FEDERAL COURT OF AUSTRALIA Boothe v Commonwealth of Australia [2002] FCA 1101 BANKRUPTCY – realisations charge – the whole of the amount of a judgment recovered by the trustee of a deed of assignment is, when paid to his solicitors pursuant to an authority to receive, "received" by that trustee. Bankruptcy (Estate Charges) Act 1997, s 8 IN THE MATTER OF ROBERT GALLUZZO & ANOR STEPHEN ALAN BOOTHE v COMMONWEALTH OF AUSTRALIA N 7442 of 2001 WHITLAM J 6 SEPTEMBER 2002 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 7442 of 2001 IN THE MATTER OF ROBERT GALLUZZO AND LORRAINE KAREN GALLUZZO BETWEEN: STEPHEN ALAN BOOTHE APPLICANT AND: COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: WHITLAM J DATE OF ORDER: 6 SEPTEMBER 2002 WHERE MADE: SYDNEY THE COURT DECLARES THAT: 1. The whole of the amount of $325,000 paid in satisfaction of the judgment in action no. 5723 of 2000 in the District Court of New South Wales was received by the applicant as trustee of the deed of assignment executed in relation to Robert Galluzzo and Lorraine Karen Galluzzo. 2. The amounts paid out of the said sum by authority of the applicant to his solicitors and to Insolvency Management Fund Pty Ltd are not permitted deductions within the meaning of s 8(3) of the Bankruptcy (Estate Charges) Act 1997. AND ORDERS THAT: 3. The applicant pay the respondent's costs of the proceeding. 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 N 7442 of 2001 IN THE MATTER OF ROBERT GALLUZZO AND LORRAINE KAREN GALLUZZO BETWEEN: STEPHEN ALAN BOOTHE APPLICANT AND: COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: WHITLAM J DATE: 6 SEPTEMBER 2002 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The applicant is the trustee of a deed of assignment executed on 8 September 1998 by Robert Galluzzo and Lorraine Karen Galluzzo under Pt X of the Bankruptcy Act 1966 ("the Act"). This case concerns the amount on which the realisations charge payable by the applicant as such trustee under Pt 3 (ss 6, 7, 8) of the Bankruptcy (Estate Charges) Act 1997 ("the Estate Charges Act") is calculated for the period ended 31 October 2001. 2 Section 6 of the Estate Charges Act imposed a charge, calculated in accordance with ss 7 and 8, in respect of "amounts received by a trustee … during a charge period". (Section 4 of that Act defined a charge period as a period of 6 months commencing on 1 November or 1 May.) By virtue of s 7 the amount of charge payable for a charge period is an amount equal to 8% of the "amount on which charge is payable" for the period. Section 8 provided: "(1) The amount on which charge is payable for a charge period is the amount realised less the permitted deductions. (2) The amount realised is the total amount received by the trustee in the capacity referred to in subsection 6(1) during the charge period, but not including: (a) amounts paid to the trustee by creditors under an indemnity in respect of costs; or (b) amounts paid to the trustee under section 305 of the Bankruptcy Act 1996. (3) The permitted deductions are all amounts paid by the trustee in the capacity referred to in subsection 6(1) during the charge period that are: (a) amounts paid by the trustee in carrying on the business of the bankrupt, deceased person or debtor; or (b) amounts paid to secured creditors. (4) Once an amount has been taken into account for the purposes of subsection (2) as an amount received, the whole or part of the amount is not to be taken into account again as an amount received for the purposes of another application of that subsection." 3 The applicant disputes his liability to pay the realisations charge in respect of the full amount of a judgment of $325,000 recovered by him in the District Court of New South Wales on 20 June 2001. The judgment debt arose from an action commenced by the applicant as trustee of the deed against MMI General Insurance Limited ("MMI"), which was a claim on an insurance policy of Mr Galluzo in respect of a fire that occurred on 17 March 1998. Prior to judgment in that action Allianz Australia Insurance Limited ("Allianz") was added, and MMI was removed, as defendant. Judgment was entered pursuant to an agreement signed by the parties' solicitors on 19 June 2001 and filed on 20 June 2001. 4 On 6 July 2001 the applicant executed a so-called authority to receive directing Allianz to pay the judgment debt to his solicitors, and on or about 10 July 2001 the amount of $325,000 was paid to the applicant's solicitors by cheque. From that amount the applicant authorised his solicitors to pay $40,870.66 and $113,750 to Insolvency Management Fund Pty Ltd ("IMF") and to deduct $28,584.99. The sum of $40,870.66 was a reimbursement of amounts, part of which covered costs and disbursements of the action, advanced by IMF pursuant to a funding agreement with the applicant made on 16 May 2000. The sum of $28,584.99 comprised costs and disbursements of the action not covered by the advances from IMF. The sum of $113,750 was paid in satisfaction of the applicant's purported disposition to IMF under the funding agreement of 35% of any judgment debt in the action. On 11 July 2001 the applicant's solicitors paid to him by cheque the balance of $141,794.35. 5 Counsel for the applicant's primary submission is that the amounts so authorised to be paid and deducted from the judgment debt were not part of "the total amount received" by the applicant in his capacity as trustee of the deed of assignment for the purposes of s 8(2) of the Estate Charges Act. He submits that the word "received" in the statutory context means that a trustee must have physical possession of any amounts paid and that accordingly the realisations charge is only payable on the "net" amount of $141,794.95. No authority is cited in support of this construction. 6 The expressions used in s 8 of the Estate Charges Act are not new. They appeared in r 179 of the Bankruptcy Rules as in force immediately before the commencement of Sch 1 to the Bankruptcy Legislation Amendment Act 1996. In Re Hughes; Ex parte Freer (1987) 74 ALR 319 Forster J remarked (at 321) that the words of r 179(5) were perfectly clear and that there was no suggestion in that rule or elsewhere in the Act that the total amount received by the trustee meant something less than the total amount. The argument rejected in that case was not the same as that put by counsel for the applicant, but Forster J's view emphasizes the breadth of the expression here under consideration. 7 The amount paid by Allianz was paid in satisfaction of the judgment debt. Allianz could have chosen, had it so wished, to pay that amount directly to the applicant as judgment creditor. The fact that it paid the full amount at the applicant's direction to his solicitors does not change the nature of the payment. It is not open to the applicant by an agreement with either his solicitors or IMF to alter the character of that receipt. The payment is not made by Allianz pursuant to such an agreement. Counsel for the respondent helpfully drew attention to the decision of the Full Court of this Court in Archer v Comcare (2000) 101 FCR 30, where it was held that a person "receives" a benefit for the purposes of the statute there under consideration when it is paid at his direction to another person because the obligation to pay him is discharged. The present case is not exactly analogous, but Archer illustrates the futility of the device employed by the applicant in this case. Here the interposing of the applicant's solicitors makes no difference. The judgment debt satisfied by the payment arose out of an action by the applicant as trustee of the deed. It follows that this submission of counsel for the applicant is rejected. 8 In the alternative, counsel for the applicant submits that the costs and disbursements of the action are permitted deductions by virtue of s 8(3)(a) of the Estate Charges Act as amounts paid "in carrying on the business" of the debtors. Section 134 of the Act, as applied by s 231(2) of the Act, empowers the trustee of a deed to do certain things. Section 134(1)(b) permits a trustee to "carry on a business" of the debtor "so far as may be necessary to dispose of it or wind it up for the benefit of the creditors". That is the context in which "permitted deductions" under s 8(3)(a) of the Estate Charges Act may arise. Here the costs and disbursements of the action were not so incurred. They were made because the applicant exercised his power under s 134(1)(j) of the Act to institute an action relating to the administration of the estate. This submission is also rejected. 9 Finally, and again in the alternative to his earlier submissions, counsel for the applicant contends that IMF and the applicant's solicitors are "secured creditors" within the meaning of s 8(3)(b) of the Estate Charges Act. These alleged securities were, of course, created after the execution by the debtors of the deed of assignment. Section 4(2) of the Estate Charges Act provided that, unless the contrary intention appears, expressions used in that Act have the same meanings as in the Act. The expression "secured creditor" is defined in s 5(1) of the Act, and counsel for the applicant correctly points out that it means a person holding a security from a debtor. Counsel contends that the expression "secured creditor" in s 8(3)(b) of the Estate Charges Act is apt to include a person holding a security over the divisible property of the debtors given by the trustee of a deed. I do not accept that submission. Section 230(2) of the Act expressly preserves the rights of secured creditors, and it is payments to those persons which are the permitted deductions under s 8(3)(b) of the Estate Charges Act. 10 The Estate Charges Act was amended with effect from 3 July 2002 by the Bankruptcy (Estate Charges) Amendment Act 2001 and by the Bankruptcy (Estate Charges) Amendment Act 2002. I have not had regard to those amendments. 11 The applicant has been wholly unsuccessful. I shall make declarations to give effect to the conclusions I have reached. The applicant must pay the respondent's costs of the proceeding. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Whitlam. Associate: Dated: 6 September 2002 Counsel for the applicant: D L Williams Solicitors for the applicant: Walker Insolvency Lawyers Counsel for the respondent: C E Adamson Solicitor for the respondent: Australian Government Solicitor Date of hearing: 5 February 2002 Date of judgment: 6 September 2002