FEDERAL COURT OF AUSTRALIA

Commissioner of Taxation v Yeo (Trustee) (No 2) [2019] FCA 1188

ORDERS

THE COURT ORDERS THAT:

1.    The interim application by the Third Respondent dated 15 May 2019 and filed on 17 May 2019 (Interim Application) is dismissed.

2.    The Third Respondent pay the Applicant’s costs of and incidental to the Interim Application

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

REASONS FOR JUDGMENT

ANDERSON J:

Introduction and summary

1    The Commissioner of Taxation (Commissioner) seeks in this proceeding to obtain judgment against the third respondent, Florin Burhala, for a sum relating to outstanding taxation liabilities. Mr Burhala was made bankrupt in 2016 as a result of his departure from Australia to Romania, where he continues to reside.

2    The question for immediate determination is whether Mr Burhala has standing to seek various orders set out in his interlocutory application filed in May 2019. Mr Burhala relevantly seeks to set aside previous orders of this Court, which were made in Mr Burhala’s absence, granting leave for the Commissioner to commence this proceeding and two related proceedings in Romania against Mr Burhala. He also seeks various orders which would have the effect of preserving the property of the bankrupt estate.

3    For the reasons set out below, Mr Burhala does not have standing to seek the orders in his interlocutory application. In short, this follows from the fundamental feature of bankruptcy law, as reflected in the Bankruptcy Act 1966 (Cth) (Act), that, upon a sequestration order, a bankrupt is divested of both his or her interest in his or her property and liability for his or her provable debts. When Mr Burhala was made bankrupt, the relevant rights and powers in relation to his property vested in the trustees of his bankrupt estate. He now has no right to bring proceedings to preserve the property of which he has been divested.

Background

4    On 10 August 2016, Mr Burhala was made bankrupt by order of the Federal Circuit Court of Australia: Deputy Commissioner of Taxation v Burhala (No.2) [2016] FCCA 2241. The act of bankruptcy was Mr Burhala’s departure from Australia on 2 October 2015 with the intent to defeat or delay a creditor: ibid at [10]. At this time, Andrew Yeo and Gess Rambaldi (Trustees), the first and second respondents, were appointed trustees of Mr Burhala’s estate.

5    On 15 October 2016, the Deputy Commissioner of Taxation lodged a Proof of Debt with the Trustees for outstanding taxation liabilities owing by the bankrupt to the Commonwealth of Australia. This Proof of Debt has not yet been adjudicated upon by the Trustees.

6    On 5 December 2017, the Commissioner filed an application in this Court relevantly seeking an order of the Court granting leave pursuant to s 58(3)(b) of the Act for the Commissioner to commence and maintain three proceedings against Mr Burhala. For reference, s 58(3) provides the following:

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.

7    The three proceedings in respect of which the Commissioner sought leave were:

    (a)    this proceeding, by which the Commissioner sought judgment for $4,737,623.81 in respect of outstanding taxation liabilities;

    (b)    a claim jointly filed in the name of the Trustees and the Commissioner, which asks the Bucharest Tribunal in Romania to recognise that certain transfers of real property located in Romania by Mr Burhala to his children should be declared void, as they were done with the intention of defrauding his creditors; and

    (c)    a proposed action in Romania, to be brought in the names of both the Commissioner and the Trustees, being an application to freeze assets still held in the name of Mr Burhala in Romania under Article 1075 of the Romanian Civil Procedure Code.

8    On 19 December 2017, the Commissioner’s application for leave, pursuant to s 58(3)(b), which was supported by the Trustees, was heard by Moshinsky J. The next day, on 20 December 2017, his Honour made the following orders:

1.     Leave be granted to the applicant, pursuant to s 58(3)(b) of the Bankruptcy Act 1966 (Cth), to commence proceedings against the bankrupt for recovery of the sum of $4,737,623.81 and to obtain judgment against the bankrupt for the sum of $4,737,623.81.

2.     Leave be granted to the applicant, pursuant to s 58(3)(b) of the Bankruptcy Act 1966 (Cth), nunc pro tunc, to commence and take all necessary steps to obtain judgment in the legal proceeding concerning the bankrupt that the applicant is a party to in Bucharest Tribunal, 6th Civil Division, Case File No. 9877/3/2017.

3.     Leave be granted to the applicant, pursuant to s 58(3)(b) of the Bankruptcy Act 1966 (Cth), to commence and take all necessary steps to obtain judgment in a proposed freezing order application in Romania concerning the property of the bankrupt.

 4.     The balance of the proceeding be adjourned to a date to be fixed.

9    These orders were made upon the Commissioner undertaking to pay any funds or property received by him to the Trustees in order for any such funds or property to be distributed rateably among the creditors of the bankrupt.

10    Moshinsky J gave ex tempore reasons for making these orders. In the course of those reasons, his Honour remarked that, although Mr Burhala had not been served in relation to the Commissioner’s application for leave, this did not appear to be necessary. His Honour cited Kattirtzis v Zaravinos [2001] FCA 1158 (Kattirtzis) at [5] per Gyles J for the proposition that the bankrupt is not a necessary party to proceedings under s 58(3).

11    On 7 May 2018, Moshinsky J granted the Commissioner, pursuant to rr 10.43 and 10.44 of the Federal Court Rules 2011 (Cth) (Rules), leave to serve Mr Burhala in Romania with the application in this proceeding and associated affidavits, orders and reasons: Commissioner of Taxation v Yeo (Trustee) [2018] FCA 635.

12    On 14 December 2018, Mr Burhala, having been served, filed a notice of address for service in this proceeding.

13    On 14 March 2019, Moshinsky J gave directions at a case management hearing for the filing of an application for summary judgment by the Commissioner, which was listed for hearing on 22 July 2019.

14    On 29 March 2019, the Commissioner filed that application for summary judgment.

Mr Burhala’s interim application

15    On 17 May 2019, Mr Burhala filed an interim application in this proceeding. An affidavit sworn by Mr Burhala on 15 May 2019 was filed in support of the application.

16    Mr Burhala’s interim application sought the following orders:

1.    That the Orders made by this Honourable Court on 20th of December 2017 be set aside in accordance with Rule 39.05(1) or alternatively Rule 39.05(b) of the Federal Court Rules 2011.

2.    That the Third Respondent be granted leave to file and serve a Defence to the application filed on 5th of December 2017 by the Applicant.

3.    That pursuant to section 60(1) of the Bankruptcy Act 1966 (Cth) the Court stay any legal process commenced by the Applicant with regard to enforcement to their alleged provable debt including but not limited to the request issued by the Applicant on 4th of April 2017 to the Romanian Fiscal Authorities namely Agenția Națională de Administrare Fiscală pursuant to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 Protocol.

4.    A declaration that pursuant to section 58(3)(a) of the Bankruptcy Act 1966 (Cth) the Applicant’s alleged provable debt is no longer enforceable under the laws of Australia as described by the Applicant the Certificate issued by the Applicant on 4th of April 2017 under the Multilateral Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 Protocol given the Sequestration Order made by the Federal Circuit Court at Melbourne in File Number MLG160/2016.

5.    That the Applicant be required to withdraw the request made on 4th of April 2017 under the Multilateral Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 Protocol to the Romanian Fiscal Authorities namely Agenția Națională de Administrare Fiscală and serve them with a copy of the declaration and the stay Orders.

6.    Should the Applicant fail to comply with Orders made under paragraph 5 therein within 30 days from the date of such Order, a Registrar of this Honourable Court cause for these Orders to be served on the Romanian Fiscal Authorities namely Agenția Națională de Administrare Fiscală.

7.    That pursuant to section 47B(1) of the Federal Court Act 1976 (Cth) the Third Respondent be allowed to appear and provide submissions before this Honourable Court by way of audio link.

8.    Costs.

9.    Such further Orders as this Honourable Court deems appropriate.

17    Prior to the scheduled hearing of Mr Burhala’s interim application, the parties agreed that, before the Court addressed the merits of his application, the Court ought to first determine as a preliminary matter whether Mr Burhala had standing to make the application.

18    The hearing on 23 July 2019 was devoted to the determination of whether Mr Burhala had standing to make his interim application. Mr Connard of counsel appeared for the Commissioner. Mr Burhala appeared via telephone link from Romania.

Submissions

19    Both the Commissioner and Mr Burhala filed written submissions in respect of Mr Burhala’s standing. Their key submissions are summarised as follows.

Commissioner’s submissions

20    In respect of the first two orders sought by Mr Burhala, the Commissioner argued that a bankrupt lacks standing to bring proceedings such as an appeal from, or an application to set aside, a judgment in respect of a debt which is provable in the bankrupt estate. Because the order of Moshinsky J on 20 December 2017 concerned the recovery of, and judgment in respect of, debts which are provable in Mr Burhala’s estate, there was a complete bar to the bankrupt’s application to set aside the grants of leave under s 58(3)(b) of the Act. Furthermore, as illustrated in Kattirtzis, as noted by Moshinsky J, a bankrupt is not considered to be a necessary party to a s 58(3) application.

21    The Commissioner moreover argued that orders 3 to 6 sought by Mr Burhala were, however formulated, properly characterised as relief aimed at protecting property of which Mr Burhala has been divested upon bankruptcy. This was evident, in the Commissioner’s submission, from the following passage of Mr Burhala’s written submissions:

56.    The orders sought at paragraphs 3, 4, 5 and 6 seek interim injunctions that would preserve the estate, by stopping further costs being expended, pending final determination as to the conduct of the [Commissioner]. They do not seek to protect, enhance or add to the property of which [Mr Burhala] was divested of in bankruptcy.

(Emphasis added.)

22    The Commissioner submitted that, in view of established principles, Mr Burhala was divested of any entitlement to seek such relief in respect of that property. To support this proposition, counsel for the Commissioner cited Cummings v Claremont Petroleum NL [1996] HCA 19; 185 CLR 124 at 135-138 per Brennan CJ, Gaudron and McHugh JJ; Bendigo Bank Ltd v Demaria & Ors [2001] VSC 218 at [18] per McDonald J; Rogers v Asset Loan Co Pty Ltd [2006] FCA 434; 4 ABC(NS) 293 (Rogers) at [36]-[38] per Greenwood J and Coumanios v Giunti [2017] FCA 678 per Perry J. Consequently, Mr Burhala lacks standing to seek the forms of relief in orders 3 to 6. In the Commissioner’ submission, citing Rogers at [43], the Trustees are the only person with standing to seek the forms of relief sought in orders 3 to 6.

Trustees’ submissions

23    The Trustees did not appear at the hearing or provide written submissions to the Court. However, Mr Yeo, one of the Trustees, provided a letter to the Court objecting to Mr Burhala’s standing in the proceeding “on the grounds that the bankrupt does not have a financial interest which would confer lack of standing to appear. The right to appear in this proceeding is a proprietary right, and not a personal right, and therefore vests in me as trustee of his bankrupt estate”.

Mr Burhala’s submissions

24    Mr Burhala’s submissions in respect of the first two orders sought in his interim application largely centered on his motives for seeking those orders, and the merits of those orders, rather than his standing to seek such orders. Although the only question for immediate determination is whether Mr Burhala has standing to seek the orders in his interim application, it is convenient to summarise some aspects of these submissions.

25    Mr Burhala first seeks to argue that the order of Moshinsky J granting leave under s 58(3)(b) of the Act permitted the Commissioner to engage in conduct—the commencement of and engagement in certain legal proceedings—that is strictly prohibited by s 58(3)(a) of the Act. This latter provision provides that “[e]xcept as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor … to enforce a remedy against the person or the property of the bankrupt in respect of a provable debt”.

26    In support of this argument, Mr Burhala relied particularly on the High Court’s decision in Talacko v Bennett [2017] HCA 15; 260 CLR 124 (Talacko), and in particular the following passage of Kiefel CJ, Bell, Keane, Gordon and Edelman JJ at [71] (with Mr Burhala’s emphasis set out in his written submissions) :

The effect of s 58(3)(a) is to preclude a creditor from enforcing any remedy against “the person or the property of the bankrupt in respect of a provable debt”. One would naturally speak of the effect of s 58(3)(a) as a “stay” of enforcement by execution upon the judgment. To adopt the words of Denning J in describing the effect of a “stay of execution”, it prevents a creditor “from putting into operation the machinery of [the] law”.

(Citations omitted.)

27    Mr Burhala seeks to argue, amongst other things, that the legal proceedings to which leave was granted by Moshinsky J constitute the engagement in the enforcement of a remedy against the property of Mr Burhala in contravention of s 58(3)(a) of the Act. In particular, Mr Burhala highlights that the first paragraph of the order of Moshinksky J permits the commencement of this proceeding against Mr Burhala “for recovery” of the relevant sum, which, in the contention of Mr Burhala, contravenes the principles in Talacko, amongst other authorities.

28    Central to Mr Burhala’s dissatisfaction of the Commissioner’s conduct in this proceeding is the fact that Mr Burhala did not receive notice of the hearing before Moshinksky J. For instance, Mr Burhala’s written submissions contained the following passages:

31.    The matters before the Court at the hearing on 20th of December 2017 [before Moshinsky J] contained no urgent issues that required attention prior to the [Mr Burhala] being notified of the application before the Court, which is clearly the case given that to date no further applications were filed by either the [Commissioner] or the Trustees to date.

…

36.    By not serving [Mr Burhala] and allowing them to defend the proceedings at the hearing on 20 December 2017, the [Commissioner] misdirected the attention of the Court, thus the Court did not take into consideration the provisions of section 58(3)(a) and the Talacko case as despite the requirement of the [Commissioner], as a government authority to act as a model litigant it failed to … direct the Court to the provisions of Talacko Case and how these do not apply to this case.

29    Mr Burhala also provided submissions on the question of standing in respect of orders 3 to 6 sought in his interim application. He argued that those orders sought were “not with regard to property but simply seeking to prevent the [Commissioner] from engaging in breach of Australian law on an interim basis until a final determination is made by this Court”. The breach of Australian law is a reference to Mr Burhala’s contention that the Commissioner is engaging in legal proceedings for purposes which contravene s 58(3)(a) of the Act.

Consideration

Effect of bankruptcy

30    In Cummings v Claremont Petroleum NL [1996] HCA 19; 185 CLR 124 (Cummings), Brennan CJ, Gaudron and McHugh JJ observed at 138 that it was “fundamental to the law of bankruptcy that the bankrupt is divested of both his interest in his property and liability for his provable debts”. That central feature of bankruptcy law is reflected in the terms of the Act.

31    Section 58(1) of the Act provides the following:

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.

32    “After acquired property”, as referred to in s 58(1)(a), is defined in s 58(6) as follows:

(6)    In this section, after-acquired property, in relation to a bankrupt, means property that is acquired by, or devolves on, the bankrupt on or after the date of the bankruptcy, being property that is divisible amongst the creditors of the bankrupt.

33    “[T]he property of the bankrupt”, as referred to in s 58(1)(a), is defined in s 5 of the Act as follows:

the property of the bankrupt, in relation to a bankrupt, means:

(a)     except in subsections 58(3) and (4):

   (i)     the property divisible among the bankrupt’s creditors; and

(ii)     any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt; and

(b)     in subsections 58(3) and (4):

(i)     the property, rights and powers referred to in paragraph (a) of this definition; and

   (ii)     any other property of the bankrupt.

34    The concept of “property divisible among the bankrupt’s creditors”, as referred to in sub-paragraph (a)(i) of this definition, is informed by s 116(1) of the Act. That provision relevantly provides as follows:

Property divisible among creditors

(1)     Subject to this Act:

(a)     all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; and

(b)     the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge; and

…

is property divisible amongst the creditors of the bankrupt.

35    It may therefore be observed that, when Mr Burhala became bankrupt pursuant to the order of the Federal Circuit Court, any rights and powers in relation to his property that would have been exercisable by him if he had not become a bankrupt vested forthwith in the Trustees. The consequence is that “a bankrupt has no right to bring or prosecute proceedings to protect, enhance or add to the property of which he has been divested on bankruptcy”: Cummings at 136 per Brennan CJ, Gaudron and McHugh JJ.

Mr Burhala’s standing to set aside the order of Justice Moshinsky

36    The first interim order sought by Mr Burhala seeks the setting aside of the order of Moshinsky J on 20 December 2017 pursuant to rr 39.05(a) and 39.05(b) of the Rules. Those rules provide that:

The Court may vary or set aside a judgment or order after it has been entered if:

(a)     it was made in the absence of a party; or

(b)     it was obtained by fraud; …

37    As a threshold matter relevant to determining Mr Burhala’s standing to seek these orders, r 1.40 of the Rules provides the following:

Exercise of Court’s power

The Court may, at any stage of the proceeding, exercise a power mentioned in these Rules in the proceeding:

  (a)     on its own initiative; or

(b)     on the application of a party, or a person who has a sufficient interest in the proceeding.

38    Rule 1.40 of the Rules does not itself pose a barrier to Mr Burhala’s standing. Mr Burhala is named as third respondent and is a party to this proceeding. But a bankrupt being named as a party is not itself a sufficient basis to grant standing: see, in a slightly different context, Bagshaw v Scott [2002] FCAFC 362; 126 FCR 27 (Bagshaw) at [40] per Mansfield, Conti and Allsop JJ. The terms of r 1.40(b) is insufficient by itself to confer standing on Mr Burhala in respect of the application before Moshinsky J for the grant of leave under s 58(3)(b) of the Act. It is necessary to consider the nature and scope of such an application.

39    The policy underpinning s 58(3) of the Act was summarised by Moshinksky J in his Honour’s ex tempore reasons as follows:

The policy behind the requirement to obtain leave under s 58(3)(b) was described by Hill J in Re Rose; Ex parte Devaban Pty Ltd [1994] FCA 1082 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.

In Fraser v Commissioner of Taxation (1996) 69 FCR 99, Beaumont J, with whom Black CJ and Tamberlin J agreed, said at 114:

… a central feature of the established scheme of bankruptcy is an equitable or rateable distribution of property amongst all unsecured creditors. Any mechanism to secure this objective can allow for the recovery of assets by one person only and that is the trustee, acting on behalf of the general body of creditors. In exercising that function, the trustee will need to make administrative decisions, or judgments, from time to time. But it is for the trustee alone to make those judgments, in the interests of creditors as a whole; even if, where appropriate, the trustee may take into account their expressed wishes. The point is that there is no scope here for any role to be played by individual creditors acting on their own initiative; and if litigation is to be instituted with a view to the recovery of assets, it is the trustee's function, and responsibility, to be the dominus litis and thus entirely in charge of the litigation to the exclusion of individual creditors. In other words, the relevant scheme of the legislation, specifically that of s 58(3), is that individual creditors have no right to decide to pursue, or not pursue, the assets of the bankrupt with a view to the satisfaction of individual debts … Section 58(3) should be interpreted in a way that gives practical effect to this legislative purpose.

40    The purpose of s 58(3)(b) of the Act was likewise described by Barrett J in Mango Media Pty Ltd v Velingos [2008] NSWSC 202; 216 FLR 176 at [13] as:

to ensure that the bankrupt estate and the provable claims upon it remain under the control and supervision of the courts having jurisdiction in bankruptcy. The legislation as a whole is aimed at marshalling assets, ascertaining debts and claims and applying the former towards satisfaction of the latter. The procedures by which the process is to be conducted and the objective is to be achieved are set out in the Bankruptcy Act and administered by those courts to which exclusive jurisdiction in bankruptcy is given by Parliament. To the extent that an attempt is made to resort to any other process of dealing with debts and claims, particularly if resort is to be had to courts other than the bankruptcy courts, there must first be screening by a bankruptcy court.

41    Section 58(3)(b) operates as an exception to the general protection of the property of the bankrupt’s estate from inference by individual creditors. A court, directed by the statutory purposes underpinning the discretion in that provision, may grant leave to a creditor for the commencement and maintenance of any legal proceeding in respect of a provable debt.

42    A grant of leave under s 58(3)(b) effects, to a specified extent, a distribution in the statutory entitlement to commence and maintain proceedings in respect of provable debts. But this distribution only relevantly affects the trustee of a bankrupt estate, acting in the interests of the creditors as a whole, and the creditor obtaining leave of the Court. As such, it is open for the trustee of a bankrupt estate to oppose an application by a creditor for leave under s 58(3)(b). But, in this case, the Trustees supported the Commissioner’s application.

43    A grant of leave under s 58(3)(b) is not, however, a matter to which the bankrupt is sufficiently interested in the requisite sense. As such, I agree with the view of Gyles J in Kattirtzis at [5], as followed by Moshinsky J in his ex tempore reasons and in subsequent reasons in this proceeding (Commissioner of Taxation v Yeo (Trustee) [2018] FCA 635 at [3]), that the bankrupt is not a necessary party to proceedings under s 58(3). It follows that a bankrupt also does not have standing to set aside a grant of leave under s 58(3)(b).

44    For these reasons, even assuming there were grounds under rr 39.05(a) or 39.05(b) of the Rules for the order of Moshinsky J to be set aside, Mr Burhala does not have standing to seek such an order. It also follows from these principles that Mr Burhala does not have standing to seek the second interim order set out in his interim application—that he be granted leave to file and serve a defence to the Commissioner’s application for leave under s 58(3)(b). As discussed, Mr Burhala was not a necessary party to enable Moshinsky J to determine that application.

Mr Burhala’s standing to preserve the property of the bankrupt estate

45    The third to sixth orders sought by Mr Burhala in his interim application, as extracted above at [16], attempt to, in one form or another, frustrate the proceedings in Romania to which Moshinsky J granted leave. As counsel for the Commissioner highlighted, Mr Burhala’s written submissions, as relevantly extracted above at [21], explained that the intention of these orders was to “preserve the estate” pending the “final determination as to the conduct of [the Commissioner]”.

46    A bankrupt has no standing to seek such orders, the effect of which is protection of the property of the bankrupt estate. To again quote Brennan CJ, Gaudron and McHugh JJ in Cummings, “a bankrupt has no right to bring or prosecute proceedings to protect, enhance or add to the property of which he has been divested on bankruptcy”.

47    An example of this prohibition on the bankrupt is the decision of Perry J in Coumanios v Giunti [2017] FCA 678. In that case, the applicants, each former bankrupts, sought orders that a sum realised from the sale of four properties in Greece was the property of the applicants. They also sought a permanent stay of proceedings to prevent the first respondent, a creditor of the bankrupt estates, from realising other properties located in Greece pursuant to orders made by a Greek court for enforcement of a judgment obtained by the first respondent against the applicants in the District Court of New South Wales. Relevantly for current purposes, the first respondent argued that the former bankrupts had no standing to bring the proceedings before Perry J because any rights the applicants had in the properties had vested in the trustee pursuant to s 58 of the Act at the time of their bankruptcy.

48    Perry J, drawing on the remarks of Brennan CJ, Gaudron and McHugh JJ in Cummings, held that the applicants lacked standing insofar as they sought relief to preserve the property of the bankrupt estates. Her Honour relevantly concluded as follows at [49]:

Applying Cummings and Bagshaw, the applicants plainly lack standing to bring proceedings to preserve the Greek properties against the seizure orders made in Greece because, on the making of the sequestration order, they were divested of the properties and were no longer under any obligation to make any payments under the District Court judgment. The judgment simply became evidence of a provable debt in the bankruptcy. Furthermore, I agree with counsel for [the first respondent] that, unlike the right to appeal in Cummings, the right to bring proceedings to protect the property of the bankrupt’s estate against relevantly the sale by a creditor without authority, is itself property for the purposes of the Act: see the definition of “property” in s 5(1) of the Act and of property divisible among creditors in s 116(1)(b) …. As such that right also vested in the trustee on bankruptcy.

49    Conversely, the decision of Re-Engine Pty Ltd v Fergusson [2007] VSC 57; 209 FLR 1 (Re-Engine) is, as submitted by counsel for the Commissioner, distinguishable from the current facts. In that case, Dodds-Streeton J permitted a bankrupt—Mr Fergusson—to be heard in the “unusual circumstances” of that case. Her Honour concluded in respect of Mr Fergusson’s standing as follows at [67]-[68]:

Although the authorities indicate that a bankrupt does not have locus standi or an entitlement to be heard, the Court has a discretion to permit Mr Fergusson to give evidence in answer to the allegations.

In the unusual circumstances of this case, it would, in my view, promote the due administration of justice to permit Mr Fergusson to be heard, because the principles of natural justice favour giving him audience to answer the serious allegations of personal misconduct, the trustee in bankruptcy does not object to his participation, the trial will proceed in any event, the Court may be assisted by a contradictor and the bankrupt defendant’s participation will not impose an undue costs burden on other parties.

50    The circumstances of this case materially differ from those in Re-Engine. First, Re-Engine was a proceeding initiated by the applicants against the defendants, including Mr Fergusson, alleging that the defendants were liable to account for funds advanced pursuant to a breach of duty by Mr Fergusson. The allegations against Mr Fergusson involve breach of fiduciary duty, the creation of false invoices, contravention of fair trading legislation, and dishonesty: Re-Engine at [66]. As such, the proceedings in Re-Engine involved the obvious threat of serious adverse factual findings against the bankrupt. In contrast, the interim application in this case was initiated by the bankrupt and there is no threat of serious findings of personal misconduct against Mr Burhala in this proceeding.

51    For these reasons, Mr Burhala does not have standing to seek orders 3 to 6 set out in his interim application.

Scope of leave under s 58(3)(b) of the Act

52    Although the consideration above is sufficient to determine the immediate question before this Court—that of Mr Burhala’s standing to bring his interim application—I wish to briefly address another aspect of Mr Burhala’s submissions.

53    As noted above, Mr Burhala contends that the participation of the Commissioner in the legal proceedings to which leave was granted by Moshinsky J constitutes engagement in the enforcement of a remedy against the property of Mr Burhala in contravention of s 58(3)(a) of the Act. Mr Burhala highlights in particular that the first paragraph of the order of Moshinksky J permits the commencement of this proceeding against Mr Burhala “for recovery” of the relevant sum, which Mr Burhala argues contravenes the principles in Talacko. To this, I make the following observations.

54    Leave under s 58(3)(b) of the Act permits the commencement and maintenance of such a legal proceeding, but it does not permit the enforcement of any remedy against the bankrupt or his or her property in respect of a provable debt: Fraser v Commissioner of Taxation [1996] FCA 1701; 69 FCR 99 (Fraser) at 111 per Beaumont J, with Black CJ and Tamberlin J agreeing. For this purpose, the obtaining of an order is to be distinguished from the enforcement of such an order: see, for instance, Kostov v Nationwide News Pty Ltd (No. 1) [2018] NSWSC 1822 at [33]-[37] per Davies J. The purpose of prohibiting the enforcement by creditors of any remedy against the bankrupt or the property of the bankrupt in respect of a provable debt is to ensure the bankrupt’s assets are made available for equitable distribution among the bankrupt’s creditors: Story v Lane [1981] HCA 47; 147 CLR 549 at 556-7 per Gibbs CJ, with Mason, Wilson and Brennan JJ agreeing.

55    The order made by Moshinsky J granting leave under s 58(3)(b) should be understood and construed in light of these principles. Despite the reference in the first paragraph of that order to the commencement of proceedings “for recovery”, the preferable view is that this paragraph, construed consistently with the scope and purpose of s 58(3) of the Act, merely permits “the institution of legal proceedings and their maintenance up to the point of recovery of judgment”: Fraser at 111 (emphasis added). This construction reflects the maxim ut res magis valeat quam pereat (“it is better for a thing to have effect than to be made void”): see, in a different context, Cawood v Green at 5-6 per Hope JA (unreported, Supreme Court of New South Wales, Hardie, Hope and Reynolds JJA, 26 June 1974).

Conclusion and orders

56    For the reasons above, Mr Burhala does not have standing to seek the orders set out in his interim application. The interim application must therefore be dismissed.

57    Mr Burhala will pay the Commissioner’s costs of and incidental to the interim application.

Associate:

Dated:        1 August 2019