.UR LIMITED DISTRIBUTION NOT SUITABLE FOR REPORTING r JUDGMENT No. 2/57 SR- steeerences CATCHWORDS BANKRUPTCY - Income of bankrupt - s. 131 Bankruptcy Act 1966 - factors weighing on exercise of Court's discretion to order payment of whole or part of bankrupt's income to trustee - income derived from employment by company controlled by bankrupt's wife - bankrupt unable to earn income in any other employment. s. 131 Bankruptcy Act 1966 GERALD MARCUS JAFFEE ex parte MAXWELL WILLIAM PRENTICE as Trustee of the property of GERALD MARCUS JAFFEE No W442 of 1986 Ryan J 6 June 1988 Sydney IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION No W442 of 1986 BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY RE: GERALD MARCUS JAFFEE (Bankrupt) EX PARTE: MAXWELL WILLIAM PRENTICE as Trustee of the property of GERALD MARCUS JAFFEE Bankrupt (Applicant) Coram: Ryan J Date: 6 June 1988 Place: Sydney MINUTES OF ORDER The Court Orders: 1. That the application be dismissed. NOTE: Settlement and entry of orders is dealt with by Bankruptcy Rule 124. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION No W442 of 1986 BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY RE: GERALD MARCUS JAFFEE (Bankrupt) EX PARTE: MAXWELL WILLIAM PRENTICE as Trustee of the property of GERALD MARCUS JAFFEE Bankrupt (Applicant) Coram: Ryan J Date: 6 June 1988 Place: Sydney EX TEMPORE REASONS FOR JUDGMENT By an application dated 22 December 1987, the applicant, who is the trustee of the bankrupt estate of Gerald Marcus Jaffee, has sought the following orders:- "1. That the net salary of Gerald Marcus Jaffee be paid by his employer, Gayridge Investments Pty Limited ['Gayridge'], directly to the trustee for the benefit of his creditors pursuant to Section 131 of the Bankruptcy Act, 1966 ['the Act']. 2. Alternatively, that such part of the salary of Gerald Marcus Jaffee as the Court thinks fit be paid by his employer, Gayridge, directly to the trustee for the benefit of his creditors, pursuant to section 131 of the Act." The application, as appears on its face, is made under 8.131(2) of the Act which provides:- "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 to the trustee for the benefit of the bankrupt's creditors." In the course of a public examination under s.81 of the Act between 1 July and 3 July 1987, it was revealed that the bankrupt, Mr Jaffee, was employed as the manager of the company, Gayridge, at a net salary of approximately $1700 a month. It was further revealed that Mr Jaffee's wife had independent means from which she defrayed her own living expenses, the expenses of maintaining the joint domestic establishment of herself and Mr Jaffee and most of Mr Jaffee's personal living expenses. It was further indicted that Mr Jaffee's salary was applied by him to other expenses, such as the purchase of books, magazines, minor articles of clothing, train tickets and occasional drinks and meals, and to payment of medical fees. In an affidavit sworn on 31 March 1988, Mr Jaffee has deposed that he has acted on medical advice from Dr Glazer of Rose Bay about the consequences of a haemorrhaged duodenal ulcer for which he underwent surgery in the USA on 4 November 1986. The effect of that advice, as confirmed by the oral evidence of Dr Glazer, was that Mr Jaffee should drastically reduce his workload, take regular short walks and avoid stress as much as possible. Mr Jaffee has sworn that in reliance on that advice he has reduced his workload by now acting only as a consultant to Gayridge, in which capacity he is occupied for no more than four hours a day on no more than three days a week. Mr Jaffee has further deposed, and the records of Gayridge confirm, that since the end of February this year, he has been remunerated in his capacity as a consultant at the rate of $15 an hour and has been in receipt of a gross income of $180 a week, which leaves him, after deduction of tax instalments, with a net amount of $156.50 a week. The decision to reduce Mr Jaffee''s salary was taken at a meeting of the directors of Gayridge attended by Mr Jaffee's wife and Miss Cantrell, the secretary of Gayridge. Mc Jaffee's recollection is that he was in attendance for part of the time. It does not appear that he protested that the reduction in salary was unfair or sought in any way to dissuade Gayridge from reducing his salary in the way it did. However, a bankrupt may either, before or after his bankruptcy, make any bargain which he pleases with any person as to the remuneration which he is to receive for personal services; See Re Shine. Ex parte Shine. [1892] 1 Q.B. 522 where Fry L.J. observed at 531:- "I regard the words of the section and of the order as referring to actual receipt. They do not refer to title. They refer to the actual receipt of the money. I do not say that, if there were a colourable or sham arrangement, by which a man was made to appear not to be in receipt of a sum of which he was still actually in receipt, the Court would not see through it. But the question is, Is the man really and actually in receipt of that sum?" After dealing with the facts of the case then before the Court, his Lordship continued at the foot of page 531:- "This section does not enable the Court to require a bankrupt to receive anything. It only gives a discretionary power to the Court when the man is in actual receipt of a sum of money. The Court can neither restrain a bankrupt from entering into a valid agreement about his salary, nor compel him to earn his salary, nor prevent his forfeiting it. He is a free man in respect of all these things. The section only applies when he is actually in receipt of a salary or income." His significantly reduced income has been applied by Mr Jaffee in defraying incidental expenses similar in kind to those to which he referred in his public examination. Those items of expenditure have recently included $45 for an "Ayurvedic Massage" which Mr Jaffee undergoes about once a week and which he claims affords some relief from his physical ailments. If it were relevant, there is no evidence from which I can infer that the salary of $180 a week paid to Mr Jaffee by Gayridge is less than the present value of his services as a consultant to that company. Indeed, the inference is open that notwithstanding his expertise in matters related to breeding and racing of thoroughbred horses, which Mr Jaffee has assiduously maintained, the bankrupt, who is now aged 69 years and in indifferent health, could not obtain income from anybody other than Gayridge. There is authority for the proposition that a wife's financial position is relevant to an application under s.131 in respect of her bankrupt husband. See, for example, Re Saunders. Ex parte Saunders. [1895] 2 Q.B. 424 at 426. In Re Saunders, the Court of Appeal was at pains to emphasize that the discretion under the counterpart of s.131 is a general one to be exercised on the facts of each case and not subject to any binding rule of law. In the present case, the wife is not dependent to any extent at all on her husband's income, but, in fact, contributes significantly from her own income to his support. Those circumstances raise the question whether the whole or any part of the bankrupt's present income is reasonably necessary for the support of the bankrupt himself. The principles to be applied in answering that question were distilled from the authorities by Riley J. in the following passage from Re McLachlan (1975) 8 ALR 162 at 165 where his Honour said:- "No order should be made under s 131 which would contravene the long-standing principle that a bankrupt is not to be deprived of income reasonably necessary for the maintenance of himself and his family: see eg the cases referred to by Williams J in Federal Commissioner of Taxation v Official Receiver [1556] ALR 643 648-9; 955 Ctr 300 at 31z-5. But the cases consistently speak of what the bankrupt is entitled to retain as being what is required or reasonably necessary for the support of himself and his family: see eg Re Graydon [1896] 1 QB 417 at 421; [1895-9] All ER Rep ; Mercer v Vans Colina (1897), reported [1900] 1 9B 130 (n) at I3I; Re Roberts [1900] 1 QB 122 at 128, 129 (where Lindley MR said that 'the necessity is the limit of the axception' 3; Re Walter [1929] 1 Ch 647 at 652-3; [1928] All ER Rep 640; Nette v Howarth (1935) 53 CLR 55 at 65; P1935) ALR 241 Falstein v Official Receiver [1963] ALR 369; 108 CLR 5235 at 526. Regard must be had to the bankrupt's occupation and station: Re Walter, supra P1929] 1 Ch) at 653. 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 82)." In respect of the last observation it has been pointed out by a Full Court of this Court in Lyford v Levit (1984) 2 PCR 264 at 269:- "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. 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 in s.131(2), a statute permits someone to approach the court for an order against another, common sense and logic dictate that it is for the applicant to satisfy the court that an order should be made." I am not prepared to infer from the evidence before the Court that Mrs Jaffee would necessarily contribute to her husband's living expenses some further amount equal to so much of his present income as he might be ordered under s.131 to pay to the trustee. It is tempting to speculate that Mrs Jaffee controls Gayridge and that the present salary allowed to her husband is merely an allowance in another form to her husband by way of pocket-money with some incidental taxation advantages to Gayridge, and through it to Mrs Jaffee. The evidence does not permit the Court to form firm conclusions about those matters but, if the speculation be correct, the consequence of an order under s.131 would probably be that Gayridge would cease to pay any salary at all to Mr Jaffee who would then be entirely and directly dependent upon his wife for his living expenses. However, on the evidence before the Court, it is sufficient to indicate that Mr Jaffee has discharged the onus in an evidentiary sense of showing the whole of his present net income of $156.50 a week is reasonably necessary to meet such of his living expenses as, in the present circumstances, are not defrayed directly by his wife. Against that, the trustee has not persuaded me that the likelihood that Mr Jaffee's wife would meet all those expenses if his net income were wholly or partly diverted by an order under s.131(2) renders it an appropriate exercise of the Court's discretion to make such an order. I should say that this case turns on its own extraordinary facts, which include the circumstances that at all relevant times the bankrupt's sole income has been derived from a company controlled by his wife and he has had no capacity to earn income from any independent source. For these reasons the application is refused. I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of his Honour Mr Justice Ryan. MPV Farnanrte Associate Dated: 6 Henn -9rer