Assets purchased by a bankrupt from his or her exempt income vest automatically in the bankruptcy trustee

Di Cioccio v Official Trustee in Bankruptcy (as Trustee of the Bankrupt Estate of Di Cioccio) [2015] FCAFC 30

Whether inconsistency between Div 4B of Pt VI, s 58(1)(b) in Div 4 of Pt IV and s 116 of Pt VI of the Bankruptcy Act 1966 (Cth)

An appeal from the decision of Di Cioccio v Official Trustee in Bankruptcy [2014] FCA 782.

The appellant during his bankruptcy, used income below the “actual income threshold amount” (that would have required him to pay part of any excess to the respondent under Div 4B of Pt VI of the Bankruptcy Act 1966 (Cth) (Act), to acquire shares in several companies (Shares). The respondent Official Trustee decided that the Shares were “after-acquired property” which vested in the Official Trustee under s 58(1) of the Act.

On appeal the Court considered whether there was conflict between the operation of Div 4B of Pt VI, and ss 58(1)(b) and 116(2) of the Act.   The Full Court held there was not.   It stated:

The nature of the property (whether it is divisible amongst creditors or not) determines whether or not the property vests in the trustee. If an item of property is of a kind which is divisible amongst the creditors of a bankrupt (s 116(1)), it vests in the trustee. If it is property of a kind which falls within one of the categories listed in s 116(2), it is entitled to be retained by the bankrupt. Section 116(1) is broad. It includes property that has been acquired, or is acquired by, the bankrupt after the commencement of the bankruptcy and before discharge: s 116(1)(a). It is to be read, and is able to be read, with s 58 of the Act.

Section 116(2) of the Act does not expressly refer to property representing income previously derived by an undischarged bankrupt or, for that matter, to property acquired by an undischarged bankrupt using property representing income previously derived by an undischarged bankrupt below the actual income threshold amount applicable to that bankrupt. Sections 58 and 116 are concerned with property, not with the character of property as income or capital. The items of property able to be acquired and retained by an undischarged bankrupt are specified. If an item of property (for example, shares) is not listed in s 116(2) then it is caught by s 116(1) and is divisible amongst the bankrupt’s creditors.

Sections 58 and 116 provide that after acquired property (except for the specific items of property listed in s 116(2), as read with the Regulations) vests in a bankrupt’s trustee. The Act does not prohibit a bankrupt from acquiring a specific item of property. The Act simply deems that after-acquired property vests in the bankrupt’s trustee, unless the property is of a kind specified in s 116(2).

The operation of s 134(1)(ma) which provides that, subject to the Act, a trustee may “make such allowance out of the estate as he or she thinks just to the bankrupt, the spouse or de facto partner of the bankrupt or the family of the bankrupt” Section 134 operates as a safety value. It is a provision which assumes that a trustee will act sensibly and fairly. A decision of the trustee is reviewable: s 178 of the Act. Second, it is not uncommon for a bankrupt to be required to open a supervised account: s 139ZIE of the Act. Under the supervised account regime, a bankrupt must not make a withdrawal from the supervised account unless, amongst other things, the bankrupt has the consent of the trustee: ss 139ZIG(1), (2)(a) and (3). The Act, or at least those provisions of the Act dealing with supervised accounts, suggests that the safety valve provided by s 134 is intended to operate in relation to a bank account into which income derived by the bankrupt below the actual income threshold amount applicable to that bankrupt is deposited.

Commentary

The Full Court has interpreted s 116(2) as exhaustively stating all of the property that an undischarged bankrupt can own without it vesting under s 58(1)(b) as after-acquired property divisible among creditors, subject only to the trustee’s discretion to determine otherwise, or the implementation of a supervised account.

The decision raises a question as to whether any and all accumulations of after-acquired income – whether non-contributable, or post-contribution under Div 4B of Pt VI held by undischarged bankrupts is after-acquired property divisible among creditors vested in their bankruptcy trustees under s 58(1)(b).

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