Levit Family Trust as part of a redistribution of the respondent's capital and income with a view at least to spreading the incidence of income tax. Such a distribution may be perfectly lawful but it cannot ct 18. be ignored in considering whether a substantial expense such as legal costs must in truth be borne by the respondent out of his income. As already mentioned, the assets of Double Doc are held on behaif of the Levit Family Trust. They include unencumbered land of very considerable value, part of which might be sold or mortgaged and the proceeds applied on behalf of the respondent without an appreciable reduction in the income of the trust. Clause 6(e) and (i) empowers the trustee to take such a course. See also the Trustees Act 1962 (W.A.) 3.43. Of course this Court cannot dictate to the trustee the manner in which it will exercise its powers as trustee. It can do no more than recognise that there is a source from which the respondent's legal expenses might be met and reasonably met in the circumstances. This was not a matter adverted to by the learned primary Judge who did not refer to. the power of advancement. He placed the responsibility of seeking a variation of his order on the trustee. In the circumstances, especially having regard to the existence of the trust fund and the respondent's capacity to benefit from it, it would, in our view, be reasonable to require the respondent to pay the sum of $15,000 a year. It is a matter for him whether he applies to the trustee for assistance in respect of his legal costs. The Court is empowered by 19. sub-s.131(5) of the Bankruptcy Act to vary such an order "so as to relieve a person from liability to pay to the trustee Cof his bankrupt estate] amounts that have become payable under the order". The respondent may invoke that provision if circumstances, including the proper exercise of the trustee's discretion regarding any distribution of capital, appear in the eZ future to warrant'Such a course. The amount of $3,600 insurance premiums about which the primary Judge was not satisfied must be mentioned briefly. Counsel for the appellant submitted that the Judge had erred, after finding that he was not satisfied that this amount was justified, in not increasing the order by $3,600 more than it otherwise would have been. However, it has been agreed that the primary Judge was not engaged in a simple arithmetical exercise but was exercising a discretion by considering all the relevant circumstances. He dealt with each piece of evidence in his reasons. It is to be assumed that he considered all these aspects mentioned in his reasons in arriving at the order he made. There is no indication that his finding in relation to the insurance premiums was not taken into account by him in determining the final order. However, this does not mean that, if the respondent can establish at some later stage that it is reasonable for him to pay such a_ sum in insurance premiums,this would ensure that the amount payable by him under sub-s,131(2) 20. * should automatically be reduced by $3,600. The estimates of his expenses are general only and an aid to the Court. It would have been open to the primary Judge in his discretion to have rejected the sum of $3,600 but nevertheless make allowance for the fact that some insurance premiums were likely to be reasonably paid. If such a sum could be established in further s.131 proceedings, it would depend upon the exercise of that Court's discretion as to whether the order should be varied and, if so, by how much. The appeal should be allowed and the respondent ordered to pay to the appellant the sum of $1,250 a month. Hcerti., rh rthsani the (4 preceding pages arc true copy of the _asons for judgment nerew of theCoort Tae? ty yea) tC AY Assoclate Z Dated Toi, 1434