In the recent case of De Santis v Aravanis [2014] FCA 1243, which was an appeal to the Federal Court of Australia heard in May 2013 with judgement not given until 21 November 2014, Justice Farrell held that property acquired by a bankrupt with after–acquired income does not vest in the trustee.
The concept of after–acquired property is set out in Section 58 of the Bankruptcy Act. This section provides that property acquired by the bankrupt while they are still bankrupt vests in the trustee i.e. it is divisible amongst the bankrupt’s creditors. However, case law supports the conclusion that after–acquired income remains vested in the bankrupt. The question then arises as to what happens to property that is purchased by the bankrupt with after–acquired income?
Justice Heenan in Rodway v White [2009] WASC 201 pointed out the “incongruity” in treating after–acquired property as belonging to the trustee, yet maintaining that after–acquired income does not. There is not such a clear distinction between income and property. In general terms, income is received as money, which is itself property. When income is paid into a bank account, this represents a different form of property, being the chose in action against the bank for repayment of the monies deposited.
Justice Heenan also considered the effect of the “exempt money” provisions of Section 116 of the Bankruptcy Act, which allow for certain types of money received by a bankrupt to be protected, even when converted into property. For instance, where a bankrupt receives an award of damages in respect of a personal injury, and acquires a house with this money, both the damages payment and also the house are protected. Despite these considerations, in that matter Justice Heenan concluded that shares acquired by the bankrupt with post-bankruptcy income was after–acquired property, and that the shares vested in his trustee.
Justice Farrell in the recent case of De Santis appears to take a different concluding view:
“[95] .. taken to its extreme, the argument that property acquired with income earned by a bankrupt vests in the trustee means that although the Bankruptcy Act permits a bankrupt to earn income, it does not permit the bankrupt to acquire any property with that income. The obvious injustice of that situation was accepted in Kitson v Hardwick (1872) LR 7 CP 473…
[98] Having regard to the views of the Full Court in Meriton Apartments I consider that I would be bound to find that any property acquired by a bankrupt with after–acquired income does not vest in the trustee in bankruptcy…”
This position was not viewed to limit the scope of Section 58 and Section 116 of the Bankruptcy Act but instead as avoiding injustice. The query now arises as to whether an undischarged bankrupt can buy back his share of the family home from the trustee using after-acquired income. Perhaps yes, according to this recent authority.
April 2015