FEDERAL COURT OF AUSTRALIA

7Steel Building Solutions Pty Ltd v Wright [2011] FCA 328

THE COURT ORDERS THAT:

1.    Pursuant to s 58(3) of the Bankruptcy Act 1966 (Cth) leave is granted to the Applicant to take fresh steps in and continue with Supreme Court of New South Wales Equity Division Commercial List proceedings Case No. 2010/304280 against the First Respondent to the extent necessary to enable the Supreme Court of New South Wales to determine the Applicant’s entitlement to the relief specified in paragraphs 1(a)(i), 1(b), 4, 5, 6, 7 and 8 of the Summons filed in the Supreme Court proceedings.

2.    For the purposes of Order 1, leave to continue the Supreme Court proceedings is deemed to have been granted on 12 November 2010.

3.    Each party is to pay its own costs.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1    On 13 September 2010 the Applicant, 7Steel Building Solutions Pty Ltd (“7Steel”), filed a Summons and Commercial List Statement in the Supreme Court of New South Wales. The Defendants to those proceedings are Jason Dean Wright and Charitha Eustace Martin.

2    7Steel is a supplier of fabricated steel products. Mr Wright was its General Manager. 7Steel acquired steel products from a Taiwanese company, Shang Kai Steel Co Ltd (“SKS”). Mr Martin was the General Manager of a competitor to 7Steel.

3    In very summary form, it is alleged in the Supreme Court proceedings that Messrs Wright and Martin entered into an “unlawful scheme” whereby SKS added a margin or other charge to the price of products invoiced or supplied by SKS to 7Steel and thereafter made payments of “secret commission” to Messrs Wright and Martin. The claims made against Mr Wright are:

    breach of contract of employment;

    breach of the implied contractual duty of good faith;

    breach of fiduciary duty; and

    money had and received.

Comparable claims are made against Mr Martin.

4    The matter comes before this Court by reason of the fact that on 11 November 2010 Mr Wright became bankrupt after presenting a debtor’s petition.

5    7Steel now apply by way of Application filed on 7 March 2011 for leave pursuant to s 58(3)(b) of the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”) to take fresh steps in and continue with the Supreme Court proceedings. That Application was heard on 30 March 2011. On that occasion there was no appearance by Mr Wright but there was evidence that the Applicant had complied with orders made on 23 March 2011 for substituted service. The hearing proceeded in his absence. The Second Respondent to the Application, the Trustee, did appear to offer such assistance to the Court as may have been required. The Trustee of the estate indicated that he neither consented to nor opposed the orders sought.

6    It is considered that the leave sought should be granted.

The Vesting of Property and Leave To Proceed

7    When considering the present Application it is of continuing utility to recall the purposes sought to be achieved by the Bankruptcy Act. Expressed at a very general level, Hill J in Re McMaster; Ex parte McMaster (1991) 33 FCR 70 at 72 to 73 (“Re McMaster”) summarised these purposes as follows:

The modern bankruptcy law serves three purposes. The first is to ensure that the assets of the bankrupt are distributed rateably among creditors. The second, which is interrelated with the first, is to ensure that one creditor does not obtain an undue advantage over other creditors. The third is to bring about the discharge of the debtor from future liability for his existing debts, so that the debtor may start afresh …

See also: Moore-McQuillan v Scott [2006] FCA 63 at [14], 149 FCR 486 at 490 per Mansfield J.

8    Within this context, a limited number of provisions of the Bankruptcy Act assume present importance.

9    First, s 58(1) provides for the vesting of “the property of the bankrupt” in the Official Trustee “where a debtor becomes a bankrupt”. That sub-section provides in part as follows:

Vesting of property upon bankruptcy – general rule

(1)    Subject to this Act, where a debtor becomes a bankrupt:

(a)    the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and

(b)    after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.

The sub-section of present relevance, s 58(3)(b), provides that the leave of this Court is required before a creditor can take “any fresh step” in a legal proceeding in respect of a “provable debt”. That sub-section provides as follows:

(3)    Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:

(a)    to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or

(b)    except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.

The phrase employed in s 58(3)(b), namely “in respect of”, will be given a wide meaning: Re McMaster at 72; Melnik v Melnik [2005] FCAFC 160 at [34] to [35], 144 FCR 141 at 148 per Spender, Hill and Finn JJ. But there may in some cases be doubt as to whether a proceeding is “in respect of a provable debt” within the meaning of s 58(3)(b): eg, Pedersen v Delaveris [2010] FCA 536 at [11]. Nicholas J there expressed “real doubts” as to whether the Supreme Court proceeding there sought to be pursued was such a proceeding “at least not until such time as an order for the payment of money is made”. The proceeding there sought to be pursued against the bankrupt sought (inter alia) relief pursuant to the Property (Relationships) Act 1984 (NSW).

10    The policy behind s 58(3) has been expressed as follows by Hill J in Re Rose; Ex parte Devaban Pty Ltd (Unreported, Federal Court of Australia, Hill J, 7 October 1994) (“Re Rose”) as follows:

The obvious policy behind s 58(3) of the Act was that any proceedings in force at the time of bankruptcy should be stayed and no further proceedings should be commenced so far as they relate to the period prior to bankruptcy unless the Court gives leave. In this way the bankrupt is freed from any claims that might be made in respect to the period prior to bankruptcy and the Trustee in bankruptcy can, if the Trustee accepts the proof of debt, treat a claim against the estate like the claim of all other creditors, so that the assets of the estate are, in due course, divided pro rata among the creditors.

Another reason for staying proceedings or preventing new proceedings from being commenced is to ensure that the Trustee of a bankrupt estate is not put to expense in defending proceedings which the Trustee has no money to defend. On the other hand, the Act does contemplate that the Court will, in an appropriate case, grant leave. In that respect a case would be an appropriate case where the proceedings proposed against the bankrupt are proceedings to which other parties are involved and for the proper conduct of which it may be necessary for the bankrupt to become a party.

Section 58(3) protects a bankrupt and the property of the bankrupt against the enforcement of remedies and enables the Court to control proceedings in respect of a provable debt in the light of the objectives of the Act: Gertig v Davies (2003) 85 SASR 226 at [15].

11    The reference made by Hill J in Re Rose as to the involvement of “other parties” has since been relied upon in other proceedings as a consideration relevant to the granting of leave: eg, Re Sharp; Ex parte Tietyens Investments Pty Ltd [1998] FCA 1367 (“Re Sharp”) per Weinberg J; Sturdy Components Pty Ltd v Trustee of the Bankrupt Estate of Sturt [2000] FCA 884 at [3] per Burchett J; Done v Financial Wisdom Ltd [2008] FCA 1706 at [34] to [35] per Perram J.

12    Also relevant to the exercise of the discretion conferred by s 58(3) is whether the facts are complex and whether it may be preferable for those facts to be resolved at a hearing rather than by way of a proof of debt: Allanson v Midland Credit Ltd (1977) 30 FLR 108 (“Allanson”). Bowen CJ, Riley and Deane JJ there observed:

Before proceeding further with the question of the effect of the stay and the operation of s 58(3), it is convenient to consider the second question which arises. That is, whether the court, if it has jurisdiction, should grant leave in the present case. Franki J, while indicating that as then advised he would not have answered this question in the affirmative, never reached the stage where it was necessary to decide it. The facts are complex. The claim of Midland Credit is not only against Mr Allanson but against other defendants who, in some respects, may be jointly and severally liable with him. There is also the question of the defences, some of which form the basis of the cross-claim. It would seem that all of these issues would be better and more comprehensively dealt with by a contested trial of the action in the Supreme Court than could possibly be the case if Midland Credit were required to lodge a proof of debt in respect of its claim against Mr Allanson alone. Such a proof of debt would be in the form of an affidavit and determined by the official receiver at such time as the stay ceased to operate. If the official receiver disallowed the claim in whole or in part, an appeal on this isolated issue could be brought to the Bankruptcy Court. But in these circumstances, the issues would have been determined in a less satisfactory way and questions between Mr Allanson and the other parties to the action would not be resolved: (1977) 30 FLR at 114.

See also: Westpac Banking Corporation v Ollis [2007] FCA 1194 at [18] to [20] per Cowdroy J.

13    For present purposes it should finally be noted that in Allanson, Bowen CJ, Riley and Deane JJ went on to observe that leave may be granted without determining whether s 58(3) applies. In this context their Honours concluded:

In the circumstances, we have formed the view that, if s 58(3) applies, the court has jurisdiction to grant leave to proceed and such leave should be granted.

We consider that it is unnecessary in the circumstances for us to express a final view of the effect of the stay on the operation of s 58(3). Where a court is given power to grant leave to perform a particular act or pursue a particular course of action and the question whether the need for such leave has arisen involves difficult and complicated questions of law or fact, it is permissible, in an appropriate case, to proceed on the basis that such leave is necessary rather than involve the parties in the futile exercise of determining, possibly after a series of appeals, whether the need for such leave has arisen. In all the circumstances including the urgency of the matter, we consider that that is the appropriate course to adopt in this case and that we should, to the extent necessary, grant leave to Midland Credit to continue and take fresh steps in the proceedings in the Supreme Court of New South Wales. This approach would, it seems to us, be consistent with that adopted by the High Court in Talga Ltd v MBC International Ltd (1976) 133 CLR 622. It is an approach which was raised before us in the course of argument but not before the learned judge below: (1977) 30 FLR at 114-115.

The power of the Court to grant leave includes the power to make an order nunc pro tunc: Re Veghelyi; Smith v Official Trustee in Bankruptcy (1993) 45 FCR 413 at 417 per Sweeney J; Sturdy Components Pty Ltd v Trustee of the Bankrupt Estate of Sturt [2000] FCA 884 at [3] per Burchett J.

14    Second, s 5 of the Bankruptcy Act defines a “provable debt” as meaning “a debt or liability that is, under this Act, provable in bankruptcy”. Section 82 sets forth the debts which are provable in a bankruptcy and relevantly provides in part as follows:

Debts provable in bankruptcy

(1)    Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.

…

(2)    Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.

There is, of course, a fundamental importance in properly characterising a debt as one which is provable or not provable in bankruptcy: Coventry v Charter Pacific Corporation Ltd [2005] HCA 67, 227 CLR 234. Gleeson CJ, Gummow, Hayne and Callinan JJ there explained this importance as follows:

[4] If the claim for unliquidated damages made pursuant to the Corporations Law is a debt provable in that person’s bankruptcy, discharge from bankruptcy operates to release that person from that claim: Bankruptcy Act 1966 (Cth), s 153(1). If it is not a debt provable in the bankruptcy, discharge from bankruptcy does not operate to release the bankrupt from the claim and, subject to any question of limitation of actions, the claim can be pursued against the former bankrupt after discharge. Moreover, s 58(3) of the Bankruptcy Act 1966 (Cth) does not prevent the claimant, during the bankruptcy, from commencing a legal proceeding in respect of the claim or enforcing any remedy against the person or the property of the bankrupt in respect of that claim. The subsection denies such competency to a creditor only in respect of “a provable debt”.

[5] The central question in the appeal hinges on the meaning of s 82(2) of the Bankruptcy Act and, in particular, what is meant by a demand in the nature of unliquidated damages arising otherwise than by reason of a contract or promise …

15    Given the importance of s 82(2), it is perhaps not surprising that the application of that provision (and hence s 58(3)(b)) has not been a matter free of difficulty. Thus, for example, argument has arisen as to whether a claim which is expressed as a claim in tort may nevertheless be characterised as a claim that arises “by reason of a contract” and hence a provable debt: eg, Lovell v Penkin [2008] FCA 637 at [16] to [26], 101 ALD 335 at 339 to 346 per McKerracher J.

16    In Sharp, Weinberg J noted that there is a “modern tendency to give a narrow interpretation to the exclusionary aspect of s 82(2)”. On the facts before him, Weinberg J there continued on to observe that “[c]laims of the type which are presently contemplated in the draft statement of claim involve allegations of moral turpitude and breach of fiduciary obligation on the part of each of the three prospective defendants. They are, therefore, allegations of ‘breach of trust’ within the meaning of that expression in s 82(2)”.

17    And, finally, s 153 sets forth the effects of a discharge from bankruptcy in part as follows:

Effect of discharge

…

(2)    The discharge of a bankrupt from a bankruptcy does not:

…

(b)    release the bankrupt from a debt incurred by means of fraud or a fraudulent breach of trust to which he or she was a party or a debt of which he or she has obtained forbearance by fraud;

…

If there were to be “fraud or a fraudulent breach of trust” established, s 153(2)(b) would operate to not release the bankrupt from a debt so incurred.

The Grant of Leave

18    It is considered that:

    it is unnecessary to reach any concluded view as to whether leave is in fact required to be given pursuant to s 58(3)(b)

but that:

    the claims being made by 7Steel most probably fall within s 58(3) and s 82 as “provable debts”;

and that:

    the discretion conferred by s 58(3)(b) should be exercised in favour of granting the leave sought.

19    Although unnecessary to express any concluded view, the claims being made by 7Steel are most probably claims in respect of a “provable debt” within the meaning of and for the purposes of s 82(1) and (2). Some of those claims “aris[e] … by reason of a contract” or a “breach of trust” within the meaning of and for the purposes of s 82(2). And, although it need not necessarily be addressed at this stage, some of those claims (if made out) may also fall within the term “fraud” as used in s 153(2).

20    It is an appropriate exercise of discretion to grant leave to permit 7Steel to pursue these claims in the Supreme Court proceedings. The grant of leave promotes the general purposes of the Bankruptcy Act as a whole in that it ensures as far as possible that there is an orderly determination of such “provable debts” as 7Steel may have against Mr Wright. Those claims are unquestionably complex – both factually and legally – and involve not only Mr Wright but also Mr Martin. They are best resolved in the Supreme Court after a contested hearing in which both Messrs Wright and Martin have had the opportunity to participate rather than by 7Steel lodging a proof of debt with the Trustee. The grant of leave will remove any necessity for the Supreme Court to consider whether the claims there sought to be pursued by 7Steel are “legal proceeding[s] in respect of a provable debt” and hence prohibited by s 58(3)(b) in the absence of leave having been granted. The affairs of Messrs Wright and Martin are so intertwined, according to the Amended Commercial List Statement filed in the Supreme Court, that the resolution of those claims may be frustrated or hindered if the claims could not proceed as against both Defendants.

21    There are two further factors which weigh in favour of granting leave. First, 7Steel commenced its proceedings in the Supreme Court prior to the presentation by Mr Wright of a debtor’s petition. No suggestion arises as to 7Steel seeking to gain some advantage over other creditors. Second, the Trustee does not oppose the leave being granted.

22    Leave should thus be granted and should date back to 12 November 2010. On that date there had been a directions hearing in the Supreme Court when orders were made (inter alia) as to discovery and inspection of documents. But at that point of time 7Steel had not yet become aware of the presentation by Mr Wright on 11 November 2010 of a debtor’s petition. The grant of leave should be deemed to have taken effect prior to that directions hearing.

ORDERS

23    The Orders of the Court are:

1.    Pursuant to s 58(3) of the Bankruptcy Act 1966 (Cth) leave is granted to the Applicant to take fresh steps in and continue with Supreme Court of New South Wales Equity Division Commercial List proceedings Case No. 2010/304280 against the First Respondent to the extent necessary to enable the Supreme Court of New South Wales to determine the Applicant’s entitlement to the relief specified in paragraphs 1(a)(i), 1(b), 4, 5, 6, 7 and 8 of the Summons filed in the Supreme Court proceedings.

2.    For the purposes of Order 1, leave to continue the Supreme Court proceedings is deemed to have been granted on 12 November 2010.

3.    Each party is to pay its own costs.

Associate:

Dated:    7 April 2011