FEDERAL COURT OF AUSTRALIA

Nugawela v Deputy Commissioner of Taxation [2018] FCA 1457

ORDERS

THE COURT ORDERS THAT:

1.    The respondent's objection to competency be upheld.

2.    The appeal be dismissed.

3.    The appellant do pay the respondent's costs of the appeal to be assessed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

COLVIN J:

1    Dr Nugawela appeals against the dismissal of an application brought by him under s 39B of the Judiciary Act 1903 (Cth) against the Deputy Commissioner of Taxation. Dr Nugawela is a bankrupt. The Commissioner says that by reason of his bankruptcy, Dr Nugawela has no standing to bring the appeal and raises an objection to competency. For the following reasons, the Commissioner's objection should be upheld and the appeal dismissed with costs.

Commencement of the proceedings under s 39B of the Judiciary Act

2    On 17 March 2017, Dr Nugawela commenced proceedings seeking relief under s 39B of the Judiciary Act (Original Proceedings). Based on the relief sought, the application raises three complaints. First, it challenges sequestration orders in respect of the estate of Dr Nugawela that were made on 21 February 2017. Second, it challenges tax assessments by the Commissioner. Third, it seeks to avoid summary judgment entered in favour of the Commissioner against Dr Nugawela in the Supreme Court of Western Australia.

3    At a case management hearing held on 22 May 2017, Gilmour J was informed that a stay of the sequestration order had been granted by the Federal Circuit Court. The Commissioner sought to adjourn the matter so that an application could be made to lift the stay. Gilmour J observed that if the stay was lifted then Dr Nugawela would not be able to progress the proceedings because he would be a bankrupt. The matter was adjourned pending an application to the Federal Circuit Court in respect of the stay.

Section 60 of the Bankruptcy Act

4    Section 60(2) of the Bankruptcy Act 1966 (Cth) provides:

An action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming bankrupt, stayed until the trustee makes an election, in writing, to prosecute or discontinue the action.

5    Section  60(3) provides:

If the trustee does not make such an election within 28 days after notice of the action is served upon him or her by a defendant or other party to the action, he or she shall be deemed to have abandoned the action.

6    By operation of s 60(4), a bankrupt may continue in his or her own name an action commenced before he or she became a bankrupt in respect of personal injury or wrong or the death of a spouse, de facto partner or member of his or her family. The Original Proceedings are not of that character so s 60(4) does not apply.

Communications with the trustee in bankruptcy

7    The stay of the sequestration order ended on 19 June 2017 when an application by Dr Nugawela for further extension of the stay was refused. On 30 June 2017, solicitors for the Commissioner wrote to the trustee of Dr Nugawela's bankrupt estate providing formal notice of the Original Proceedings for the purposes of s 60(3).

8    On 21 July 2017, the Commissioner purported to consent to an extension of time for the trustee to make an election under s 60(3) until 10 August 2017. The Bankruptcy Act does not provide for an extension of the 28 day period by agreement. However, a party who has given notice for the purposes of s 60(3) could withdraw that notice and give a fresh notice. In substance that is what occurred. The Commissioner intended to afford additional time to the trustee. On 29 August 2017, the trustee provided a substantive response concerning his intentions in respect of the Substantive Proceedings. By that date the 28 day period had expired. The trustee informed the Commissioner that he was unable to make an informed determination in respect of the proceedings and said 'I have elected not to continue the proceedings and as such the action is deemed to be discontinued'.

The effect of the trustee's communication

9    The terms of s 60 apply to an 'action' which is defined to mean any civil proceeding, whether at law or in equity: s 60(5). A number of cases have considered whether the terms of s 60(2) and (3) are confined to an action where the subject matter of the action forms part of, or has a connection to, the estate of the bankrupt that is to be administered by the trustee pursuant to the sequestration order. The question arises because, s 60(3) provides for a stay until the trustee makes an election. Therefore, in effect, it confers authority upon the trustee to determine by an election whether the proceedings are prosecuted or discontinued. Further, if the trustee does nothing for 28 days after receipt of notice of proceedings commenced by the bankrupt before becoming bankrupt then those proceedings are deemed to be abandoned. Yet, the authority of a trustee is otherwise confined to the administration of the property divisible among the creditors of the sequestrated estate who have proved their claims.

10    So, if the subject matter of the action has no connection to the property being administered are the terms of s 60(2) and (3) to be construed as, in effect, conferring power on the trustee to cause any proceedings brought prior to bankruptcy to be abandoned? If the subject matter of the action has no connection to the property being administered what business does the trustee have in deciding to discontinue those proceedings or, perhaps more oddly, actually prosecuting them?

11    The decided cases focus upon the concern that would arise if a bankrupt could continue with the proceedings and expose the other parties to the burden of incurring costs. If the trustee is not to be involved (and liable for costs if the action proceeds), then in order to protect creditors, the bankrupt is deprived of the authority to determine whether the proceedings commenced before bankruptcy will be prosecuted. If the trustee has no interest in the subject matter of the proceedings then the trustee will not elect to prosecute them. If the proceedings are only of interest to the bankrupt then the bankrupt will have no authority to prosecute those proceedings unless the specific exception in s 60(4) concerning claims to personal injury or wrong applies or the subject matter is otherwise outside the administration of the bankrupt estate.

12    So, it has been held that where proceedings have been commenced by a number of plaintiffs one of whom becomes bankrupt after the commencement of those proceedings, a statutory stay of the entire proceedings still takes effect under s 60(2): Bell v Cribb [2013] WASC 32. Nothing can occur until notice has been given to the trustee. If the trustee does nothing for 28 days then the claim by the now bankrupt claimant is abandoned. Other parties are then able to move for the bankrupt party to be removed from the proceedings. Once the bankrupt has been removed then the action is no longer one to which s 60(2) applies and the action can proceed.

13    The cases concerned with the scope of the stay effected by s 60(2) were carefully reviewed by Kenny J in Garrett v Commissioner of Taxation [2015] FCA 665; (2015) 233 FCR 226. In that case, a bankrupt sought to appeal a vexatious proceedings order made prior to bankruptcy in proceedings in which there was a challenge to the validity of tax assessments and the existence of prior debts. So, the underlying claim was of a similar kind to that brought by Dr Nugawela in the Original Proceedings. Her Honour found that the word 'action' as used in s 60 should be broadly construed and that, save only for actions to which s 60(4) applies, s 60(2) covers all actions commenced by a bankrupt whether or not the action has a connection to the estate beyond the fact that the bankrupt commenced the action before becoming a bankrupt: at [21], [31]-[35]. The result is that irrespective of the subject matter, any proceedings brought in the bankrupt's name prior to the operation of a sequestration order are stayed by operation of s 60(2) and will be abandoned if the trustee does not take steps to prosecute or discontinue within 28 days of receiving formal notice of the proceedings.

14    In addition, Kenny J decided that even if s 60(2) was confined in its application to actions where there was connection between the action and the bankrupt estate beyond the fact that the bankrupt had commenced the action before becoming bankrupt then in the circumstances of the particular case there was a sufficient connection with the estate because of the consequences for the estate if costs orders against the bankrupt were successfully challenged in the appeal: at [35].

15    So, the correct legal characterisation of the sequence of events to which I have referred was that 28 days after 21 July 2017 the trustee was deemed to have abandoned the Original Proceedings by operation of the Bankruptcy Act. The abandonment meant that the bankrupt as the applicant in the proceedings could take no further step in those proceedings that was inconsistent with the abandonment and there could be an application to dismiss the proceedings for want of prosecution: Cole v Challenge Bank Limited [2002] FCAFC 200 at [16]. However, the abandonment itself did not operate as a dismissal of any underlying cause of action and it is a separate question in each particular case whether there ought to be a dismissal and what order as to costs may be made consequent upon the abandonment effected by the statute: see State of Queensland v Beames [2003] QSC 399; [2004] 2 Qd R 99. The deemed abandonment was no bar to the commencement of the fresh proceedings: Primelife Corporation Limited v Bufalo [2008] FCA 1742 at [36]. However, the bankrupt must demonstrate that he or she has standing to commence such proceedings: Cummings v Claremont Petroleum NL [1996] HCA 19; (1996) 185 CLR 124 at [131] (being an appeal from the decision in Fuller & Cummings v Beach Petroleum NL (1993) 43 FCR 60, cited in Primelife at [35]). There is no standing where the subject matter of the proceedings is an interest in property that forms part of the sequestrated estate or a liability in respect of a debt that is provable if established: Cummings at [137]-[138] and McCallum v Federal Commissioner of Taxation (1997) 75 FCR 458.

16    Further, as I have noted, the abandonment operated irrespective of whether the subject matter of the Original Proceedings or the Original Proceedings themselves formed part of the property of the bankrupt estate. It did not depend upon the authority of the trustee to administer the estate extending to the subject matter of the Original Proceedings.

Other steps by Dr Nugawela

17    On 6 July 2017, Dr Nugawela applied to renew the stay of the sequestration order. On 9 August 2017, his renewed application was dismissed in the Federal Circuit Court. Dr Nugawela then brought an appeal against the refusal. A further application for a stay of the sequestration order pending the hearing of the appeal was brought before Barker J of this Court. It was dismissed on 21 September 2017. None of these events affect the conclusions I have reached because they did not alter the fact that the sequestration order took effect on 19 June 2017.

Consent by the trustee to the dismissal of the Original Proceedings

18    However, that is not the end of the story. On 18 October 2017, the solicitors for the Commissioner received a consent order signed by the trustee inviting the Commissioner to consent to the dismissal of the Original Proceedings. The solicitors signed the consent order and provided it to the associate to Gilmour J, the case managing judge for the Original Proceedings.

19    A directions hearing was convened on 20 December 2017. Dr Nugawela did not appear and the matter was adjourned to 1 February 2018. Again, Dr Nugawela did not appear. Counsel for the Commissioner referred to the consent orders signed on behalf of the trustee and the Commissioner and on that basis orders were made dismissing the Original Proceedings.

Appeal by Dr Nugawela and objection to competency

20    On 23 February 2018, Dr Nugawela brought an appeal against the order dismissing the Original Proceedings.

21    As I have noted, the Commissioner has objected to the competency of the appeal and seeks its summary dismissal. Written submissions in support of the Commissioner's application were filed and served on 23 April 2018.

22    At a case management hearing on 30 May 2018, I made orders listing the objection to competency for hearing on 4 September 2018 and directed Dr Nugawela to file and serve any affidavit or submissions upon which he proposes to rely at the hearing by 17 August 2018. I also gave liberty to Dr Nugawela to apply to vacate the hearing for cause at any time prior to 9 July 2018. I further directed that the hearing of the matter may proceed in the absence of Dr Nugawela if there is no appearance by him on 4 September 2018.

23    Orders were made in those terms because in May 2018 the Court had received a number of communications on behalf of Dr Nugawela concerning his medical treatment and his inability to attend court. He was not in attendance when the orders were made, but subsequently a copy of the orders was served upon him by the Commissioner.

24    In July and September 2018 further correspondence was received by the Court on behalf of Dr Nugawela requesting that the hearing listed on 4 September 2018 be vacated on the basis that he was undergoing medical treatment. He was informed that in the absence of a formal application supported by an affidavit the hearing would proceed.

25    On 4 September 2018, there was no appearance from Dr Nugawela. The Commissioner sought to proceed with the application and have it dealt with substantively. I heard oral submissions in support of the application.

26    The Commissioner submits that when the stay of the sequestration order came to an end on 19 July 2017, Dr Nugawela lacked standing to make submissions in the Original Proceedings because his interest in the Original Proceedings had been vested in his trustee in bankruptcy, alternatively the Original Proceedings were stayed and then discontinued.

27    Arguably, in a different case, a bankrupt may have a basis to object to the dismissal of the proceedings. As I have noted, the fact that Dr Nugawela had been deemed by operation of s 60(3) to have abandoned the proceedings did not mean that it followed that the proceeding must be dismissed. Further, a trustee in bankruptcy may lack authority to consent to the dismissal of particular proceedings because they may have no connection to the estate being administered by the trustee.

28    However, in this case, it was submitted for the Commissioner that the Original Proceedings concerned or would affect property of Dr Nugawela that was part of his sequestrated estate. They concerned his liability to pay tax. In my view, that submission should be accepted at the very least because of the potential exposure of the estate to a costs order if an application was made by the Commissioner for an order dismissing the proceedings consequent upon the abandonment. It remained a matter in the interests of the administration of the bankrupt estate to secure an outcome that limited any liability on the part of Dr Nugawela in respect of the costs of the proceedings that might lead to claims that the Commissioner might make on the estate as a creditor. Therefore, the trustee could consent to an order for dismissal.

29    Further, it is well established that a bankrupt's contingent interest in a possible surplus does not confer an interest to be able to appeal against a judgment against him, in this case the dismissal: Cummings at [138] and Deputy Commissioner of Taxation v Hanselmann [2017] NSWCA 80 at [12]-[13].

30    It follows, that Dr Nugawela had no standing to deal with that issue because it was a matter for the trustee as part of the administration of the estate.

31    The Original Proceedings also sought to challenge the making of the sequestration order by a Registrar of this Court. However, it was not competent to bring such a complaint on the basis that it involved a review of the conduct of the Commissioner. Dr Nugawela pursued a challenge to the sequestration orders in proceedings in the Federal Circuit Court (being the proceedings in which, for a time, he obtained a stay of the sequestration orders). The relevant chronology was recounted by Barker J in Nugawela v Deputy Commissioner of Taxation [2017] FCA 897 at [30]-[36]. The inclusion in the Original Proceedings of a claim to relief in respect of the sequestration orders does not aid Dr Nugawela on the present application because it is demonstrably without merit. The competent way to advance such a claim was by way of an application for review of the decision by the Registrar to make the sequestration order which was done by Dr Nugawela in separate proceedings.

32    For those reasons, I uphold the objection to the competency of the appeal. The appeal should be dismissed.

Costs

33    The Commissioner seeks an order that the Commissioner's costs of the appeal and the application to dismiss on the basis that the appeal is incompetent be paid by Dr Nugawela. There is no reason that I can see as to why costs should not follow the event. However, the Commissioner seeks a further order that the costs be payable from the bankrupt estate of Dr Nugawela. The trustee has not been a party to the appeal which has been brought in the name of Dr Nugawela. The appeal was commenced after the sequestration order took effect. I see no reason why the costs should be borne by the creditors of Dr Nugawela's estate, particularly in circumstances where the trustee secured a dismissal of the Original Proceedings by consent without any provision for costs in the dismissal order.

Associate:

Dated:    26 September 2018