Balancing the right of bankrupts and creditors: characterising after-acquired property of bankrupts

Mr Badcock (the Respondent) was an undischarged bankrupt, and Mr Ambrose (the Applicant) was the trustee of his bankruptcy. The key issue for determination was the definition of property under the Bankruptcy Act, and whether the moving of monies into an interesting-bearing account by the Respondent was sufficient to change the character of income to after-acquired property which would vest in the Trustee’s Estate.

This case concerns the delicate balance between the rights of bankrupts and creditors. In this matter, Mr Badcock (the Respondent) was an undischarged bankrupt, and Mr Ambrose (the Applicant) was his trustee in the bankruptcy. The Trustee sought a declaration that certain assets of the Respondent were after-acquired assets to which ss 58(1)(b) and 116(1)(a) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) refer, together with consequential relief.

In this matter, the Respondent transferred $73,433.21 derived from an employment related claim of underpayment from the Complete Freedom Account to his ‘Incentive Saver’ Account No 108445640, both held with BankSA. Notably, the latter account is an interest-bearing account.

The Trustee sought relief that $37,437.31 of the balance held in the BankSA ‘Incentive Saver’ Account No 108445640 plus accrued interest was after-acquired property which vested in the trustee of the Respondent’s bankrupt estate and is divisible amongst the Respondent’s creditors.

The Court noted that the critical consideration is characterising the nature of the property under the Bankruptcy Act. If it fits within the s116(1)(a) definition of property, which states that all property that belonged to, or vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired after the commencement of the bankruptcy, is property divisible among creditors, then the funds are subject to the s58(1)(b) requirement for vesting of property in the Trustee upon bankruptcy.

Property that is classed as income is subject to the rules in Scheme in Div 4B of Pt VI of the Bankruptcy Act which holds that over a certain threshold Bankrupts must pay some of those funds to the Trustee for the Bankrupt Estate. It is very pertinent that the scheme of Div 4B of Pt VI is that the bankrupt pay, not his or her income, but a contribution, the amount of which is, by definition, a portion of the income exceeding the applicable threshold

In this instance the funds were below that statutory threshold. Therefore, if the property could be characterised as income the Respondent would be entitled to keep the funds. While the term ‘income’ is defined very broadly in ss 139K and 139L Bankruptcy Act, the Court noted that it is not customary in ordinary English usage to speak of income as property which is ‘acquired’ and there does not seem to be any indication in s 139L Bankruptcy Act that the term ‘income’ is used with a meaning of property which is acquired.

Two competing lines of cases were relevant, taking separate approaches to the interpretation of the Bankruptcy Act and the Scheme in Div 4B of Pt VI. In Re Gillies; Ex parte Official Trustee in Bankruptcy v Gilles (1993) 42 FCR 571 (Re Gilles) French J concluded that where property is classified as income, liability is restricted to those instances under the Scheme where only funds over a certain threshold are owed to the Trustee’s Estate. However, in Di Cioccio v Official Trustee in Bankruptcy (2015) 229 FCR 1 (Di Coccio) a strict interpretation was taken that any property not specifically excluded in s 116 is caught by the Bankruptcy Act. This would mean that income that becomes some other form of property, even if below the threshold in Div 4B of Pt VI, is rightfully the property of the Trustee’s Estate. In that particular case, income below the threshold used to purchase shares was deemed to be property of the trustee.

In the present case the Applicant (the Trustee) argued that income moved into an interest-bearing bank account represented the acquisition of property in that Incentive Saver Account which therefore immediately vested as after-acquired property (e.g., investment capital) and therefore was the property of the Trustee’s Estate. This argument was based on the principle espoused in the Di Coccio matter.

The Court concluded that the mere change in the account in which the monies were held cannot reasonably be regarded as changing the character of the monies as income. The Bank continued to hold the monies, and the change in the contractual terms as between banker and customer on which the monies were held did not alter the nature of the property held by the Respondent.

The Respondent’s transfer of the substantial portion of his income to the Incentive Saver Account did not constitute the acquisition of a form of after-acquired property to which ss 58(1)(b) and 116(1)(a) Bankruptcy Act refer.

The moving of monies into an interest-bearing account was insufficient to change its character from income (property rightfully retained by the bankrupt) to after-acquired property (which would vest in the Trustee’s Estate).

Authored by:

Matt Bode, Partner