FEDERAL COURT OF AUSTRALIA

PRACTICE AND PROCEDURE - application that trial judge disqualify himself from having further conduct of the proceedings - whether reasonable apprehension of pre-judgment or bias.

PRACTICE AND PROCEDURE - application by bankrupt for leave to file a further statement of claim after striking out of initial statement of claim - whether further statement of claim pleads one or more arguably sustainable causes of action - whether proceedings caught by s 60(2) of the Bankruptcy Act 1966 (Cth).

PRACTICE AND PROCEDURE - application for an order dismissing the proceedings - whether unfair to allow the proceedings to continue.

Bankruptcy Act 1966 (Cth), ss 58, 60, 116.

Federal Court Rules, O 10, r 3; O 30, r 5: O 20, r 1.

Australian National Industries Ltd v Spedley Securities Ltd (in liq) (1992) 26 NSWLR 411, cited.

Cox v Journeaux (No 2) (1935) 52 CLR 713, cited.

Daemar v Industrial Commission of New South Wales (1988) 12 NSWLR 45 (NSWCA) cited.

Jury v Westpac Banking Corporation, 18 March 1998, unreported (FCA/FC), cited.

Gascor v Ellicott [1997] 1 VR 332 (Sct Vic/FC), cited.

Livesey v New South Wales Bar Association (1983) 151 CLR 288, cited.

Mannigel v Hewlett Phelps, 12 June 1991, unreported (NSW CA), cited.

Re Morton; Ex Parte Mitchell Products Pty Ltd (1996) 21 ACSR 497, cited.

Webb v The Queen (1994) 181 CLR 41, cited.

JEFFREY R MORTON & ORS V JOHN VOURIS & ORS

QG100 OF 1995

SACKVILLE J

23 APRIL 1998

SYDNEY

THE COURT ORDERS THAT:

1.         The proceedings be dismissed.

2.         The first applicant pay the respondents’ costs of the motions.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

The Applications

There are three matters before the Court.  First, an application has been made by Mr Morton, one of the three applicants, that I disqualify myself from having any further conduct of these proceedings.  Secondly, Mr Morton has applied for leave to file a further statement of claim in the proceedings, following the striking out of the statement of claim as initially filed.  Thirdly, the respondents have applied, inter alia, for an order dismissing the proceedings.

Mr Morton’s application for leave to file the statement of claim and an application to dismiss the proceedings filed by all respondents other than the fifth respondent (“Benelan”) were listed for hearing on 17 April 1998.  None of the applicants appeared.  The respondents adduced evidence that Mr Morton had been served with the respondents’ motion for an order dismissing the proceedings and with the affidavit in support of that motion.  Mr Morton forwarded by facsimile to the Registry some handwritten submissions shortly before the hearing.  I have taken these into account, although they contain much material that is simply offensive and scurrilous.

At the hearing Mr Lever appeared with Mr Gooley for all respondents, including Benelan which had previously been separately represented in the proceedings.  Prior to the hearing no motion seeking dismissal of the proceedings had been filed on behalf of Benelan.  Mr Lever sought to file a motion on behalf of Benelan in identical terms to the motion already filed on behalf of all other respondents.  I granted that leave, on the basis that a motion in those terms raised no new issues.

I stated at the outset of the hearing that I had considered whether I should disqualify myself, having regard to the written submissions previously made by Mr Morton.  I indicated that I had decided not to disqualify myself from hearing the matters then before the Court and that I would give my reasons later.

I suggested to Mr Lever that the appropriate way to proceed was to regard Mr Morton’s motion for leave to file the draft statement of claim as on foot, despite Mr Morton’s non-appearance, and to decide that motion and the respondents’ motion together.  Mr Lever concurred in that course, read affidavits in support of the respondents’ motion and elaborated briefly on his written submissions.

The Principal Proceedings and the September 1996 Judgment

The principal proceedings, QG100 of 1995, which I describe as “the administration proceedings”, were commenced by an application filed in the Queensland Registry of this Court, on 12 July 1995.  They were subsequently transferred to the New South Wales Registry.  The applicants were Mr Morton and two companies, Mack Studios Pty Limited (“Mack Studios”) and Update Publishing Pty Limited (“Update”).  Both companies were dissolved on 9 October 1995 although, as will be seen, they have since been reinstated for the limited purpose of conducting certain proceedings, including the administration proceedings.

There were seven respondents to the administration proceedings.  The following description of the respondents is taken from a judgment delivered by me in the administration proceedings on 18 September 1996, reported at (1996) 21 ACSR 497 (the “September 1996 judgment”), in which I ordered, inter alia, that the applicants’ statement of claim be struck out:

·      “The first respondent [is] John Vouris, a chartered accountant and a partner in the firm Court & Co, the second respondent.  Mr Vouris acted as administrator of the third and fourth respondents, pursuant to deeds of company arrangement, from 1 November 1994 until his retirement on 2 September 1995.

·      The second respondent [is] Court & Co.

·      The third respondent [is] Mitchell Products Pty Ltd (“Mitchell”), formerly known as Truefeat Pty Ltd (“Truefeat”).  Mitchell has ceased to be subject to the deed of company arrangement and now trades in the Australian Capital Territory, apparently in the field of “adult” entertainment.  Mitchell was the petitioning creditor in bankruptcy proceedings against Mr Morton, having been substituted for the fourth respondent by an order of Tamberlin J, made on 2 November 1995.

·      The fourth respondent [is] Budlyre Pty Ltd (“Budlyre”).  Like Mitchell, Budlyre has ceased to be subject to the deed of company arrangement and trades in the Australian Capital Territory, apparently in the same field.

·      The fifth respondent [is] Benelan Pty Ltd (“Benelan”).  Benelan is a corporation which trades in the Australian Capital Territory, also apparently in the field of “adult” entertainment.  Benelan appears to have been under the control of the Franks family.

·      The sixth respondent [is] Mark A Franks, a resident of the United States.

·      The seventh respondent [is] Mark A Franks and Barbara Franks as trustees for the Franks Family Trust (the “Franks Trust”).  The Franks Trust is a shareholder in Budlyre, Mitchell and Benelan.  The Franks Family, according to a statement of claim filed on behalf of the Franks Trust in earlier proceedings, [has] been involved, through various corporate entities, in the business of producing, supplying and distributing “adult” videos and products.”

In the September 1996 judgment, I made a number of orders, including the following:

“1.       The statement of claim filed on 8 March 1996 by the applicants in Proceedings QG100 of 1995 be struck out.

2.         The applicants in Proceedings QG100 of 1995 be at liberty to apply to the Court within 42 days from today for leave to file an amended statement of claim, on production of an affidavit or affidavits showing that (a) there are facts which probably can be proved and which, if proved, would support the general allegations of the proposed amended statement of claim; and (b) any corporate applicant is entitled to maintain legal proceedings on its own behalf and that any such applicant has duly authorised the making of the application to file the amended statement of claim.

3.         Any application for leave to file an amended statement of claim in accordance with paragraph 2, and any affidavit or affidavits in support of such an application, be in typed or word processed form and otherwise in accordance with the Federal Court Rules.”

I also dismissed a motion on behalf of the applicants, including Mr Morton as the debtor in Proceedings NP898 of 1995 (“the bankruptcy proceedings”), that both proceedings be heard together.

I noted in the September 1996 judgment that the statement of claim filed by the applicants comprised 110 handwritten pages.  Mr Morton, by the time the strike out application was heard, had filed at least ninety-three affidavits and some thirty notices of motion.  The hearing of the strike out application and associated motions took four days.  In August and September 1995, Beazley J had dismissed a claim by the applicants for interlocutory orders restraining Mr Vouris, who was then the administrator of Truefeat and Budlyre, from dealing with the assets of those companies.  That application and subsequent hearings by Beazley J took six hearing days.  There has been other litigation between Mr Morton and some or all of the respondents to the administration proceedings.  This litigation includes the bankruptcy proceedings against Mr Morton and applications in the Industrial Relations Court by Mr Morton alleging unlawful termination of his employment with a number of companies including Benelan and Truefeat.  The latter proceedings were dismissed by Wilcox CJ on 15 November 1996.

I do not intend to summarise the September 1996 judgment.  It should, however, be read together with this judgment to understand the full background to the present applications.

The principal events

The principal events which have occurred since the hearing of the strike out application and associated motions are as follows:

·           On 9 September 1996, after the strike out application had been heard by me but before I had delivered judgment, a Registrar of the Supreme Court of the Australian Capital Territory made orders, on the application of Mr Morton, that the registration of Update and Mack Publishing be reinstated “for the limited purpose of the conduct of” the administration proceedings and the applications to be heard in the Industrial Relations Court.

·           On 18 December 1996, Mr Morton filed an affidavit sworn by him, apparently in support of his (then) foreshadowed motion for leave to file an amended statement of claim.  The affidavit is 62 pages long and contains 347 paragraphs.  On its face, it includes material having nothing to do with the motion for leave to file the draft statement of claim, such as assertions relating to alleged conflicts of interests by certain solicitors and allegations concerning what Mr Morton describes as threats to his life.

·           On 20 December 1996, Mr Morton filed a motion seeking the leave of the Court for the “applicant” to file an amended statement of claim, identified as draft No 3.  I shall refer to this document as the draft statement of claim.  I should note that in some subsequent documentation filed by Mr Morton reference was made to drafts 4 and 5, but it appeared no such drafts have been filed.  Nor have they been served on the respondents.

·           On 23 December 1996, Mr Morton filed a motion seeking a number of orders.  The relief sought included an order that I disqualify myself from further participation in these proceedings.

·           On 26 February 1997, Mr Morton was directed to file and serve, by 13 March 1997, a list of the paragraphs in his affidavit filed on 18 December 1996 upon which he intended to rely in support of the motion for leave to file the draft statement of claim.  That direction has never been complied with.  In an affidavit sworn on 14 March 1997, and filed on 17 March 1997, Mr Morton referred in full to several affidavits, including the affidavit filed on 18 December 1996.

·           On 7 April 1997, directions were made that the matter be listed during a nominated period in May 1997 for the hearing of the following motions

            -           Mr Morton’s motion that I disqualify myself;

            -           Mr Morton’s motion for leave to file the draft statement of claim; and

            -           any motion the respondents might file and serve that were made returnable on the nominated hearing date.

        A direction was made that Mr Morton can file no affidavits after 21 April 1997, save with the leave of the Court.

·           On 29 April 1997, Einfeld J delivered a reserved judgment in the bankruptcy proceedings.  His Honour made a sequestration order against Mr Morton’s estate, on the application of Mitchell as a substituted creditor.

·           In consequence of the sequestration order, and the need for the Official Trustee to consider his position in relation to the litigation, the hearing in the administration proceedings scheduled for May 1997 did not take place.

·           On 7 May 1997, the solicitors for the respondents (other than Benelan) advised the Insolvency and Trustee Service of Australia of the sequestration order and invited the Official Trustee to advise of his intention to prosecute or discontinue the proceedings.

·           On 27 June 1997, the Official Trustee advised the solicitors that he had elected not to adopt the administration proceedings.

·           On 8 December 1997, at the request of the Court, the administration proceedings were re-listed.  Mr Morton did not appear on that date and the proceedings were stood over until 18 December 1997.

·           On 18 December 1997, orders were made, inter alia, that any notices of motion to be filed by the respondents should be filed and served on or before 21 January 1998.  Mr Morton’s motion, filed on 20 December 1996 was set down for hearing on 17 April 1998, as was any motion filed by the respondents in accordance with the direction of the Court.

·           On 20 January 1998, all respondents other than Benelan filed a notice of motion seeking orders that the proceedings be dismissed pursuant to Federal Court Rules (“FCR”) O 10, r 3, O 30, r 5(1)(a) or O 20, r 1.  That motion was supported by an affidavit, sworn by Ms Redfern the solicitor for the applicants on the motion, annexing various documents, including Einfeld J’s judgment.

Disqualification

The test of whether a case of apprehended bias is made out is whether “fair minded people might reasonably apprehend or suspect that the judge has prejudged or might prejudge the case”: Webb v The Queen (1994) 181 CLR 41, at 47, per Mason CJ and McHugh J; Jury v Westpac Banking Corporation, FCA/FC 18 March 1998, unreported, at 2.  In Livesey v New South Wales Bar Association (1983) 151 CLR 288, the Court said this (at 294):

“If a judge at first instance considers that there is a real possibility that his participation in a case might lead to a reasonable apprehension of pre-judgment or bias, he should, of course, refrain from sitting.  On the other hand, it would be an abdication of judicial function and an encouragement of procedural abuse for a judge to adopt the approach that he should automatically disqualify himself whenever he was requested by one party so to do on the grounds of a possible appearance of pre-judgment or bias, regardless of whether the other party desired that the matter be dealt with by him as a judge to whom the hearing of the case had been entrusted by the ordinary procedures and practices of the particular court.”

More recently, in Gascor v Ellicott [1997] 1 VR 332 (SCt Vic/FC), Tadgell JA (with whom Brooking JA agreed) elaborated (at 342) on the test to be applied:

“Although the criterion of apprehension of partiality or prejudice is possibility, not likelihood, a reasonable apprehension is to be established to the court’s satisfaction: it is a reasonable and not a fanciful or fantastic apprehension that is to be established; and the apprehension is to be attributed to an observer who is ‘fair minded’ - which means ‘reasonable’.  As Mason CJ and McHugh J pointed out in Webb v R, at 52, ‘ ... it is the court’s view of the public’s view, not the court’s own view, which is determinative’.  Even so, the court is to be satisfied that the criterion is met, not that it might be.”

Mr Morton’s written submissions put forward several grounds to support his claim that I should disqualify myself.  In written submissions prepared by Mr Lever, the respondents urge that I should not disqualify myself.  They contend that the tests laid down by the authorities are not satisfied by the circumstances of the present case.

Mr Morton makes a number of complaints about what he regards as unfavourable rulings in interlocutory judgments, in particular the September 1996 judgment.  I do not think that these rulings can create a “reasonable apprehension of pre-judgment or bias”.  While the September 1996 judgment struck out the statement of claim and rejected certain other claims made by Mr Morton, the judgment was by no means wholly unfavourable to him.  By giving Mr Morton the opportunity to replead, I rejected arguments advanced on behalf of the respondents that the proceedings should have been terminated at that point.  Of course, Mr Morton could have appealed, or applied for leave to appeal, against any of the unfavourable rulings.  He did not do so.  Subject to one matter to which I shall return, I do not think that the interlocutory judgments provide a basis for my disqualifying myself.  Perhaps I should add that even if the interlocutory judgments had been wholly unfavourable to Mr Morton that fact, of itself, would not have created a reasonable apprehension of pre-judgment or bias.

Mr Morton also complains that I adopted an “inquisitorial” rather than an adversarial approach in some of the hearings.  I think that a reasonable observer would regard the interchanges that took place in the course of the hearings as consistent with my bringing to bear an impartial mind on a difficult problem, not made any easier by the nature and volume of the materials relied on by Mr Morton nor by the way in which they were sometimes presented.  As far as I am in a position to assess, Mr Morton was afforded a fair opportunity to put submissions on the issues I was required to decide.

Mr Morton contends that my membership of the New South Wales Bar Association (as an Associate Member) disqualifies me because (so it is said) Court & Co are auditors of that Association.  I am not and never have been an office bearer of the Association.  I have and have had no role in managing the affairs of the Association.  In these circumstances, the fact (as I am prepared to assume) that Court & Co are the auditors of the New South Wales Bar Association does not lead to a reasonable apprehension of bias on my part.

Next, Mr Morton refers to the fact that I was a member of the Full Court which dismissed an appeal by him from orders made by Hill J on 10 August 1994 and 24 October 1994.  Hill J granted summary judgment against Mr Morton, on the application of Mr and Mrs Franks as trustees of the Franks Family Trust, in respect of the sum of USD25,000 provided by Mr Franks to meet the tax liabilities of Budlyre and Truefeat.  Other orders adverse to Mr Morton’s interests were later made by His Honour, Mr Morton not having appeared at the hearing before Hill J scheduled for 24 October 1994.  The circumstances in which Hill J gave judgment are recounted in the September 1996 judgment.

Mr Morton was represented in the proceedings before Hill J (although there was no appearance on 24 October 1994), but he conducted the appeal himself.  The Full Court of which I was a member declined his application to adduce further evidence.  In an ex tempore judgment delivered by Wilcox J, with which Drummond J and I agreed, it was held that, on the facts before Hill J, His Honour’s findings were “not only supported by the evidence but indeed [were] inevitable.”

I did not recall prior to the hearing of the strike out motion dealt with in the September 1996 judgment that I had been a member of the Full Court on the appeal from Hill J.  Mr Morton did not draw my attention to that fact and made no complaint about it.  I noted my role as a member of the Full Court in the September 1996 judgment and observed that Mr Morton had not suggested that, by reason of that role, I was disqualified from hearing the proceedings listed before me.  I further expressed the view that I was not so disqualified.

No issue arose on the appeal from Hill J concerning Mr Morton’s credit.  The only substantive issue addressed on the appeal was whether the evidence before Hill J supported that orders made by His Honour on 24 October 1994.  That was simply a question of assessing the evidence adduced in the proceedings and determining whether it admitted of any conclusion other than the one reached by His Honour.  The Full Court held that it did not.

The issues before me at present are whether Mr Morton should be given leave to file the draft statement of claim and, if not, whether the proceedings instituted by him should be dismissed.  No question of Mr Morton’s credibility arises in connection with these issues.  In my opinion, my participation in the appeal from Hill J does not preclude me from determining issues of the kind presently before me, whatever the significance of my participation in the appeal might be for a final hearing in which issues of credit are at stake.  Particularly is this the case where when Mr Morton made no complaint about my determining the application to strike out the statement of claim, dealt with in the September 1996 judgment.

In the course of the September 1996 judgment, I made a finding of fact adverse to Mr Morton.  The relevant portion of the judgment is as follows:

“Mr Morton’s Non-Attendance

I interpose here that Mr Morton gave oral evidence as to his reasons for not appearing at the hearing before Hill J, scheduled for 24 October 1994.  He maintained that the principal reason for his non-attendance was that he was concerned for his physical safety.  He also gave other reasons, including at least one that was quite extraordinary, and for which there is no supporting evidence whatsoever.

Mr Morton was cross-examined on his evidence.  I therefore had the opportunity to observe him in the witness box.  In the course of his evidence, Mr Morton acknowledged that one factor in his decision not to appear was that he was aware that the ACT Police intended to arrest him, on a charge relating to the alleged misappropriation of the sum of USD25,000 at issue in the proceedings.  However, Mr Morton maintained that this was a ‘lesser fear’ and that his primary concern was his physical safety.

I do not accept Mr Morton’s explanation for his non-attendance in Court on 24 October 1994.  I find that the only significant reason motivating Mr Morton not to appear at the hearing scheduled for that day was that he wished to avoid being arrested by or at the instigation of the ACT Police.  He was fully aware that the matter was set down for hearing and was not unable, whether by reasons of health or fears for his personal safety, to attend the hearing had he chosen to do so.”

There are circumstances in which an adverse finding of credit, made in interlocutory proceedings, will disqualify the judge making such a finding from presiding at the final hearing.  This may be so even where the litigation is complex and it would be highly inconvenient for a new judge to be brought into the proceedings.  This point is illustrated by the decision of a divided five member New South Wales Court of Appeal in Australian National Industries Ltd v Spedley Securities Ltd (in liq) (1992) 26 NSWLR 411 (Kirby P, Mahoney and Meagher JJA; Gleeson CJ and Samuels JA dissenting).  The Court held that a trial Judge was disqualified from the further hearing of a case in which he had made a number of findings on credit.  However, the facts in Spedley were very different from those of the present case.  There the judge had made what Kirby P described as “damning ... findings of credit” and did so in relation to issues central to the principal proceedings.

The motions I am required to determine do not involve any assessment of Mr Morton’s credibility as a witness.  There may have been force in Mr Morton’s contention had the question been whether I should conduct a final hearing, at least if issues of credit were likely to arise.  Mr Morton’s contention may have had force even though the finding made by me in the September 1996 judgment related to an issue peripheral to the conclusions reached in that judgment and was likely to be peripheral to any issue requiring consideration at a final hearing.  Be that as it may, there has never been anything to suggest that, even if Mr Morton had appeared on the hearing of the present motions, their resolution would require an assessment of his credit.

In these circumstances, I do not think that the finding made by me in the September 1996 judgment requires my disqualification from determining the motions presently before me.  I appreciate that, as appears from Spedley, convenience to the Court is not by any means the sole or even the principal criterion to be considered on an application for disqualification.  Nonetheless care must be taken not to accede too readily to an application for disqualification, especially in interlocutory disputes in a matter with a complex history.  To do so would not merely increase the already heavy burdens on the Court imposed by a case of this nature, but might create serious injustice to other parties to the litigation.  The effect of requiring another judge to take over conduct of a case of this nature would be to delay the proceedings, prolong both the hearing time and the time required for preparation and to increase costs substantially.  As the High Court specifically acknowledged in Livesey the interests of the parties opposing disqualification are not to be ignored.

Draft statement of claim

The draft statement of claim upon which the applicants seek to rely is seventeen pages in length, considerably shorter than the statement of claim struck out in September 1996.  The draft statement of claim alleges that Mr Morton:

·           was a director and secretary of Truefeat from October 1991 to December 1994, and managing director from April 1992 to December 1994 (par 1);

·           held 75 percent of the shares in Truefeat from November 1991 to December 1994 (par 2);

·           was a paid employee of Truefeat from February 1992 to July 1994 (par 3);

·           was a director and secretary of Budlyre from November 1991 to June 1994, and managing director from April 1992 to June 1994 (par 5);

·           holds 50 percent of the shares in Budlyre (par 4);

·           was a paid employee of Budlyre from February 1992 to June 1994 (par 6);

·           was a director of Benelan from October 1992 to 24 June 1994, and managing director from April 1992 to 24 June 1994 (par 7);

·           held 50 percent of the shares in Benelan from November 1991 to December 1994 (par 8); and

·           was a paid employee of Benelan from February 1992 to June 1994.

It is alleged that Mr Vouris was the receiver and manager of Truefeat and Benelan from 4 July 1994 to 24 October 1994 and that he was the administrator of Truefeat and Budlyre from 1 November 1994 to 21 September 1995 (pars 11a, 12).  It is said that Mr Vouris and Court & Co, when acting as receivers and managers of Truefeat and Benelan, and thereafter as administrators of Budlyre and Benelan “treated the applicant unfairly, unjustly and unreasonably” (par 18).

There is a disparity between the pleading in par 12 and that in par 18, since the first refers to the administration of Truefeat and Budlyre, while the second refers to the administration of Budlyre and Benelan.  Leaving that to one side, the particulars to par 18, assert that Mr Morton was owed $50,000 by Truefeat in back wages; that he “seeks” $300,000 in damages for unlawful termination of employment (presumably by Truefeat); and that he is owed other moneys for backpay by Budlyre and Benelan.  The “particulars” go on to allege that, despite raising moneys from the sale of assets of Truefeat and Budlyre, Mr Vouris and Court & Co “refused to honour” any of Mr Morton’s claims. 

Next, the particulars allege that Truefeat was owed money by Benelan and that Mr Vouris and Court & Co failed to “reimburse” these payments to Truefeat, thereby preventing Mr Morton from being repaid.  Somewhat confusingly, the particulars then suggest that Budlyre should be ordered to repay Truefeat moneys said to be due to the latter by the former.

The draft statement of claim alleges that Mr Vouris and Court & Co, when acting as receivers and managers of Truefeat and Benelan, and thereafter as administrators of Truefeat and Budlyre, “mismanaged and also unjustly enriched themselves of the assets of [Truefeat] and [Benelan] of which [Mr Morton] had a direct interest of” (par 19).  The draft statement of claim also alleges that Mr Vouris and Court & Co were “engaged in the maladministration of” Truefeat, Budlyre and Benelan, which caused “undue financial loss to the applicant” (presumably Mr Morton) (par 20).

The particulars further allege that Mr Vouris and Court & Co acted as accountants to various named companies, on the nomination of the Franks, and were thereby involved in a situation of conflict of interest.  It is said that Mr Vouris and Court & Co always acted in the interests of the Franks at the expense of Mr Morton.

The particulars to pars 19 and 20 then refer to the sum of USD25,000 which Mr Morton was ordered, in the proceedings determined by Hill J, to pay to the trustees of the Franks trust.  It seems to be alleged that this money was paid to Mr Mark Franks, although how this affects the applicant in the present proceedings is obscure.

The particulars then suggest that Mr Vouris and Court & Co wrongfully accepted proofs of debt lodged by Benelan and the trustees of the Franks Family Trust.  Similarly, it seems to be alleged that a proof of debt lodged by Budlyre against Truefeat was wrongly accepted.

Certain other allegations are made in the particulars that are extremely difficult to understand.  However, the particulars allege that Mr Vouris and Court & Co failed to file a report of affairs with the Australian Securities Commission and to maintain separate bank accounts in the course of the receiverships and administrations to which the pleadings previously referred.  Other breaches of duty are alleged, including the provision of false minutes to the creditors of Truefeat and Budlyre.  It is said that Mr Vouris and Court & Co failed to declare certain mailing lists as assets of Truefeat, falsely accepting the claim of Benelan to own the lists.

It is then said that Mr Franks and the trustees of the Franks Family Trust “misappropriated and plundered” the assets of Truefeat, Budlyre and Benelan.  This is said to have caused Mr Morton economic loss and psychological stress and mental trauma.  The particulars allege that the Franks “connived” with Mr Vouris in stating that the mailing list was an asset of Benelan.  Certain allegations, again extremely difficult to understand, are made that Mr Franks involved Truefeat in litigation in the United States.

It is further alleged that in November 1994, Benelan, Mr Franks and the trustees of the Franks Family Trust, together with a director of Benelan identified as Mr Herkus entered into an agreement.  Although it is very difficult to follow, it seems to be suggested that the agreement related to the transfer of assets from Benelan.

The relief sought by the applicants in the draft statement of claim extends for four pages.  It includes orders that Mr Morton be paid salary and wages owed to him and that he be reinstated as the managing director of Truefeat, Budlyre and Benelan; a declaration that Mr Franks and the trustees of the Franks Family Trust “misappropriated and plundered” the assets of Truefeat and Benelan; an order that Mr Morton be financially compensated for his psychological pain and suffering; an order that the November 1994 agreement be declared null and void; an order that Benelan repay $500,000 to Truefeat; an order that Budlyre repay moneys owed to Truefeat; an order that Budlyre repay moneys owed to Benelan; and an order that a Mr Rangott be appointed administrator of Truefeat, Budlyre and Benelan.

Defects in the Draft Statement of Claim

I discussed the approach to a strike out application under FCR O 20, r 2 in the September 1996 judgment (21 ACSR, at 513-514).  I incorporate that analysis in this judgment.  In my opinion, there are a number of serious defects in the draft statement of claim.

First, although the draft statement of claim purports to name Mack Studios and Update as applicants, no relief is claimed on their behalf.  The fact that each of these companies has been reinstated for the purpose of the administration proceedings does not overcome the difficulty that the claim, as pleaded, simply does not seek relief on their behalf.

Secondly, the draft statement of claim pleads, or attempts to plead, a case on behalf of Mr Morton that is not open to him, having regard to the sequestration order made against his estate.  Under s 58(1) of the Bankruptcy Act 1966 (Cth) [“Bankruptcy Act”],when a debtor becomes bankrupt, the property of the bankrupt vests forthwith in the Official Trustee; after acquired property of the bankrupt vests in the Official Trustee as soon as it is required by the bankrupt.  Any property that belonged to or vested in the bankrupt at the commencement of the bankruptcy, or has been acquired by the bankrupt after that date but before discharge, is property divisible among creditors: Bankruptcy Act, s 116(1)(a).  This does not extend, however, to any right of the bankrupt to recover damages or compensation “for personal injury or wrong done to the bankrupt”: Bankruptcy Act, s 116(1)(g).

These provisions need to be read with s 60 of the Bankruptcy Act.  An action commenced by a person who subsequently becomes bankrupt is stayed pending the Trustee’s election to prosecute or discontinue the action: s 60(2).  If the Trustee does not make such an election within 21 days after notice of the action is served on him by a defendant or other party to the action, he or she is deemed to have abandoned the action: s 60(3).  However, the bankrupt is permitted to continue, in his or her own name, an action commenced before the bankruptcy in respect of any personal injury or wrong done to the bankrupt: s 60(4).

In the present case, it is arguable whether the Official Trustee’s letter of 27 June constitutes an election to discontinue the proceedings.  The letter stated that the Official Trustee had “elected not to adopt” the proceedings and did not specifically make an election to discontinue the proceedings.  Despite later requests by the respondents to clarify the position, the Official Trustee declined to take the matter further.  In my view, if the letter of 27 June 1997 does not constitute an election for the purposes of s 60(2) of the Bankruptcy Act, the Official Trustee is deemed under s 60(3) to have abandoned the proceedings.

In Daemar v Industrial Commission of New South Wales (1988) 12 NSWLR 45 (NSW CA), Kirby P explained the scheme of the Bankruptcy Act as follows (at 50-51):

“These provisions make it clear that the scheme and purpose of the Act is, upon the debtor’s become a bankrupt, to transfer property rights, including certainly the right to sue in respect of claims to property, from the bankrupt to his trustee.  This is so, notwithstanding that it involves personal inconvenience to the bankrupt: see Faulkner v Bluett (1981) 52 FLR 115 at 119.  Indeed, it is so notwithstanding the fact that it deprives the bankrupt of important civil rights which he or she would otherwise normally enjoy.  It is of the essence of bankruptcy, as provided for by the Act, that property which belongs to the bankrupt, including choses in action (other than those which are specifically exempted) are vested upon bankruptcy in the bankrupt’s trustee.  The trustee has the charge of the estate of the bankrupt.  It is then for the trustee to distribute that property as the Act provides, principally for the benefit of the creditors.  To secure the benefits and protections which the Act provides to a debtor, the debtor’s status is changed, rights are diminished and property is controlled.  It could scarcely be otherwise for if it were, valuable interests which a bankrupt might have, in the form of choses in action would not be caught in the net cast by the very wide language of s 116(1).  This would be so despite the specific and limited terms of the exemption in the case of rights to recover damages or compensation provided by s 116(2) and the very purposes of gathering in the bankrupt’s property."

His Honour explained (at 55-56) the meaning of the phrase “personal injury or wrong done to the bankrupt” in s 60(4), by reference to the “classic expression” in the judgment of Dixon J in Cox v Journeaux (No 2) (1935) 52 CLR 713, at 721:

            “Speaking of the appellant in that case, Dixon J said:

            ‘... He is a bankrupt and there is no prospect of his satisfying any order for costs made against him in this, or as I infer, in previous litigation.  Notice was given under sec 63(3) of the Bankruptcy Act 1924-1933 to the official receiver requiring him to elect to prosecute or discontinue the action and he has elected not to prosecute it.  The plaintiff says that he himself is entitled to prosecute it under the proviso as an action for personal injury or wrong done to himself.  The test appears to be whether the damages or part of them are to be estimated by immediate reference to pain felt by the bankrupt in respect of his mind, body or character and without reference to his rights of property.  (Wilson v United Counties Bank Ltd [1920] AC 102 at 111 and 128-133).’

            ...

            Applying that test to the present case, the action brought by the claimant cannot be categorised as he submits.  Although it is true that the claimant contends that a ‘wrong’ has been done to him and that he has suffered hurt and even ‘defamation’ in the course of the judgments of the Commission, these contentions are irrelevant to the task of identifying, for the purpose of s 60(4)(a) of the Act, the nature of the action exempted from the stay.  The exemption is limited to those cases where it has been considered appropriate to sever the personal interests of the person subsequently made bankrupt from his property, and to reserve to him the prosecution of and benefits derived from such litigation as not being legitimately entitlements of the creditors.  In the present case the so called ‘wrong’ of which the claimant complains is the very source of the financial problems which have led to his bankruptcy.  It is therefore to be classified not as a ‘wrong’ which is exempted from the operation of s 60(2) and the statutory stay provided for but as of the very essence of the subject matter to which s 60(2) is addressed.”

These principles were applied by the New South Wales Court of Appeal in Mannigel v Hewlett Phelps 12 June 1991, unreported.  In that case, the plaintiffs, who had become bankrupt, sought damages against their former solicitors in respect of what was alleged to be professional negligence.  The plaintiffs claimed damages for economic loss and for loss of credit and reputation, mental distress and injury to their physical and mental health.  The non-economic loss (as was admitted by the plaintiffs) was a consequence of the economic loss suffered as a result of the defendants’ alleged breach of duty.  It was held that the claims for non-economic loss could not be described as claims “without reference to [the bankrupts’] rights of property” under the principle stated by Dixon J.  The plaintiffs had sued on indivisible causes of action in tort and contract.  Those causes of action formed part of the property of the plaintiffs which vested in the Official Receiver on their bankruptcy.

The draft statement of claim, insofar as it pleads a case for relief by Mr Morton, is within
s 60(2) of the Bankruptcy Act.  The action was commenced by Mr Morton on 12 July 1995 and he subsequently became bankrupt.  As I have said, the Official Trustee is deemed to have abandoned the action pursuant to Bankruptcy Act, s 60(3).

Insofar as the draft statement of claim seeks relief in favour of Mr Morton, it is not within the exception created by s 60(4)(a) of the Bankruptcy Act.  The relief claimed includes orders that Mr Morton be paid the amounts allegedly due to him for back wages and other monetary entitlements and that Mr Vouris and Court & Co provide funds to Mr Morton to enable the accounts of the receivers and managers to be corrected.  Assuming that these claims are otherwise appropriately pleaded, they are clearly not within the exception created by
s 60(4)(a) of the Bankruptcy Act.  The body of the draft statement of claims (par 20) alleges that Mr Vouris and Court & Co were engaged in maladministration of Truefeat, Budlyre and Benelan “which caused undue financial loss to [Mr Morton]”.  It is not clear which, if any, of the relief claimed relates to this portion of the pleading.  However, insofar as Mr Morton seeks compensation for financial loss, caused to him by maladministration of the three companies, his claim is also precluded by the Bankruptcy Act.  The same can be said about the application for an order that Mr Franks and the trustees of the Franks Family Trust repay to the creditors of Budlyre (who are alleged to include Mr Morton) the sum of USD25,000 said to have been recovered from a person in the United States.

The draft statement of claim seeks a declaration that Mr Morton has suffered economic loss and psychological stress and trauma as the result of the alleged misappropriation of the assets of Truefeat and Benelan by the Franks interests.  The draft also claims an order that Mr Morton be “adequately financially compensated by all the respondents for the psychological pain and suffering incurred on [sic] [Mr Morton] by the respondents due to their activities”.  While these claims refer to non-economic loss, the alleged losses appear to flow from the economic loss Mr Morton alleges that he sustained.  In any event, as in Mannigel v Hewlett Phelps, the claim for non-economic loss cannot be described as a claim made “without reference to [Mr Morton’s] rights of property”, within the test articulated by Dixon J in Cox v Journeaux (No 2).

Thirdly, the draft statement of claim, although not easy to follow, seeks orders that Budlyre pay moneys said to be owed by that company to Truefeat and Benelan.  Orders are also sought that Benelan pay moneys said to be due by it to Truefeat.  Like some of the claims for relief in the first statement of claim, these claims appear to be made on behalf of Truefeat and Benelan.  Neither of those companies is named as an applicant.  The pleadings do not establish a basis for Mr Morton having standing to claim relief on behalf of the companies, even assuming there is a factual basis for the allegations pleaded.

Fourthly, it is impossible to discern from the pleadings the basis for some of the relief claimed.  For example, the relief sought includes orders that the deeds of arrangement entered into by Truefeat and Budlyre “be null and void”.  This form of claimed relief appears to pick up a reference in the September 1996 judgment (at 48-49) to the possibility of an application being made under the Corporations Law to set aside the orders.  But, even making allowances for the difficulties faced by an unrepresented litigant, the material facts supporting the claimed relief are not pleaded and the basis of the claim is unclear.  The issues identified in the September 1996 judgment, in particular the operation of the relevant provisions of the Corporations Law, are not addressed in the pleading.  The respondents are entitled to know the nature of the case made against them.

Fifthly, while the draft statement of claim is briefer than the version struck out, much of it is confused, incomplete and obscure.  The so-called “particulars”, for example, often bear no relationship to the principal allegations and, if read in isolation, are difficult, if not impossible to follow.  This is not a mere matter of form.  As I have already said, the respondents are entitled to know the case against them.  Much of the draft statement of claims does not plead a case which is capable of being understood and responded to.

Finally, the pleadings must be considered in the light of the orders made in the September 1996 judgment.  Those orders provided that the applicants could apply for leave to file an amended statement of claim on production of an affidavit or affidavits showing that there are facts which probably can be proved and which, if proved, would support the general allegations in the proposed amended statement of claim.  Mr Morton has filed many affidavits, including the lengthy affidavit filed on 18 December 1996.  The affidavits contain much irrelevant material.  Mr Morton has failed to comply with the order requiring him to identify the portions of the 18 December 1996 affidavit which are said to support the draft statement of claim.  He did not appear at the hearing and has made no attempt to identify in a careful and helpful manner any evidence that supports the allegations made in the draft statement of claims.  Mr Morton has therefore failed to comply with an order of the Court specifying a pre-condition for the grant of leave to file an amended statement of claim.

In my view, the defects I have identified are such that Mr Morton should not be given leave to file the draft statement of claim.  This is not a case where portions of a statement of claim, or draft statement of claim, are defective, but the remainder pleads a cause of action capable of surviving scrutiny and in respect of which supporting evidence is adduced.  There is no part of the draft statement of claim that pleads in a coherent form one or more arguably sustainable causes of action.

Should the Proceedings be Dismissed?

Mr Lever, on behalf of the respondents, submitted that the proceedings should be dismissed pursuant to FCR, O 20, r 2.  That rule provides as follows:

“2(1)   Where in any proceeding, it appears to the Court that in relation to the proceeding generally or in relation to any claim for relief in the proceeding:

            (a)        no reasonable cause of action is disclosed;

            (b)        the proceeding is frivolous or vexatious; or

            (c)        the proceeding is an abuse of the process of the Court,

the Court may order that the proceeding be stayed or dismissed generally or in relation to any claim for relief in the proceeding.”

Despite two attempts to plead a case, the applicants and, in particular, Mr Morton have not put forward pleadings that disclose a reasonable cause of action.  Mr Morton has not been willing to abide by orders of the Court designed to ensure that there is a factual foundation for any case pleaded.  Moreover, Mr Morton has filed numerous affidavits and submissions not merely containing a great deal of patently irrelevant material, but which make many unsubstantiated allegations of a scurrilous nature against other parties, their legal advisers, non-parties and judges.  Making due allowance for Mr Morton’s unrepresented status, this is not indicative of a litigant willing to use his best endeavours to formulate and present a case in a manner that allows the proceedings to be conducted in an orderly and reasonably expeditious manner.

In my view, it would be grossly unfair to the respondents to allow the proceedings to continue.  After nearly three years there is no sign that Mr Morton is able or willing to plead a reasonable course of action.  He is now bankrupt.  The respondents have incurred very substantial costs in defending the proceedings.  It is unlikely that any of these costs will be recovered from Mr Morton, or from his bankrupt estate.  If the proceedings continue, the respondents will incur further irrecoverable costs.  The proceedings should now be brought to a halt.  They should be dismissed and Mr Morton should be ordered to pay the respondents’ costs of the motions.

Associate:

Dated:              23 April 1998