FEDERAL COURT OF AUSTRALIA Trustee of the Property of Patrick Bede O'Reilly v Law Society of New South Wales [2001] FCA 701 BANKRUPTCY – property of bankrupt vesting in trustee of bankrupt's estate – where property acquired before bankruptcy ("before-acquired property") vests upon bankruptcy – where property acquired after bankruptcy ("after-acquired property") vests upon acquisition or devolution – income of bankrupt as property – whether before-acquired income consisting of personal earnings does not vest – where no statutory provision to that effect – where statutory provision has effect that after-acquired income does not vest – whether, pursuant to "common law of bankruptcy", before-acquired income consisting of personal earnings does not vest – whether "common law of bankruptcy" provides basis for statutory implication that before-acquired income consisting of personal earnings does not vest – whether "common law of bankruptcy" should only be accepted as providing such basis where pressing reason for doing so. Bankruptcy Act 1966 (Cth) ss 5(1), 58(1)(a), 58(1)(b), 58(6), 116(1)(a), 116(2)(g), Pt VI, Div 4B Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies (1993) 42 FCR 571 followed Re Hawkins; Ex parte Worrell (1996) 71 FCR 371 referred to Re Sharpe; Ex parte Donnelly (1998) 80 FCR 536 referred to Geia v Palm Island Aboriginal Council [2001] 1 Qd R 245 followed Chipendall v Tomlinson (1785) 4 Dougl 318; 99 ER 900 referred to In re Roberts [1900] 1 QB 122 considered Williams and Muir Hunter on Bankruptcy 19th ed. 1979 Practice and Procedure High Court and Federal Court of Australia looseleaf TRUSTEE OF THE PROPERTY OF PATRICK BEDE O'REILLY, A BANKRUPT v LAW SOCIETY OF NEW SOUTH WALES NG 8447 of 1997 KATZ J 12 JUNE 2001 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 8447 of 1997 BETWEEN: TRUSTEE OF THE PROPERTY OF PATRICK BEDE O'REILLY, A BANKRUPT APPLICANT AND: LAW SOCIETY OF NEW SOUTH WALES RESPONDENT JUDGE: KATZ J DATE OF ORDER: 12 JUNE 2001 WHERE MADE: SYDNEY THE COURT ORDERS THAT: The matter be stood over for seven days. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 8447 of 1997 BETWEEN: TRUSTEE OF THE PROPERTY OF PATRICK BEDE O'REILLY, A BANKRUPT APPLICANT AND: LAW SOCIETY OF NEW SOUTH WALES RESPONDENT JUDGE: KATZ J DATE: 12 JUNE 2001 PLACE: SYDNEY REASONS FOR JUDGMENT 1 There is before the Court a claim by the Official Trustee in Bankruptcy ("the Trustee") that the Trustee is entitled to the sum of $58,180.87, which sum is presently in the possession of the Law Society of New South Wales ("the Society"). 2 The circumstances out of which the claim has arisen are as follows: in May 1993, Mr Patrick Bede O'Reilly was practising as a solicitor in New South Wales. On 28 May 1993, the Supreme Court of New South Wales ("the Supreme Court") ordered that, pursuant to s 92 of the Legal Profession Act 1987 (NSW), a receiver ("the receiver") be appointed of all property held by Mr O'Reilly in accordance with Pt 8 of that Act. After the receiver's appointment, but before 6 December 1994, the receiver received from clients of Mr O'Reilly the sum of $58,180.87, representing fees and disbursements owed by those clients to Mr O'Reilly in respect of work which had been done for them by him. On 6 December 1994, Mr O'Reilly committed an act of bankruptcy, he having failed either to comply with or to have set aside a bankruptcy notice which had earlier been served on him by the Society. That bankruptcy notice had been based on a judgment which had earlier been obtained by the Society against Mr O'Reilly in the Supreme Court in respect of the receiver's remuneration, costs and expenses. On 29 June 1995, on the Society's petition, which had been presented on 1 May 1995, a sequestration order was made by this Court against Mr O'Reilly's estate, based on the act of bankruptcy to which I have referred above. The Trustee became the trustee of Mr O'Reilly's estate. On 1 August 1995, the receiver paid to the Society a sum of money which he had received from Mr O'Reilly's clients, which sum included the sum of $58,180.87 which is the subject of the present proceeding. 3 Paragraph 58(1)(a) of the Bankruptcy Act 1966 (Cth) ("the Act") provides in effect that, subject to the Act, at the time when a debtor becomes a bankrupt, "the property of the bankrupt, not being after-acquired property", vests forthwith in the trustee of the bankrupt's estate. Paragraph 58(1)(b) of the Act provides in effect that, subject to the Act, "after-acquired property of the bankrupt" vests, as soon as it is acquired by, or devolves on, the bankrupt, in the trustee of the bankrupt's estate. In relation to a bankrupt, "after-acquired property" in s 58 of the Act is defined in subs 58(6) of the Act as meaning "property that is acquired by, or devolves on, the bankrupt on or after the date of the bankruptcy, being property that is divisible amongst the creditors of the bankrupt". The term "property" is defined in subs 5(1) of the Act as meaning "real or personal property of every description, whether situate in Australia or elsewhere" and as including "any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property". The phrase "the property of the bankrupt" is defined in subs 5(1) of the Act as meaning generally, in relation to a bankrupt, "the property divisible among the bankrupt's creditors" and "any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt". Paragraph 116(1)(a) of the Act provides generally that "property divisible amongst the creditors of the bankrupt" includes, "… all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge…." Other provisions of s 116 of the Act exclude certain types of property from that property of the bankrupt which is divisible amongst the bankrupt's creditors, but it is unnecessary for present purposes to refer to the detail of those exclusions. 4 The Trustee's position before me was that, at the time when Mr O'Reilly became a bankrupt, the sum of $58,180.87 which is the subject of the present proceeding was, within the meaning of the Act, Mr O'Reilly's property, not being after-acquired property, and that the sum therefore vested forthwith in the Trustee pursuant to par 58(1)(a) of the Act. 5 The Society's position before me, on the other hand, was that, "The short answer [to the Trustee's claim] is that the sum of money was income of the bankrupt collected before his bankruptcy and hence was not 'property' within the meaning of that expression under the Act". 6 In my view, the Trustee's, rather than the Society's, position before me was the correct one. 7 I begin my account of the reasons for that conclusion with the proposition that "the after-acquired property to which ss 58 and 116 [of the Act] apply is defined widely enough to encompass income" received by a bankrupt. The words which I have just quoted come from the reasons for judgment of French J in Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies (1993) 42 FCR 571 at 577. However, nonetheless though French J accepted that the after-acquired property to which ss 58 and 116 of the Act apply is defined widely enough to encompass after-acquired income, his Honour concluded in Gillies that after-acquired income did not, in the result, fall within that definition. That was because, "… 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 [Pt VI,] Div 4B [of the Act] which approaches a code for dealing with after-acquired income of the bankrupt." The comprehensive scheme in the Act to which his Honour was referring is one in which a bankruptcy trustee can assess the bankrupt's income as exceeding a certain level, in which case the bankrupt becomes liable to contribute a part of that income to the trustee for division amongst the bankrupt's creditors. 8 French J's approach in Gillies was afterwards referred to with approval by Spender J in Re Hawkins; Ex parte Worrell (1996) 71 FCR 371 at 375, by Lockhart J in Re Sharpe; Ex parte Donnelly (1998) 80 FCR 536 at 540 and by the Queensland Court of Appeal (Pincus and Thomas JJA and Jones J) in Geia v Palm Island Aboriginal Council [2001] 1 Qd R 245 at 249-50. I too accept its correctness. 9 No reason whatever appears to me to give a different answer to the question, similar to the question discussed in Gillies, whether the property, not being after-acquired property, to which ss 58 and 116 of the Act apply is defined widely enough to encompass what I may call before-acquired income; in my view, that property plainly is defined widely enough. The question then arises whether, despite the width of the definition, there is any reason why such before-acquired income should be treated as not being so encompassed. 10 The Society did not submit before me, and could not seriously have done so, that there exists in the Act any comprehensive scheme for dealing with before-acquired income which achieves the same result as that which French J held in Gillies was achieved by the comprehensive scheme in the Act for dealing with after-acquired income, namely, the result of excluding the income concerned from the definition of the property to which ss 58 and 116 of the Act would otherwise have applied. Further, the Society did not submit before me, and could not seriously have done so, that any of those express exclusions from the property of a bankrupt divisible amongst the bankrupt's creditors, which express exclusions appear in s 116 of the Act, had application to the sum of $58,180.87. 11 Instead, the Society relied before me on "the common law of bankruptcy" as impliedly excluding before-acquired income from the definition of the property to which ss 58 and 116 of the Act would otherwise have applied, at least when that income consists of personal earnings. 12 It is convenient to introduce the topic of "the common law of bankruptcy" by referring, as the Society did in its submissions before me, to the English work, Williams and Muir Hunter on Bankruptcy (19th ed). The editors of that work began the relevant discussion by mentioning (at 259) "[t]he general rule … that all the bankrupt possesses at the beginning of, or acquires during the continuance of, his [or her] bankruptcy vests … in the trustee". They then pointed out that "to both parts of this rule there are numerous exceptions". They then classified, by reference to the sources of the various exceptions, "[a]ssets of the [b]ankrupt not divisible amongst his [or her c]reditors". The source of most of those exceptions was express statutory provision, whether in bankruptcy or in other legislation, but another such source was said to be "the common law of bankruptcy", by which there were said to be excepted from the assets of a bankrupt divisible amongst the bankrupt's creditors two types of assets: first, "[s]uch part of the bankrupt's personal earnings as may be necessary for his [or her] maintenance"; and, secondly, "[c]ertain rights of action". 13 I will refer more particularly below to the discussion in Williams and Muir Hunter on Bankruptcy of the exception from the assets of a bankrupt divisible amongst the bankrupt's creditors consisting of "[s]uch part of the bankrupt's personal earnings as may be necessary for his [or her] maintenance". However, before I do so, I should mention again the case of Geia, to which I have already referred above. 14 In Geia, the question arose whether a particular cause of action which had accrued to a person had vested in the trustee of his estate, given that the accrual had occurred after the person's bankruptcy. Paragraph 116(2)(g) of the Act expressly excludes from the property of a bankrupt divisible amongst the bankrupt's creditors certain causes of action. However, the bankrupt accepted that the particular cause of action concerned did not fall within that paragraph of the Act. Instead, his argument, as recorded by the court at 248, [4], was that "although no provision of the statute exempts such a cause of action as that which the plaintiff asserts from the general vesting provisions [of the Act], the 'common law of bankruptcy' does so". The similarity between the bankrupt's argument in that case and the Society's argument in the present case will be apparent. 15 For the purpose of his argument, the bankrupt relied in Geia on a number of English authorities, including, in particular, Bailey v Thurston & Co Ltd [1903] 1 KB 137 (Collins MR and Stirling and Cozens-Hardy LJJ). (The English authorities relied on by the bankrupt in Geia had, not surprisingly, been discussed in Williams and Muir Hunter on Bankruptcy when the editors were discussing (see at 291-94) "[c]ertain rights of action" as being excepted by reason of "the common law of bankruptcy" from the assets of a bankrupt divisible amongst the bankrupt's creditors.) 16 In Geia, the court gave reasons for doubting the correctness of Bailey, which reasons were, in substance, that Bailey had misunderstood the effect of earlier English authorities and that a particular distinction drawn in it was an illogical one. The court then continued (at 252), "[16] Apart from the reasons just discussed for doubting whether Bailey v. Thurston & Co. Ltd should be treated as authority under our statute, other considerations should be mentioned. One is …. Another point is that it is, in general, undesirable to require those who have to work under the Bankruptcy Act 1966 (Cth) (a long and complex statute) to read it down on the basis of decisions such as Bailey v. Thurston & Co. Ltd; on the face of our statute, there is nothing to support the notion that a cause of action of the kind here in question passes to the trustee if it comes into existence before bankruptcy, but not if it does so after bankruptcy. Looking at that matter more broadly, there appears to have been a collection of exceptions to the general proposition that the bankrupt's property vested in the trustee, developed in English cases to fill in what seemed to be gaps in, initially relatively simple, bankruptcy legislation. The Bankruptcy Act 1966 (Cth) has elaborate provisions on this subject, particularly in s 116 and, as to income received after bankruptcy, in [Pt VI,] Div 4B. Unless there is some pressing reason to do so, such as that it is evident that the parliament must have intended an exception to be implied, courts should be slow to hold that the statutory scheme to which we have referred has, to some uncertain extent, to be read subject to unstated exceptions, because of doctrines worked out in the older cases, under English statutes. [17] We have therefore concluded that it is not the law that an action of the present type may be brought by the bankrupt; it can only be brought by the trustee." 17 I agree with the cautious approach taken by the court in Geia to the acceptance of arguments based on "the common law of bankruptcy" as a means of introducing implied exclusions from the property of a bankrupt divisible amongst the bankrupt's creditors. If, therefore, the implied exclusion worked by "the common law of bankruptcy" for "[s]uch part of the bankrupt's personal earnings as may be necessary for his [or her] maintenance" had extended to before-acquired personal earnings, I would have been doubtful whether I should treat that implied exclusion, in its application to such before-acquired personal earnings, as being applicable under the Act, perceiving no "pressing reason" for doing so. 18 However, the fact is that there is no warrant for concluding that that implied exclusion ever did extend to before-acquired, as opposed to after-acquired, personal earnings, so that I need not resolve the doubt which I would otherwise have had to resolve. 19 The discussion (at 290-91) in Williams and Muir Hunter on Bankruptcy of "[p]ersonal earnings" as assets excepted by the "common law of bankruptcy" from the assets of the bankrupt divisible amongst the bankrupt's creditors dealt only with the personal earnings of persons during their bankruptcy; that discussion made no reference to the question of the divisibility amongst the bankrupt's creditors of such personal earnings when they had been received before bankruptcy. Nor did the Society direct me to any judicial decision in which the exception had ever been applied to before-acquired personal earnings, although it is now more than two hundred years since the exception was first established: see Chipendall v Tomlinson (1785) 4 Dougl 318 [99 ER 900] (KB: Lord Mansfield CJ and Willes, Ashurst and Buller JJ). Further, I have been unable myself to find any judicial decision in which the exception has ever been so applied or in which the possibility of its being so applied has ever even been discussed, although I have consulted numerous commentaries on bankruptcy law from several countries in an attempt to discover any such judicial decision. 20 The Society's explanation before me for the absence of any such judicial decision was that, as a matter of fact, it was unlikely that, at the time of bankruptcy, any bankrupt would still possess any before-acquired personal earnings, so that the issue had simply never arisen before now. I should, however, assume, the Society submitted, that if the issue had arisen, then the courts would have reached the same result regarding before-acquired personal earnings as they had actually reached regarding after-acquired personal earnings in the absence of superseding statutory provisions such as those contained in Pt VI, Div 4B of the Act. 21 Let it be assumed for the sake of argument that the Society's explanation for the absence of any such judicial decision was a correct one; nevertheless, the fact remains that the Society's submissions seek to have me sanction an implied exclusion from the property of a bankrupt divisible amongst the bankrupt's creditors by reference to a judicially created doctrine, when the Society can point to no judicial decision in which that doctrine has ever been applied as the Society would have me apply it in this case. I am, however, simply not prepared to assume that if the issue had arisen earlier, then the courts would have reached the same result regarding before-acquired personal earnings as they had actually reached regarding after-acquired personal earnings in the absence of superseding statutory provisions such as those contained in Pt VI, Div 4B of the Act. The rationale for the exclusionary rule concerning personal earnings was a simple one; the bankrupt must be able to live: see, for example, In re Roberts [1900] 1 QB 122 at 128 (Lindley MR, Sir FH Jeune P and Romer LJ), and note, in particular, the statement that the bankrupt's necessity to be able to live was the limit of the exception. Provided that the bankrupt's ability to live was assured by the ability to earn a living after bankruptcy, no necessity existed, in order to assure the bankrupt's ability to live, to carve out from the property divisible amongst the bankrupt's creditors any exemption for personal earnings which the bankrupt had received before bankruptcy. 22 (I add that even if the exclusion under discussion had applied to before-acquired personal earnings, it would surely have applied only to that part of such personal earnings as might be necessary for the bankrupt's maintenance during bankruptcy, a limitation which, given the state of the evidence before me, would appear to have robbed it of any utility in the present case from the Society's point of view, even if it had been applicable under the Act. I add further that, if the exclusion under discussion had been applicable under the Act, a question would have arisen in the present case whether that part of the sum of $58,180.87 which represented a reimbursement by his clients of disbursements which had been made on their behalf by Mr O'Reilly could properly be described as personal earnings of his within the meaning of the exclusion.) 23 In the circumstances, I am therefore comfortably satisfied that the legal position is as it is stated to be in Practice and Procedure High Court and Federal Court of Australia by the authors of the annotations to the Act: "Income received by a bankrupt prior to the date of bankruptcy will, to the extent it remains unexpended, vest in the trustee upon bankruptcy as property of the bankrupt": see at [82,113P.5]. From that statement, I would not exclude income consisting of personal earnings. 24 Before I conclude these reasons for judgment, there are two matters remaining to be mentioned. 25 First, the Trustee did not make Mr O'Reilly a party to the present proceeding. The Trustee did, however, make Mr O'Reilly aware of the proceeding's existence and Mr O'Reilly consequently made application before me to be joined as a party to it. He did so against the prospect that I might conclude that the sum of $58,180.87 the subject of the proceeding had not vested in the Trustee, in which case he wished to mount a claim that he, rather than the Society, was entitled to that sum. By agreement among the parties and Mr O'Reilly, I postponed consideration of Mr O'Reilly's application to be joined as a party until I had determined whether the Trustee was entitled to the sum. As I have now determined that the Trustee is entitled to the sum, any joinder of Mr O'Reilly as a party to the proceeding would, it appears to me, be futile. I will, however, ensure that Mr O'Reilly is informed of these reasons for judgment, so that, if he does wish to persist with his joinder application for some reason which is not presently apparent to me, he may do so. If that is his wish, he should notify my chambers and the parties of that fact within seven days of the date of these reasons. 26 Secondly, it follows from my reasons for judgment that I will order the Society to pay the sum of $58,180.87 to the Trustee and I presently see no reason not to order as well that the Society pay the Trustee's costs of the proceeding. Further, the Trustee sought an order that the Society pay interest on the sum of $58,180.87 and I presently see no reason not to order that the Society pay interest on that sum from 1 August 1995 until judgment, at the rates of interest which would ordinarily apply if the order for the payment of interest were being made in the Supreme Court of New South Wales. It may be, however, that the Society wishes to be heard in opposition to the form of orders which I propose. I will therefore make no orders now, but will wait at least seven days after the date of these reasons before doing so. If, within that time, the Society notifies my chambers and the Trustee that it wishes to be heard in opposition to the orders which I propose, then the matter can be listed for further argument. If not, then I will make the foreshadowed orders in seven days' time. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Katz. Associate: Dated: 12 June 2001 Counsel for the Applicant: Messrs A Robertson SC & M Leeming Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondent: Mr B Skinner Solicitor for the Respondent: Mr A Brown Date of Hearing: 5 March 2001 Date of Judgment: 12 June 2001