FEDERAL COURT OF AUSTRALIA

BWK Elders (Australia) Pty Ltd v White[2004] FCA 1611

BANKRUPTCY – annulment – abuse of process – petitioner not insolvent – arrangement to avoid creditor

Bankruptcy Act 1966 (Cth) ss 55, 60(1)(b), 82(2)

Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 applied

European Life Assurance Society, In re (1869) 9 LR  Eq 122 applied

Mottee, Re; Ex parte Mottee v Official Receiver (1977) 16 ALR 129 applied

In the matter of the bankrupt estates of PETER JOSEPH ANDERSON, MATT ILLMARI KAINE and GRAEME JOHN MOYLE

BWK ELDERS (AUSTRALIA) PTY LTD v CLYDE WHITE in his capacity as trustee of the bankrupt estate of PETER JOSEPH ANDERSON, MATT ILLMARI KAINE and GRAEME JOHN MOYLE ; PETER JOSEPH ANDERSON, MATT ILLMARI KAINE and GRAEME JOHN MOYLE

V1139 of 2004

FINKELSTEIN J

10 DECEMBER 2004

MELBOURNE

In the matter of the bankrupt estates of PETER JOSEPH ANDERSON, MATT ILLMARI KAINE and GRAEME JOHN MOYLE

THE COURT ORDERS THAT:

1. The bankruptcy of Peter Joseph Anderson be annulled.
2. The bankruptcy of Matt Illmari Kaine be annulled. 
3. The bankruptcy of Graeme John Moyle be annulled. 
4. The costs of Clyde Peter White incurred in acting as trustee in bankruptcy of Peter Joseph Anderson prior to the date of this order (including in relation to this application) be costs payable out of the bankrupt estate of Peter Joseph Anderson created by sequestration order in proceedings numbered VID1138 of 2004, payable with the same priority as if they had been incurred in the bankruptcy created by that sequestration order.
5. The costs of Mr  White incurred in acting as trustee in bankruptcy of Matt Illmari Kaine prior to the date of this order (including in relation to this application) be costs payable out of the bankrupt estate of Matt Illmari Kaine created by sequestration order in proceedings numbered VID1138 of 2004, payable with the same priority as if they had been incurred in the bankruptcy created by that sequestration order.
6. The costs of Mr  White incurred in acting as trustee in bankruptcy of Graeme John Moyle prior to the date of this order (including in relation to this application) be costs payable out of the bankrupt estate of Graeme John Moyle created by sequestration order in proceedings numbered VID1138 of 2004, payable with the same priority as if they had been incurred in the bankruptcy created by that sequestration order.
7. The applicants costs of this application be payable jointly from the bankrupt estates of Peter Joseph Anderson, Matt Illmari Kaine and Graeme John Moyle created by sequestration order in proceedings numbered VID1138 of 2004.

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

In the matter of the bankrupt estates of PETER JOSEPH ANDERSON, MATT ILLMARI KAINE and GRAEME JOHN MOYLE

REASONS FOR JUDGMENT

1                     On 8 June 2004 the second to fourth respondents were faced with a very difficult situation.  They were defendants to a suit commenced by BWK Elders (Aust) Pty Ltd, the present applicant, in which it sought damages exceeding $1.8 million for alleged contraventions of ss 52, 53 and 58 of the Trade Practices Act 1975 (Cth).  The trial had begun on the previous day despite the respondents’ request for an adjournment.  Following the failed adjournment application, the respondents decided not to defend the action.  At that point it must have seemed to the respondents that judgment against them was all but a foregone conclusion.

2                     The respondents were not wealthy men, but they owned assets which had more than a nominal value.  The second respondent owned assets (cash, shares, debts and superannuation) worth $225,314.  The third respondent owned assets (cash, superannuation, debts and property) worth $813,306 and the fourth respondent owned assets (cash, debts and superannuation) worth $411,705.  The only debt which was then due and payable by any of them was approximately $200,000 which each had borrowed from their wives to cover the legal costs of the action.  If, as was likely, BWK recovered a judgment in the next day or so for anything like the amount claimed, the respondents would then clearly be insolvent.

3                     When the trial resumed on the morning of 8 June a lawyer representing the second to fourth respondents informed the trial judge that his instructions to appear on their behalf had been withdrawn and that his clients were in the process of presenting their own petitions under s 55 of the Bankruptcy Act 1966 (Cth).  That is what occurred later that morning and by force of that section each respondent became a bankrupt by virtue of the presentation of his own petition.

4                     The respondents’ bankruptcies did not bring the action to an end.  Section 60(1)(b) of the Bankruptcy Act only stays legal proceedings against a bankrupt if the claim is for a provable debt.  BWK’s claim was not for a provable debt; it was in the nature of unliquidated damages arising by reason of breach of contract, promise or breach of trust:  Bankruptcy Act, s 82(2).  BWK obtained judgment on 25 June 2004.  The judgment gave BWK damages in the sum of $1,833,609 together with interest, costs being reserved.  That judgment then founded BWK’s petition to bankrupt the respondents.  Sequestration orders were made on 19 October 2004.

5                     In this application, BWK seeks to annul the bankruptcies which resulted from the acceptance of the respondents’ petitions on the ground that those proceedings amounted to an abuse of process.  The court has power to annul a bankruptcy order if the petition upon which it is founded was an abuse of process.  In Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589, 599 the High Court held that there will be an abuse of process if a debtor presents his own petition for a purpose foreign to the bankruptcy laws.

6                     There appear to be two bases for holding that each respondent’s petition amounted to an abuse of process.  A person is only entitled to present a petition under s 55 if he is insolvent:  Re Mottee; Ex parte Mottee v Official Receiver (1977) 16 ALR 129,135.  Putting to one side the claim by BWK, according to their statements of affairs, the second to fourth respondents were each able to pay their debts when due at the time they presented their own petitions.  It is true that a judgment for a very large sum was about to be entered against them and in that event each would be insolvent.  But a person is not unable to pay his debts because at some future time he will have to pay a debt which he would then be unable to meet or would be unable to meet if it was presently payable.  I think that is the effect of In re European Life Assurance Society (1869) 9 LR  Eq 122.

7                     Secondly, the effect, no doubt the intentional effect, of what the second to fourth respondents did is this.  By presenting their own petitions, subject to the costs and expenses incurred by their respective trustees in bankruptcy, each bankrupt’s estate will go to his wife as the sole creditor.  No part of the estate will be available to discharge the judgement debt obtained by BWK.  It is an abuse of process for a debtor to present a petition for the purpose of placing his estate beyond the reach of a person who will imminently become a creditor.  The purpose of bankruptcy laws is to secure an equitable distribution of a bankrupt’s assets among all creditors.  True it is that BWK was not a creditor holding a provable debt when the petitions were presented, but the object of the petitioner in each case was to thwart or override the effect of the judgment that was about to be obtained.  The bankruptcy laws cannot be used for that purpose.

8                     In the circumstances I will make the orders sought.

Associate:

Dated:              10 December 2004