FEDERAL COURT OF AUSTRALIA

Prentice v Cummins [2002] FCA 1140

BANKRUPTCY – application to remove bankrupt as a party to proceedings commenced by trustee – whether bankrupt unnecessarily joined to proceedings seeking to recover property in the interests of creditors – whether bankrupt’s rights affected.

Bankruptcy Act 1966 (Cth), s 55(4A), 81, 120, 121 

Evidence Act 1995 (Cth)

Federal Court Rules (“FCR”), O 6 rr 8, 9

Supreme Court (General Civil Procedure) Rules 1996 (Vic), r 9.06(b)

Colonial Life Insurance v Donnelly (1998) 82 FCR 418, cited.

Australian Competition and Consumer Commission v News Corporation Ltd (1997) 79 FCR 117, cited.

News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410, followed.

Pegang Mining Co Ltd v Choong Sam [1969] 2 MLJ 52, cited.

Wily (as Trustee of the Bankrupt Estate of Fuller) v Fuller [2000] FCA 1512, distinguished.

Julius v Lord Bishop of Oxford (1880) 5 App Cas 214, cited.

Commissioner of State Revenue (Victoria) v Royal Insurance Australia Ltd (1994) 182 CLR 51, cited.

MAXWELL WILLIAM PRENTICE & ANOR (together the Trustees of the property of John Daniel Cummins, a Bankrupt) v JOHN DANIEL CUMMINS & ORS

N 7481 of 2001

SACKVILLE J

SYDNEY

13 SEPTEMBER 2002

THE COURT ORDERS THAT:

1.         The notice of motion filed by the second, third and fourth respondents on 9 September 2002 be stood over until 17 September 2002 at 10-15 am.

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

REASONS FOR JUDGMENT

the proceedings

1                     In these proceedings, the applicants (“the Trustees”) are the trustees of the bankrupt estate of the first respondent (“the Bankrupt”).  The Bankrupt presented his own debtor’s petition on 12 December 2000 and became bankrupt by virtue of the acceptance of that petition: Bankruptcy Act 1966 (Cth) (Bankruptcy Act”), s 55(4A).  At the time the petition was accepted, the Bankrupt was a practising barrister.  It appears that the principal creditor is the Deputy Commissioner of Taxation.

2                     The Trustees’ claims are pleaded in a further amended statement of claim.  As Mr Coles QC, who appeared for the Trustees, accepted, the Trustees, as their claim is presently formulated, seek no relief orders which directly affect the rights of the Bankrupt.  Subject to one qualification to which I shall return, the Trustees seek declarations and orders only against

• the second respondent, the Bankrupt’s wife (“Mrs Cummins”);
• the third respondent, the trustee of the Cummins Family Trust (“Aymcopic”); and
• the fourth respondent, a company of which Mrs Cummins is the sole director and which carries on trading activities (“Hospitality”).

3                     In substance, the Trustees allege that a number of transactions entered into by the Bankrupt prior to his becoming bankrupt are void as against them by virtue of ss 120 and 121 of the Bankruptcy Act.  The principal allegations made by the Trustees may be summarised as follows:

• The Bankrupt transferred his share of the then matrimonial home to Mrs Cummins in 1987 without consideration, for the purpose of preventing that share becoming divisible among his creditors.
• The Bankrupt transferred shares in Counsel’s Chambers Ltd (a company which has an interest in a building containing barristers’ chambers) to Aymcopic in 1987 for a stated consideration of $360,000.  It is alleged that Aymcopic did not pay the purchase price and that the Bankrupt transferred the shares for the purpose of preventing them being divisible among his creditors.
• The Bankrupt is the registered holder of one share in Hospitality, which “[u]pon his Bankruptcy…formed part of [his] Bankrupt Estate”.
• The Bankrupt transferred various sums of money totalling about $194,000 to Mrs Cummins during the period 1992 to 1999.  It is said that Mrs Cummins provided no consideration for these payments, which were made for the purpose of preventing the funds from becoming divisible amongst the Bankrupt’s creditors.

4                     The proceedings are set down for hearing on 17 September 2002.  On 9 September 2002, Mrs Cummins, Aymcopic and Hospitality (to whom I shall refer collectively for convenience as the “Cummins parties”) filed a motion seeking an order pursuant to Federal Court Rules (“FCR”), O 6 r 9, or in the Court’s inherent jurisdiction, that the Bankrupt cease to be a party to the proceedings.  Because the substantive hearing is listed to commence in a few days, I set down the motion for argument on 12 September 2002. 

5                     It may seem a little curious that a contest about proper parties should be brought on at short notice shortly before the hearing of the claim is due to commence.  The reason is that the filing of the motion is part of a tactical battle between the Cummins parties and the Trustees.

6                     The Trustees wish to tender at the trial a portion of the transcript of the examination of the Bankrupt conducted pursuant to s 81 of the Bankruptcy Act.  I was not told the purpose of the tender nor what is recorded in the transcript.  Clearly, however, the Trustees wish to rely on what was said by the Bankrupt as evidence against the Cummins parties.

7                     Section 255(2) of the Bankruptcy Act provides that the transcript of an examination under s 81 “is admissible as evidence of the matters described by a person whose words are recorded in the transcript”, unless the Court makes an order to the contrary.  If s 255(2) applies to the current proceedings, it would seem to authorise the course contemplated by the Trustees, subject of course to the Court’s discretion to make an order to the contrary.  The complication arises because it was held by the Full Court in Colonial Life Insurance v Donnelly (1998) 82 FCR 418, at 434, that

“s 255(2) must be read together with s 81(17).  As we have said, s 81(17) is intended, in part, to impose a restriction on the use to which a s 81 transcript can be put in subsequent proceedings.  Thus the apparently broad terms of s 255(2) must be qualified so as to make a s 81 transcript admissible (subject to the power of the court to make an order to the contrary) only in proceedings under the Bankruptcy Act to which the examinee is a party.”

It follows that the Trustees cannot rely on s 255(2) to render the transcript of the Bankrupt’s examination admissible in these proceedings unless the Bankrupt remains a party.  Hence the present motion by the Cummins parties.

8                     I should record that the Bankrupt was represented at the hearing of the motion by Mr Eddy.  The Bankrupt did not file a separate motion, but Mr Eddy, on his behalf, adopted the Cummins parties’ submissions.

reasoning

9                     FCR, O 6 r 9 provides as follows:

“Where a party:

            (a) has been improperly or unnecessarily joined; or

            (b) has ceased to be a proper or necessary party;

the Court, on application by any party or of its own motion, may order that he cease to be a party and make orders for the further conduct of the proceeding.”

It will be seen that an order may be made on application by “any party”.  It is clear, therefore, that an order can be made pursuant to O 6 r 9 on the application of the Cummins parties notwithstanding that the Bankrupt has not filed his own motion.  Mr Coles’ submission that the Cummins parties lack “standing” to seek an order that the Bankrupt cease to be a party must be rejected.

10                  In order to determine the scope of O 6 r 9, it is necessary to take account of O 6 r 8.  The latter provides as follows:

“(1)     Where a person who is not a party:

            (a)        ought to have been joined as a party; or

(b)        is a person whose joinder as a party is necessary to ensure that all matters in dispute in the proceeding may be effectually and completely determined and adjudicated upon;

            the Court, on application by him or by any party or of its own motion, may order that he be added as a party and make orders for the further conduct of the proceeding.

(2) A person shall not be added as an applicant without his consent.”

11                  It is to be noted that in some jurisdictions, the equivalent to O 6 r 8 includes power to add as a party a person between whom and any other party there arises a question which is related to any claim in the proceeding and which “it is just and convenient to determine”: see, for example, Supreme Court (General Civil Procedure) Rules 1996 (Vic), r 9.06(b); Australian Competition and Consumer Commission v News Corporation Ltd (1997) 79 FCR 117, at 120-123, 125, per Hill J.  The FCR contain no such power.

12                  In News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410, the Full Court cited with approval (at 524) observations by Lord Diplock, in delivering the opinion of the Privy Council in Pegang Mining Co Ltd v Choong Sam [1969] 2 MLJ 52, in relation to a precursor to O 6 r 8.  Lord Diplock said this (at 55-56):

“The cases illustrate the great variety of circumstances in which it may be sought to join an additional party to an existing action.  In their Lordships’ view one of the principal objects of the rule is to enable the court to prevent injustice being done to a person whose rights will be affected by its judgment by proceeding to adjudicate upon the matter in dispute in the action without his being given an opportunity of being heard.  To achieve this object calls for a flexibility of approach which makes it undesirable in the present case, in which the facts are unique, to attempt to lay down any general proposition which could be applicable to all cases….

It has been sometimes said…that a party may be added if his legal interests will be affected by the judgment in the action but not if his commercial interest only would be affected.  While their Lordships agree that the mere fact that a person is likely to be better off financially if a case is decided one way rather than another is not a sufficient ground to entitle him to be added as a party, they do not find the dichotomy between ‘legal’ and ‘commercial’ interests helpful.  A better way of expressing the test is: will his rights against or liabilities to any party to the action in respect of the subject matter of the action be directly affected by any order which may be made in the action?”

The Full Court made these comments (at 525) about the test formulated by Lord Diplock:

“The test involves matters of degree, and ultimately judgment, having regard to the practical realities of the case, and the nature and value of the rights and liabilities of the third party which might be directly affected.  The requirement that a third party’s rights against, or liability to, any party to the proceedings be directly affected is an important qualification that recognises that many orders of a court are likely to affect other people to a greater or lesser extent….  The requirement of a direct effect on rights or liabilities differentiates the case where a person ought to be joined, from other cases where the effect of the order on non-parties can be characterised as only indirect or consequential.

Where, before trial, a question arises whether a necessary party has been joined, attention should be directed to the orders sought in the proceedings.  It is the effect of the orders upon the third party that must be determined.  The test is not whether the conduct of the third party is raised in the pleadings between the existing parties, or whether the third party is a party to a contract, the meaning or effect of which is pleaded as a matter relevant to the ascertainment of the rights between those parties.”

13                  The reasoning of the Full Court in News Ltd v ARL makes it clear that the test of whether a person ought to be joined in proceedings is whether the orders sought would directly affect that person’s rights or liabilities.  The fact that the pleadings make allegations about the conduct of a person does not, of itself, establish that the person ought to be joined.  Similarly, a person already joined as a party to proceedings, may be “unnecessarily joined” for the purposes of O 6 r 9 notwithstanding that the pleadings allege that he or she has acted in what loosely might be described as an improper manner.

14                  In News Ltd v ARL, the Full Court acknowledged that the test involves matters of degree and judgment.  In Colonial Life Insurance v Donnelly, to which reference has already been made, the Full Court held that the trial Judge in that case had not erred in permitting the bankrupt (among others) to continue as parties to the proceedings.  The Full Court did so, because (at 437)

“the trustees’ case rested on serious allegations against the bankrupt which, if established in criminal proceedings, would expose him to a penalty of imprisonment”.

This decision suggests that if the pleadings make allegations against a person capable of amounting to criminal misconduct, that may be a basis for concluding that the person is a proper party to the proceedings.

15                  Mr Coles, although not referring to Colonial Life Insurance v Donnelly in this context, submitted that the Bankrupt is a proper party to the present proceedings because the Trustees’ case impugned his conduct.  In the absence, however, of allegations of the kind that persuaded the Full Court in Colonial Life Insurance v Donnelly that the trial Judge’s discretion had not miscarried, I do not think that the Bankrupt can be said to be a necessary or proper party, simply because he is said to have had a particular purpose in making certain transfers of property.  Particularly is this so where the Bankrupt himself has not sought to remain a party to the proceedings.

16                  There are other circumstances in which a bankrupt can be regarded as properly joined to proceedings instituted by a trustee in bankruptcy against third parties for the benefit of creditors, under provisions such as ss 120 and 121 of the Bankruptcy Act.  In Wily (as Trustee of the Bankrupt Estate of Fuller) v Fuller [2000] FCA 1512, Hill J said (at [55]) that it might be appropriate to join the bankrupt as a party where there is likely to be a surplus in the estate after creditors have been paid in full.  In Wily v Fuller itself, Hill J declined to remove the bankrupt from the proceedings.  One reason his Honour gave for adopting this course was that the bankrupt had previously argued that his bankruptcy was invalid.  Since it was open to the bankrupt to apply for an annulment of his bankruptcy, his Honour considered it important that the bankrupt be bound by findings in the proceedings concerning the beneficial ownership of certain assets.

17                  Mr Coles did not suggest that the present case is one in which the Bankrupt’s rights might be affected by reason, for example, of the possibility that his estate might produce a surplus of assets over liabilities or that the bankruptcy might be annulled.  Certainly there was no evidence indicating either that the estate might produce a surplus or that there is some basis for expecting that the bankruptcy might be annulled.

18                  As I have already indicated, Mr Coles accepted that the pleadings, as presently drafted, do not seek orders that would directly affect the Bankrupt’s rights.  The only relief sought against the Bankrupt himself is a declaration

“that the Shareholding in Hospitality…held by Mr Cummins is held by him legally and beneficially and accordingly forms part of his bankrupt estate vested in the Trustee[s]”.

Mr Coles seemed to accept that relief in this form would not directly affect the Bankrupt’s rights.  He took this approach because he recognised that there are only two relevant possibilities.  If (contrary to the position of the Cummins parties) the shareholding was held beneficially by the Bankrupt immediately before his bankruptcy, his interest would have thereupon vested in the Trustees by virtue of s 58(1)(a) of the Bankruptcy Act.  If he held the shareholding on trust for Mrs Cummins (as the Cummins parties contend), he had no beneficial interest in the shareholding at the date of his bankruptcy.

19                  In the absence of any other claims against the Bankrupt, on the test laid down in News Ltd v ARL, I would conclude that the Bankrupt has been “unnecessarily joined” in the present proceedings for the purposes of FCR O 6 r 9.

20                  Mr Coles submitted that even if I reached this conclusion, I should withhold relief in the exercise of the discretion conferred on me by O 6 r 9.  He founded this submission on the proposition that the Trustees had prepared for the imminent hearing on the basis that the Bankrupt would be a party to the proceedings and that the Trustees could rely on s 255 of the Bankruptcy Act to support the tender of the transcript of the Bankrupt’s examination.  Mr Coles criticised the delay by the Cummins parties in filing their motion only shortly before the scheduled hearing.

21                  The Trustees’ submission assumes that FCR O 6 r 9 confers a discretion on the Court to withhold relief, even if it is established that a party has been “improperly or unnecessarily joined” to the proceedings.  In Wily v Fuller, Hill J appeared to accept (at [59]) that O 6 r 9 does confer such a discretion.  Mr Ashhurst who appeared for the Cummins parties, did not challenge this interpretation of the rule although it is not impossible that another view might be taken: cf Julius v Lord Bishop of Oxford (1880) 5 App Cas 214, at 222-223, per Earl Cairns LC; at 235, per Lord Selborne; Commissioner of State Revenue (Victoria) v Royal Insurance Australia Ltd (1994) 182 CLR 51, at 88, per Brennan J (with whom Toohey and McHugh JJ agreed), at 97-98, per Dawson J.

22                  Accepting for present purposes the assumption underlying the Trustees’ submission, I would not withhold relief to the Cummins parties on discretionary grounds.  The correspondence between the parties reveals that the parties’ legal advisers discussed whether the Bankrupt had been properly joined as early as November 2001.  However, in a letter of 12 December 2001, the solicitors for the Trustees informed the Bankrupt’s solicitors that

“your client was joined to the proceedings because it seemed to us that, as the various assets in dispute were actually held in his name, at least theoretically, he may have an interest in the outcome of the proceedings.”

No mention appears to have been made at this stage that the Trustees intended to rely on s 255 of the Bankruptcy Act at the trial.

23                  It was not until a directions hearing of 3 May 2002 that counsel for the Trustees adverted to the likelihood that the Trustees would seek to rely on the transcript of the Bankrupt’s examination.  The Trustees did not, however, identify the precise passages in the transcript on which they intended to rely until 31 July 2002.  There is no doubt that the Cummins parties could and should have filed their motion earlier than they did.  Nonetheless, having regard to the fact that the Cummins parties were only informed on 31 July 2002 which passages in the transcript were to be relied on, I do not think that the delay, of itself, warrants withholding the relief that would otherwise be granted by reason of the Bankrupt having been unnecessarily joined as a party to the proceedings.

24                  I think that the more substantial question, so far as the exercise of any discretion is concerned, is whether the delay in filing the motion has prejudiced the Trustees in their preparation for trial.  It is true that, if the motion succeeds, the Trustees will not be able to tender the transcript of the Bankrupt’s examination pursuant to s 255 of the Bankruptcy Act.  But the Trustees, or their advisers, must have been aware that they cannot be assured that an application under s 255 will be successful, bearing in mind that the section confers on the Court a discretion to make an order to the contrary.  Indeed, it is clear enough from the transcript of the directions hearing held on 3 May 2002 that counsel appearing at that time for the Trustees was alert to the potential difficulty.  While the Trustees doubtless wish to preserve the opportunity to rely on  s 255 of the Bankruptcy Act, it is difficult to see how their preparation for the case could have safely proceeded on the assumption that the transcript would be admitted into evidence.  As was pointed out in Colonial Life Insurance v Donnelly, at 429-430, per curiam, the Evidence Act 1995 (Cth) has considerably expanded the circumstances in which an “unfavourable witness” may be cross-examined by the party calling the witness.  No doubt these observations have been taken into account by the Trustees’ legal advisers.

25                  But for one matter mentioned by Mr Coles towards the end of his submissions, I would have granted the relief sought by the Cummins parties in their motion.  The matter is this.  Mr Coles acknowledged that the terms of the declaration sought by the Trustees in respect of the Bankrupt’s shareholding in Hospitality (see [17] above) are inappropriate, since the Bankrupt, on any view, plainly does not now hold the shareholding beneficially.  Making a virtue out of necessity, Mr Coles foreshadowed an application to further amend the current statement of claim to seek (in substance) an order requiring the Bankrupt to do all things necessary to ensure the registration of the Trustees as the holder of the legal title to the Bankrupt’s share in Hospitality.  Mr Coles asserted that relief of this kind is necessary and appropriate because (as is alleged in the pleadings) the Trustees have requested Hospitality to transfer the share to them, but Hospitality has refused or neglected to do so.

26                  At this stage, I have not seen the precise terms of the foreshadowed amendment.  I do not know whether any application to amend will be successful.  Nor is it clear whether an amendment, if made, would mean that the orders sought by the Trustees would affect the rights of the Bankrupt in the relevant sense.  If, however, any amendment were to have this result, the consequence might be that the Bankrupt would become a proper party to the proceedings.

27                  In my opinion, the appropriate course is to stand over the motion until the commencement of the hearing on 17 September 2002.  Depending on whether an application to amend is made and the outcome of any such application, it may be necessary to give further attention to the motion.

Associate:

Dated:              13 September 2002