FEDERAL COURT OF AUSTRALIA

Polis v Zombor [2019] FCA 69

ORDERS

THE COURT ORDERS THAT:

1.    Service of these orders is taken to have been effected by the prospective applicant serving a copy of these orders on the first prospective respondent in the manner prescribed in Order 2(b) and (c) of the orders made on 26 April 2018.

2.    Within 28 days of service of these orders on the first prospective respondent in accordance with Order 1, or within such further period as the Court allows on application by the first prospective respondent, the first prospective respondent give discovery to the prospective applicant of:

(a)    all bank statements for any and all bank accounts owned, operated or controlled by the first prospective respondent during the period 1 January 2012 to 1 February 2018;

(b)    all bank statements for any and all bank accounts owned, operated or controlled by the second or third prospective respondents during the period 3 December 2014 to 1 February 2018;

(c)    any documents with respect to the sale of General Brokerage Services Pty Ltd (ACN 158266141) (GBS) to iSelect, the disbursement of the sale proceeds of GBS and the incorporation of the second and third prospective respondents.

3.    The first prospective respondent have liberty to apply to vary or set aside this order, within 14 days of being served in accordance with the manner prescribed in Order 2(b) and (c) of the orders made on 26 April 2018, doing so on notice to the prospective applicant.

4.    Costs be reserved.

Endorsement pursuant to Rule 41.06

To: the first prospective respondent

You will be liable to imprisonment, sequestration of property or punishment for contempt if:

(a)    for an order that requires you to do an act or thing – you neglect or refuse to do the act or thing within the time specified in the order; or

(b)    for an order that requires you not to do an act or thing – you disobey the order.

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

REASONS FOR JUDGMENT

MURPHY J:

INTRODUCTION

1    In this proceeding the prospective applicant, Mr Henry Polis, seeks orders pursuant to rule 7.23 of the Federal Court Rules 2011 (Cth) (the Rules) to require the prospective first respondent, Mr Luke Zombor, to provide preliminary discovery of documents relevant to whether Mr Polis has a right to relief against Mr Zombor. Mr Polis contends that he has plausible causes of action against Mr Zombor based in deceit, misleading or deceptive conduct and/or unconscionable conduct but says that he requires further information to assist him in deciding whether to commence such a proceeding. He believes that Mr Zombor is likely to have control of documents which will provide him with that information. Mr Polis does not press the application against the prospective second and third respondents LMZ Projects Pty Ltd (LMZ) and Latrme Pty Ltd (Latrme) respectively.

2    The proceeding was served on Mr Zombor on 27 April 2018 in accordance with orders for substituted service made 26 April 2018, and Mr Zombor was notified that if he failed to attend the case management hearing on 22 June 2018 Mr Polis intended to seek final orders for relief. Despite this Mr Zombor has not responded in any way to the proceeding. He did not file a defence and did not appear at the case management hearing on 22 June 2018.

3    At the case management hearing Mr Polis applied for final orders pursuant to r 5.08 of the Rules, and sought orders requiring Mr Zombor to provide discovery of:

(a)    all bank statements for any and all bank accounts owned, operated or controlled by Mr Zombor during the period 1 January 2012 to 1 February 2018;

(b)    all bank statements for any and all bank accounts owned, operated or controlled by LMZ or Latrme during the period 3 December 2014 to 1 February 2018. The materials show that at all material times Latrme owned 80% of the shares in LMZ and Mr Zombor is or was the sole director of both companies; and

(c)    any documents with respect to the sale of General Brokerage Services Pty Ltd (GBS) to iSelect, the disbursement of the sale proceeds of GBS and the incorporation of LMZ or Latrme.

4    Having regard to the material filed in the application I consider it appropriate to make orders for preliminary discovery. I do so notwithstanding that, if Mr Polis decides to commence a proceeding for deceit, misleading or deceptive conduct and/or unconscionable conduct, a question may arise as to whether he is able to do so having regard to s 229(2)(c) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).

5    Mr Zombor entered into a personal insolvency agreement (PIA) under Part X of the Bankruptcy Act on or about 12 April 2013. Section 229(2)(c) provides that, if a PIA has become binding on the creditors of the debtor, as long as the agreement remains valid, a creditor cannot commence a proceeding in respect of a provable debt or take any fresh step in such a proceeding. The same or at least a similar question arises as to whether Mr Polis was competent to commence the present originating application and is permitted to apply for final orders for relief. While I have not had the benefit of submissions by Mr Zombor or any other contradictor which would have placed the Court in a better position to decide the application, for present purposes I am persuaded that Mr Polis is competent to make the application.

THE FACTS AND PROCEDURAL HISTORY

6    In an affidavit sworn 21 February 2018 Mr Polis states the following:

(a)    In about November 2007 he provided a $70,000 loan (Start Up Loan) to Mr Zombor and his son, Benjamin Polis, to assist them in starting a new business. The terms of the Start Up Loan included that the loan was interest-free, repayable at call and that Mr Zombor and Benjamin Polis were jointly and severally liable to repay the loan. Mr Polis transferred $70,000 to a bank account set up in the name of Polis Australia Pty Ltd (now deregistered), which later became known as Energy Watch.

(b)    In February 2009 Mr Zombor and Benjamin Polis incorporated Energy Watch Pty Ltd (Energy Watch), and the new business was operated through that entity;

(c)    In about August 2009 Polis Australia went into liquidation. Mr Polis did not lodge a proof of debt in the liquidation as the loan agreement was with Mr Zombor and Benjamin Polis personally.

(d)    In about early 2012 the public reputation of Energy Watch was damaged after extracts from Benjamin Polis’ Facebook account were published in the media. The business fell into severe financial difficulty.

(e)    In about June 2012 Energy Watch went into liquidation. Mr Polis did not lodge a proof of debt as the loan agreement was with Mr Zombor and Benjamin Polis personally.

(f)    Mr Polis had received some repayments of the Start Up Loan, but those repayments were wrongly recorded in Energy Watch’s books as a loan to Mr Polis, such that he was wrongly recorded as a debtor of the business. Mr Polis requested that the account ledgers be changed so that they accurately reflected the repayments of the Start Up Loan that were made, but that was not done. Mr Polis was later sued by Energy Watch’s liquidator for $75,412 for debts which Energy Watch’s books erroneously said he owed. The proceeding was later settled on terms not favourable to Mr Polis.

(g)    On or about 12 April 2013 Mr Zombor executed a PIA under Part X of the Bankruptcy Act, the agreement carrying Australian Financial Security Authority (AFSA) reference VIC 650/13/2. Mr Polis states that he was not notified of the proposed PIA nor afforded the opportunity to consider it or vote on it.

(h)    James Patrick Downey of JP Downey & Co, Level 1, 22 William Street, Melbourne was the controlling trustee under the PIA and provided a “Report by Controlling Trustee” which stated, amongst other things, that Mr Zombor had provided a Statement of Affairs which disclosed total liabilities of $9,694,182, made up of 15 unsecured creditors the largest of which was a potential $8.25 million insolvent trading claim by Energy Watch’s liquidator. The Statement of Affairs disclosed assets of only $13,000 and the estimated deficiency was therefore $9,681,182.

(i)    Under the PIA Mr Zombor was obliged to pay $10,000 on or before 31 May 2013 and a further $85,000 on or before 1 December 2013. On doing so he was to be “released from all provable debts within the meaning of the [Bankruptcy] Act”. The PIA was accepted by creditors (other than Mr Polis) and Mr Zombor complied with the PIA and paid $95,000 in two instalments by the due dates.

7    Mr Polis says that creditors voted in favour of the personal insolvency agreement after being misled by Mr Zombor as to his true financial capacity. He bases this view upon the following matters:

(a)    Benjamin Polis has informed him and he believes that, in an effort to salvage Energy Watch, in early 2012 Benjamin Polis arranged for Mr Zombor to contact Mr Daniel Wallace, who he describes as an entrepreneur and the head of a large equity capital fund. Benjamin Polis has informed him and he believes that, in about April 2012, the assets of Energy Watch and its name were sold to GBS, an entity controlled by Mr Wallace.

(b)    Mr Harley Aitkens, a former employee of Energy Watch, made a statutory declaration on 27 January 2018, a copy of which is exhibited to Mr Polis’ affidavit. Mr Aitkens states that on 29 April 2012 Mr Wallace told him that a new entity would conduct the business of Energy Watch, that Mr Zombor would be contracted to the new entity, and when the new entity was sold Mr Zombor would be paid an “agreed percentage”, which arrangement Mr Zombor was hiding. He states that the new entity was sold in about late 2014.

(c)    Mr Marcus Denning, a business associate of Mr Zombor and Benjamin Polis, made a statutory declaration on 17 January 2018 a copy of which is also exhibited. Mr Denning states that in about April 2012 he was told by Mr Noel Mcdermott and Mr David Rutledge that they had made an offer to Mr Zombor to pay between $500,000 and $700,000 to continue the business of Energy Watch within a new corporate structure. He states that Mr Zombor subsequently discussed that business proposal with him. He further states that, approximately a week later, Mr Zombor accepted a different offer from a consortium led by Mr Wallace.

(d)    Benjamin Polis made a statutory declaration on 16 January 2018, a copy of which is also exhibited. Benjamin Polis states, amongst other things, that:

    (i)      in early 2012, in an effort to salvage Energy Watch, he suggested that Mr Zombor contact Mr Wallace;

    (ii)     Mr Zombor subsequently informed him that he had reached an agreement with Mr Wallace pursuant to which Mr Zombor would own 20% of GBS, that Mr Zombor would give half of whatever was realised from those shares to Benjamin Polis, and that Mr Zombor had hidden his shares in GBS in a third party;

    (iii)    a few months later Benjamin Polis met with his and Mr Zombor’s joint lawyer who told him that Mr Zombor had hidden the shares in GBS in a financial management firm on Collins Street. He says that the name of the financial management firm “floating around” at the time was Providence Growth Solutions Pty Ltd. He states that Mr Zombor said he would pay Mr Polis his half share of the 20% shareholding in GBS;

(e)    On 30 May 2014 iSelect Ltd announced to the ASX that it had agreed to purchase GBS for $10 million; and

(f)    Mr Polis believes Mr Zombor received an amount of $1.93 million from the sale of GBS, through a shareholding in GBS by QHT Investments Pty Ltd, the sole shareholder of which at the material time was Providence Growth Solutions Pty Ltd. He says that, had that amount been made available to the creditors, they would have received approximately $0.20 on the dollar for their debts as opposed to the $0.005 cents on a dollar they received under the PIA.

8    On 26 February 2018 Mr Polis filed the present originating application, seeking preliminary discovery from four prospective respondents, Mr Zombor, LMZ, Latrme and Mr George Schifter. Mr Schifter was removed as a party by orders made 15 March 2018.

9    Mr Polis was unable to effect personal service of the originating application and affidavit in support on Mr Zombor. In support of an application for substituted service he filed evidence to the following effect:

(a)    service of the originating application and supporting affidavit had been attempted by an investigator at various addresses identified in searches of electoral, property, company, and other public records;

(b)    a Facebook page under the name ‘Luke Zee’ existed, to which had been uploaded a photograph of Mr Zombor;

(c)    the ‘Luke Zee’ account holder responded to a Facebook message and said that Mr Zombor was in Bangkok at the time but would be home by the weekend of 16 December 2017, that he would be using his parents’ home of 19 Zebrafinch Court, Carrum Downs, Victoria as his base location, and that correspondence could be sent to that address;

(d)    the property at that address is jointly owned by Mr Bela Zombor and Mrs Janet Zombor; and

(e)    that an ABN, held in the name Luke Michael Zombor and trading as Freedom Mortgages, is owned by Mr Zombor and its registered address is 19 Zebrafinch Court, Carrum Downs.

10    On 26 April 2018 I made orders for substituted service and directed that service on Mr Zombor of the originating application and supporting affidavit be taken to have been effected by:

(a)    sending the documents to the Facebook page in the name of ‘Luke Zee’ at the specified internet address;

(b)    posting the documents marked to the attention of Mr Zombor to the address Level 18, 530 Collins Street, Melbourne; and

(c)    leaving the documents in an envelope marked to the attention of Mr Zombor with a person who is apparently over the age of 16 and residing at 19 Zebrafinch Court, Carrum Downs, the home of Mr Zombor’s parents.

11    I later made orders for Mr Zombor to be notified of the case management hearing on 22 June 2018 by the latter two methods (as by that time the ‘Luke Zee’ Facebook account had been closed) and that Mr Polis proposed to seek orders for final relief if Mr Zombor did not appear. I am satisfied that Mr Polis complied with the orders for substituted service and notification of the case management hearing.

12    Mr Zombor did not appear at the case management hearing and Mr Polis filed submissions in support of an application for final relief. However, on the morning of the hearing the solicitors for Mr Polis, Enyo Lawyers, informed chambers that counsel had just become aware that s 229(2)(c) of the Bankruptcy Act may be relevant to the application. Counsel sought an opportunity to consider the provision and provide written submissions, and subsequently did so.

THE APPLICATION FOR PRELIMINARY DISCOVERY

13    Rule 7.23 provides:

Discovery from prospective respondent

(1)    A prospective applicant may apply to the Court for an order under subrule (2) if the prospective applicant:

(a)    reasonably believes that he or she may have the right to obtain relief in the Court from a prospective respondent whose description has been ascertained; and

(b)    after making reasonable inquiries, does not have sufficient information to decide whether to start a proceeding in the Court to obtain that relief; and

  (c)    reasonably believes that:

(i)    the prospective respondent has or is likely to have or has had or is likely to have had in the prospective respondent’s control documents directly relevant to the question whether the prospective applicant has a right to obtain the relief; and

(ii)    inspection of the documents by the prospective applicant would assist in making the decision.

(2)    If the Court is satisfied about matters mentioned in subrule (1), the Court may order the prospective respondent to give discovery to the prospective applicant of the documents of the kind mentioned in subparagraph (1)(c)(i).

14    It follows that for preliminary discovery orders to be made pursuant to r 7.23 Mr Polis must show that:

(a)    he believes, on a reasonable basis, that he may have the right to obtain relief from Mr Zombor based on claims of deceit, misleading or deceptive conduct and/or unconscionable conduct;

(b)    after making reasonable inquiries he does not have sufficient information to decide whether to start a proceeding to obtain that relief, having regard to the usual costs and risks involved in litigation;

(c)    he reasonably believes that Mr Zombor has or is likely to have, or has had or is likely to have had in his possession, power or control documents which are directly relevant to whether Mr Polis has a right to obtain such relief; and

(d)    he reasonably believes that inspection of the documents sought to be discovered will assist him in deciding whether to start a proceeding to obtain relief:

see generally Reeve v Aqualast Pty Ltd [2012] FCA 679 at [61]-[66]; EBOS Group Pty Ltd v Team Medical Supplies Pty Ltd (No 3) (2012) 199 FCR 533; [2012] FCA 48 at [15]-[17], [31], [53]-[54], [96], [100]; Optiver Australia Pty Ltd v Tibra Trading Pty Ltd (2008) 169 FCR 435; [2008] FCAFC 133 at [20]-[21], [36], [47]-[48]; Pfizer Ireland Pharmaceuticals v Samsung Bioepis AU Pty Ltd [2017] FCA 285 at [47]-[55], [115]-[117]. The general principles relevant to rule 7.23 are the same, or at least similar, to those which governed its predecessor, Order 15A r 6. Those principles were summarised by Hely J in St George Bank Ltd v Rabo Australia Ltd (2004) 211 ALR 147; [2004] FCA 1360 at [26].

15    On the basis of the materials and having regard to the relevant principles I am satisfied, first, that there is a reasonable basis for Mr Polis’s belief that he may have a right to obtain relief from Mr Zombor for deceit, misleading or deceptive conduct and/or unconscionable conduct.

16    Mr Polis is not required to show reasonable grounds for believing that he does have a right to obtain relief. He needs only reasonable grounds for believing he may have a right to obtain relief: Pfizer Ireland Pharmaceuticals v Samsung Bioepis AU Pty Ltd (2017) 351 ALR 103; [2017] FCAFC 193 at [51]. Rule 7.23 is intended to aid a prospective applicant who is having difficulty, and reasonably so, in deciding whether to litigate because of a lack of key information. The rule is of a beneficial kind and is to be given the full scope that its language will reasonably allow. The proper brake on any excesses of its use lies in the discretion of the Court, which is required to be exercised in the particular circumstances of each case: Paxus Services Ltd v People Bank Pty Ltd (1990) 99 ALR 728 at 733.

17    There is evidentiary support for Mr Polis’ belief that Mr Zombor had a beneficial entitlement to 20% of the shares in GBS and an entitlement to receive a benefit upon any sale of GBS. In completing his Statement of Affairs Mr Zombor was required to disclose any benefit he expected to receive from any person or entity in the future. The Statement of Affairs does not disclose any entitlement that Mr Zombor had to shares in GBS or any benefit he may receive if GBS was sold. This supports Mr Polis’ belief that creditors voted in favour of the PIA without being informed of Mr Zombor’s asserted entitlement to a substantial benefit if GBS was sold.

18    Mr Polis argues that had Mr Zombor disclosed to his creditors that he had a beneficial entitlement to 20% of the shares in GBS, and/or was entitled to receive a substantial benefit if GBS was sold, the creditors would not have accepted the proposed PIA and would have proceeded to bankrupt him. He also contends that Mr Zombor’s asserted entitlement to a 20% share of any proceeds from the sale of GBS would have vested in the trustee in bankruptcy who is likely to have sought to recover those monies. There is a reasonable basis for Mr Polis’ belief that he may be able to obtain relief from Mr Zombor in deceit, misleading or deceptive conduct and/or unconscionable conduct.

19    Second, I am satisfied that, having made reasonable inquiries, Mr Polis does not have sufficient information to decide whether to start a proceeding against Mr Zombor. The evidence he has as to the alleged agreement under which Mr Zombor had a beneficial entitlement to 20% of the shares of GBS and to receive 20% from any sale of GBS is hearsay, he has no documentary evidence of such an agreement, and the material is insufficient to decide whether it is appropriate to start a proceeding against Mr Zombor.

20    Third, I am satisfied that there is a reasonable basis for Mr Polis’ belief that Mr Zombor has or is likely to have, or has had or is likely to have had, in his possession, power or control, the documents set out in the orders, and that such documents are directly relevant to whether Mr Polis has a right to obtain relief. This is obviously so in the case of bank statements for accounts Mr Zombor owned, operated or controlled, and is also reasonably likely in the case of LMZ and Latrme, companies of which Mr Zombor was the sole director. That the documents are directly relevant to the proposed claims of deceit, misleading or deceptive conduct and/or unconscionable conduct is plain from their nature.

21    Fourth, I am satisfied that there is a reasonable basis for Mr Polis’ belief that inspection of the documents of which he seeks discovery will assist him to decide whether to commence a claim for deceit, misleading or deceptive conduct and/or unconscionable conduct against Mr Zombor. It is reasonable for Mr Polis to believe that inspection of the identified documents may substantiate some of the matters to which he has referred in evidence, namely Mr Zombor’s entitlement to and receipt of 20% of the proceeds of the shares in GBS. This is central to his decision about whether to commence a proceeding.

22    Finally, the power to order discovery from a prospective respondent pursuant to r 7.23 is discretionary. I am not aware of anything to indicate that the orders sought might be unfairly prejudicial to Mr Zombor in a commercial or litigious sense: see Optiver Australia Pty Ltd v Tibra Trading Pty Ltd (2007) 247 ALR 199; [2007] FCA 2065 at [35].

23    It could, however, be argued that by operation of s 229(2)(c) of the Bankruptcy Act Mr Polis was not competent to bring the originating application (nor to apply for orders for final relief) and/or is not competent to bring the proposed proceeding. For the reasons I now explain, for the purposes of the present application I consider Mr Polis is competent to bring the application and to apply for the orders sought.

THE OPERATION OF SECTION 229(2)(C) OF THE BANKRUPTCY ACT

24    Section 229, which is in Part X of the Bankruptcy Act, relevantly provides:

Personal insolvency agreement to bind all creditors

(1)    A personal insolvency agreement that:

(a)    is entered into in accordance with this Part; and

(b)    complies with the requirements of this Part;

is, upon being duly executed by the debtor and the trustee, binding on all the creditors of the debtor.

(2)    If a personal insolvency agreement has become binding on the creditors of the debtor, it is not competent for a creditor, so long as the agreement remains valid:

…

(c)    to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.

(3)    This section does not:

(a)    affect the right of a secured creditor to realise or otherwise deal with the creditor’s security; or

(b)    prevent a creditor, after all the obligations that a personal insolvency agreement created have been discharged, from taking any proceeding or enforcing any remedy in respect of a provable debt from which the debtor is not released by the operation of the agreement.

(4)    …

25    “Provable debt” is defined in s 5 of the Bankruptcy Act to mean “a debt or liability that is, under this Act, provable in bankruptcy.” Section 82 of the Act sets out what constitutes a debt provable in bankruptcy. It relevantly provides:

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.

(1A)    …

(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.

…

(Emphasis added.)

Mr Polis’ submissions

26    Mr Polis’ submissions assume that Mr Zombor’s PIA is valid and that all obligations created by the PIA have been discharged. He accepts that the phrase “in respect of” in s 229(2)(c) has a wide meaning but says that the decisions in Tarea Management (North Shore) Pty Ltd (in liq) v Glass (1991) 28 FCR 93 (Tarea Management) (Hill J with whom Lockhart and Einfeld JJ agreed); Re McMaster; Ex parte McMaster (1991) 33 FCR 70 (McMaster) (Hill J), In the Estate of Gary Killington; Ex parte Chisholm [1998] FCA 1474 (Mansfield J) and Melnik v Melnik (2005) 144 FCR 141; [2005] FCAFC 160 can be distinguished on their facts from the present case.

27    Mr Polis implicitly accepts that Mr Zombor’s original debt of $70,000 for the Start Up Loan arises under a contract and is therefore provable in bankruptcy, but submits that the same cannot be said of damages sought in the prospective proceeding. He submits that the proposed proceeding concerns Mr Zombor’s failure to disclose in his Statement of Affairs that he might receive a benefit from the sale of GBS and therefore misleading creditors about the state of his financial affairs, prior to the creditors accepting his PIA. In Mr Polis’ contention this is not seeking to recover the original debt but is a claim for damages for Mr Polis’s loss of a chance to recover some of it.

28    Mr Polis contends that the nature of the proposed causes of action (deceit, misleading or deceptive conduct and/or unconscionable conduct) mean the proposed proceeding is not in respect of a “provable debt” because one or more of the causes of action are within the exception to provable debts in s 82(2) of the Bankruptcy Act. That is, he says they are claims in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust.

29    Mr Polis further argues that, even if the prospective proceeding is in respect of a provable debt, the PIA did not release the debt, relying on ss 153(2)(b), s 229(3)(b) and 230(3) of the Bankruptcy Act. He did not develop this argument but I note that s 153(2)(b) provides that a discharge from bankruptcy does not release the bankrupt from a debt incurred by means of fraud or a fraudulent breach of trust to which the bankrupt was a party or a debt of which the bankrupt has obtained forbearance by fraud. Section 230(3) provides that a discharge from bankruptcy does not release the debtor from a debt that would not be released if the bankrupt had become a bankrupt on the day on which he or she executed a personal insolvency agreement. Mr Polis submits that “fraud” in s 153(2)(b) “could well encompass” the prospective claims of deceit, misleading or deceptive conduct and/or unconscionable conduct.

Determination

30    The phrase “in respect of a provable debt” in s 229(2)(c) must be given a wide meaning. In Tarea Management Hill J (with whom Lockhart and Einfeld JJ agreed) cited with approval the statement of Mann CJ in Trustees Executors & Agency Co Ltd v Reilly [1941] VLR 110 at 111 that the words “in respect of” have the “…widest possible meaning of an expression intended to convey some connection or relation between the two subject matters to which the words refer”.

31    The question is one of nexus between the originating application and the asserted provable debt. In my view, if the prospective proceeding is in respect of a provable debt, then there is a sufficient nexus between the originating application and the provable debt. This is so because by the originating application Mr Polis seeks further information to assist him to decide whether he should start the prospective proceeding. The central question is therefore whether the prospective proceeding is in respect of a provable debt.

32    Section 82(1) of the Bankruptcy Act provides a wide definition of debts provable in bankruptcy, subject to some carve-outs in following subsections. In Ex parte Llynvi Coal & Iron Co; Re Hide (1871) 7 LR Ch App 28 at 31, cited with approval in relation to s 82 in Coventry v Charter Pacific Corp Ltd (2005) 227 CLR 234; [2005] HCA 67 (Coventry) at [37], James LJ said in relation to an equivalent provision:

Every possible demand, every possible claim, every possible liability, except for personal torts, is to be the subject of proof in bankruptcy, and to be ascertained either by the Court itself or with the aid of a jury. The broad purview of this Act is, that the bankrupt is to be a freed man, freed not only from debts, but from contracts, liabilities, engagements, and contingencies of every kind. On the other hand, all the persons from whose claims, and from liability to whom he is so freed are to come in with the other creditors and share in the distribution of the assets.

33    The purpose of s 82 is to capture and have proved in the bankruptcy a broad range of debts and liabilities. It is aimed at ensuring that the assets of the bankrupt are distributed rateably among creditors, that one creditor does not obtain an undue advantage over other creditors, and at bringing about the discharge of the debtor from future liability for his or her existing debts, so that the debtor may start afresh without lingering disabilities and with the immunities achieved through bankruptcy remaining in place: McMaster at 72-73; Official Receiver v Todd (1986) 14 FCR 177 at 188 (Spender J).

34    Section 82(2) provides a carve-out from the definition of provable debt. Understood in conjunction with s 82(1) it means that an unliquidated claim for damages that arises by reason of a contract, promise or breach of trust is a provable debt, and an unliquidated claim that is not by reason of a contract, promise or breach of trust is not provable. Liquidated claims for damages are provable unless such claim falls within one of the other carve-outs.

Whether the proposed claims are for unliquidated damages

35    The distinction between liquidated and unliquidated claims was classically described by Odgers in Pleading and Practice, 12th ed, 1939, p 47-8 in the following terms, approved in Spain v Union Steamship Company of New Zealand Ltd (1923) 32 CLR 138 at 142 (Knox CJ and Starke J):

…whenever the amount to which the plaintiff is entitled (if he is entitled to anything) can be ascertained by calculation or fixed by any scale of charges, or other positive data, it is said to be liquidated or “made clear”. But an action in which the amount to be recovered depends upon all the circumstances of the case, and no one can say positively beforehand whether the plaintiff will recover a farthing, or 40 shillings, or £100, is an action for unliquidated damages.

36    Section 82(2) speaks of the nature of the demand, meaning its essential quality. The question is whether the relevant claim or demand for damages is “in the nature of unliquidated damages”. The answer does not depend on how the claim is expressed in the pleading, although the pleading will often be the best evidence of the true character of the demand: Cornelius v Barewa Oil & Mining (NL) (in liquidation) (1982) 42 ALR 83 (Cornelius) at 84 (Burt CJ) and 89 (Wickham J); Coventry at [69], and at [143]-[144] (Kirby J).

37    In my view the proposed claims for deceit, misleading or deceptive conduct and/or unconscionable conduct are claims for unliquidated damages.

38    There is no draft pleading in evidence but the proposed claim for misleading or deceptive conduct is a statutory claim under s 18 of the Australian Consumer Law (ACL) in Schedule 2 of the Competition and Consumer Act 2010 (Cth), and the claim for unconscionable conduct is likely to be brought as a statutory claim under s 20 of the ACL. Section 236 of the ACL provides that a person who suffers loss or damage because of conduct that contravenes those provisions may recover the amount of the loss or damage by an action for damages.

39    It is clear that a statutory action for damages for misleading or deceptive conduct is a claim for an unliquidated amount: see Coventry at [6] and [71], and ACCC v Black on White Pty Ltd (2004) 138 FCR 314; [2004] FCA 363 at [30] (Spender J) in relation to the predecessor provisions in ss 52, 82 and 87(1A) and 87(1B) of the Trade Practices Act 1974 (Cth). The same is true of the proposed claim for unconscionable conduct. A claim for damages for deceit also obviously cannot be “made clear” before judicial determination.

40    Of course, each of the proposed claims is compensatory in nature and it can be argued that the outer limit of any loss or damage suffered by Mr Polis must be the amount of the Start Up Loan. Even so, I accept Mr Polis’ contention that the proposed claims do not seek to recover that original debt by an action for breach of contract and are instead claims to damages for Mr Polis’ loss of a chance to recover some of it. The quantum of such claims can only be determined as a consequence of judicial estimation and cannot be “made clear” before the case has been decided.

Whether the proposed claims arise by reason of a contract, promise or breach of trust

41    The absence of a draft pleading makes it more difficult to decide whether the proposed claims arise by reason of a contract, promise or breach of trust, but the Court must look at the substance or underlying basis of the claims rather than the manner in which the cause of action is pleaded or formulated: Coventry at [6], [69], [143]-[144]; Cornelius at 84 and 89.

42    There is nothing in the materials to suggest that the proposed claims of deceit and unconscionable conduct arise by reason of a contract, promise or breach of trust, and in my view they do not. Both claims are based in an allegation that Mr Zombor – either deceitfully or unconscionably – failed to disclose in his Statement of Affairs that he had acquired a 20% share of GBS and that he stood to receive a substantial benefit if GBS was sold. Those proposed claims do not involve any allegation of breach of trust and do not arise by reason of a contract or promise.

43    In relation to the proposed claim of misleading or deceptive conduct the position is more nuanced. In Coventry (at [70]-[71]) the plurality held that a claim for unliquidated damages for misleading or deceptive conduct by the bankrupt which induced the claimant to make a contract with the bankrupt (described as a bilateral case) does arise by reason of a contract and is provable in bankruptcy, whereas such a claim which induced the claimant to make a contract, not with the bankrupt but with a third party (described as a tripartite case) does not arise by reason of a contract and is not provable. Having noted this, the distinction drawn has no relevance in the present case. Again, the proposed misleading or deceptive conduct is based on the allegation that Mr Zombor failed to disclose in his Statement of Affairs that he had acquired a 20% share of GBS and that he stood to receive a substantial benefit if GBS was sold. The proposed claim does not arise in the context of a contract or promise and it cannot be said to arise by reason of a contract.

44    Accordingly, the claims to be made in the prospective proceeding fall within the carve-out in s 82(2), and are not provable debts in the bankruptcy. It follows that, at least for the purpose of the present application and without having had the benefit of submissions on Mr Zombor’s behalf, I do not consider the originating application to be in respect of a provable debt such that it is caught by s 229(2)(c) of the Bankruptcy Act.

45    I will make the interlocutory orders which Mr Polis seeks, but I will hear Mr Zombor in relation to these questions if he applies to vary or set aside those orders. If the prospective proceeding is commenced, it will also be open to Mr Zombor to rely on s 229(2)(c) to plead that Mr Polis is barred from commencing it and/or to apply to dismiss the proceeding.

Associate:

Dated:    5 February 2019