Federal Court of Australia

Kitay (Liquidator) v Trenfield (Trustee) [2021] FCA 508

ORDERS

THE COURT ORDERS THAT:

1.    If and to the extent that leave is necessary under s 58(3) of the Bankruptcy Act 1966 (Cth), the applicants have leave to take all and any further steps in connection with the prosecution of the counterclaim in Supreme Court of Western Australia proceedings CIV 2765 of 2010, and all or any interlocutory applications and steps, including as against the bankrupt estates of Angela Cecilia Theresa Frigger and Hartmut Hubert Josef Frigger.

2.    The applicants' costs of this application are costs, jointly and severally, in and are to be paid from the bankrupt estates of Angela Cecilia Theresa Frigger and Hartmut Hubert Josef Frigger and are to be assessed.

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

REASONS FOR JUDGMENT

JACKSON J:

1    This is an application for leave under s 58(3) of the Bankruptcy Act 1966 (Cth) to take further steps in the prosecution of a counterclaim against two bankrupt persons in an action in the Supreme Court of Western Australia. The applicants were Computer Accounting and Tax Pty Ltd (CAT) and its liquidator, Mervyn Kitay. The respondents were the bankrupts, Angela and Hartmut Frigger, and their trustee in bankruptcy, Kelly-Anne Trenfield.

2    Mrs Trenfield neither opposed nor consented to leave to proceed and she filed a submitting notice. But one of the bankrupts, Mrs Frigger, sought leave to be heard in opposition. Despite having named the bankrupts as respondents, the applicants submitted that Mrs Frigger had no right to be heard.

3    At the hearing on 6 May 2021 I made orders allowing the application. These are my reasons for having done so, as well as my reasons for determining that Mrs Frigger had no right to be heard on the application.

The Supreme Court proceeding

4    Mrs Frigger commenced the Supreme Court action against Mr Kitay and CAT in 2010. The present issues are defined by an amended substituted statement of claim (SOC), a further re-amended substituted defence and counterclaim (DAC), and an amended substituted reply and defence to counterclaim.

5    The Friggers were directors of CAT and say that they are trustees of their self-managed superannuation fund, the Frigger Super Fund (FSF). Mr Kitay became liquidator of CAT on 6 May 2010. CAT is the registered proprietor of real property in Perth and real property in Armadale. It is common ground that CAT was trustee of the FSF at material times (it claims that it is and has been the only trustee). The Friggers made claims, among others, that they contributed the Perth and Armadale properties to the FSF as in specie contributions to be held on trust by CAT or that, in other ways, CAT came to hold the properties on trust on the terms of the FSF.

6    The DAC is a long and involved document and it would be a substantial task to describe fully all of the different claims made in it. There are claims that CAT owns the Perth land in its own right and is entitled to the proceeds from the sale of the Armadale land, which are held in an escrow account. There are also claims to the proceeds of the sale of a business conducted on the Armadale land, claims of estoppel, claims to rights of indemnity out of assets as trustee, claims about the identity of trustees and members of the FSF at certain times and claims of breach of fiduciary duty and voidable transactions. But it is not necessary to go into detail about these, because for reasons that appear below it is sufficient in this application to focus on a claim based on an alleged loan account between CAT and the Friggers, and the manner in which that claim is dependent on other issues of fact and law in the Supreme Court action.

7    The DAC claims a declaration that the Friggers owe CAT $2,600,801, alternatively $2,356,283, as the balance of the loan account. The loan account is said to be comprised of a large number of transactions; it is only necessary to focus on the most material ones here. The first of these is an amount of $435,000 which the Friggers are said to have provided to CAT for the purchase of the Perth property. The second is a sum of $665,000 which they are said to have provided to CAT for the purchase of the Armadale property. The DAC pleads that both of these advances are properly characterised as loans by the Friggers to CAT. The third is a sum of $80,000 which Mrs Frigger is said to have paid to St George Bank to secure a bank guarantee needed for the service station business operated on the Armadale land. This too is said to be a loan from Mrs Frigger. (Note, the DAC has a schedule which appears to contain all alleged transactions concerning the loan account. There are discrepancies between the figures in that schedule and corresponding figures in the body of the pleading, but they are not material for present purposes.)

8    The fourth transaction material to the loan account was an alleged transfer by CAT to the Friggers, in January 2009, of a sum of $999,999 which CAT had on deposit with ING Direct Bank. The fifth material transaction is an alleged payment by CAT to the Friggers, on or about 30 June 2009, of the entire amount of a sum paid to CAT pursuant to judgment in different Supreme Court proceedings, alternatively $900,000 of that judgment sum. These are both pleaded (as one of many alternative pleas) to be unsecured loans by CAT to the Friggers.

9    However these transactions are not the only matters potentially material to the balance of the loan account that are pleaded in the DAC. For example there are allegations raised in the alternative that, when alleged in specie contributions of the real property were made to the FSF, they occurred via transfers of the land from CAT to the Friggers, in return for the reduction of money which at that time CAT owed to the Friggers, so that the Friggers could then personally contribute the land to the FSF. The reductions of CAT's debt to the Friggers are claimed to have taken place at a time when CAT was insolvent, and so to have been unfair preferences or otherwise voidable. If that allegation is made good, it may result in the effective reversal of the decreases in moneys owing to the Friggers, and so will affect the ultimate balance of the loan account. Allegations are also made that the alleged payment to the Friggers of the ING amount of $999,999 in January 2009, and of some or all of the judgment sum on 30 June 2009, are both voidable transactions. If those claims are established, that will also affect the balance of the loan account.

10    Mrs and Mr Frigger became bankrupt by order of this court on 20 July 2018. On 1 November 2018, Mr Kitay's solicitor gave notice under s 60(3) of the Bankruptcy Act effectively requiring Mrs Trenfield to elect within 28 days whether to prosecute or discontinue Supreme Court action CIV 2765 of 2010. She did not make that election within that time so, Mr Kitay asserts, pursuant to s 60(3) she is deemed to have abandoned the claims made in the SOC. But if that is so, it does not directly affect the status of the counterclaim; although it could conceivably require amendment, the counterclaim remains a distinct claim which (subject to s 58(3)) remains on foot: see Frigger v Kitay (Liquidator) [2020] FCA 482 at [27]-[28].

Whether Mrs Frigger had a right to be heard on the application for leave to proceed

11    Section 58(3) of the Act provides that:

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.

12    In Commissioner of Taxation v Yeo (Trustee) (No 2) [2019] FCA 1188 at [30]-[44] (Yeo No 2), Anderson J discussed the principles as to whether a bankrupt must be heard on an application for leave under s 58(3). His Honour did so in the context of an application by a bankrupt to set aside orders giving leave under the section which had been made in his absence. The application was dismissed, due to 'the fundamental feature of bankruptcy law, as reflected in the Bankruptcy 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': see [3], [30], relying on Cummings v Claremont Petroleum NL (1996) 185 CLR 124 at 136.

13    I respectfully agree with Anderson J's views on the question. To summarise those views:

(1)    The consequence of the fundamental feature of bankruptcy just mentioned 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': at [35], quoting Cummings at 136.

(2)    The policy of s 58(3) is to stay proceedings in the absence of leave of the court, so that the bankrupt may be freed from any claims in respect of the period before the bankruptcy, the trustee in bankruptcy may deal with the claim through the proof of debt process along with all other claims on the estate so that assets are in due course divided among creditors, and the trustee is not put to the expense of defending proceedings. The Act does, however, contemplate that the court will grant leave in appropriate cases; this permits the bankruptcy court to screen claims: at [39], relying (ultimately) on Re Rose; Ex parte Devaban Pty Ltd [1994] FCA 1082 (Hill J); and see also Fraser v Deputy Commissioner of Taxation (1996) 69 FCR 99 at 114 (Beaumont J); and Mango Media Pty Ltd v Velingos [2008] NSWSC 202; (2008) 216 FLR 176 at [13] (Barrett J).

(3)    It is not necessary for the bankrupt to be heard on an application for leave to proceed in respect of a provable claim: see [10]. The bankrupt being named as a party is not itself a sufficient basis to grant standing: at [38].

(4)    The trustee in bankruptcy, acting in the interests of the creditors as a whole, may oppose an application for leave under s 58(3): at [42]. But such an application is not a matter in which the bankrupt has sufficient interest in the requisite sense: at [43].

14    The effective stay for which s 58(3) provides, and the court's power to except a given claim from that stay, are matters that concern provable claims from which the bankrupt will be released and the property divisible among creditors of the estate in which the bankrupt no longer has any interest. The bankrupt has no right to be heard on those matters. It is true that Anderson J was considering the question specifically through the prism of whether the bankrupt was a 'person who has a sufficient interest in the proceeding' within the meaning of r 1.40(b) of the Federal Court Rules 2011 (Cth) to make an application under r 39.05 for the order giving leave to be set aside. But the same conclusion follows in cases where leave has not yet been granted or refused, and the bankrupt seeks to be heard. That is reflected in a number of cases, including: Kattirtzis v Zaravinos [2001] FCA 1158 at [5] (Gyles J); Commissioner of Taxation v Yeo (Trustee) [2018] FCA 635 at [3] (Moshinsky J; Yeo No 2 was a sequel to this case); Free v Ma [2020] FCA 226 at [13] (Abraham J).

15    Mrs Frigger sought to distinguish Yeo No 2 and Free v Ma on the basis that in those cases, the bankrupts were overseas. But that is not a relevant distinction; a person has a right to be heard, or not, regardless of his or her location. She also relied on a number of cases in which, she submitted, the court had permitted the bankrupt to be heard. In three of these, the bankrupt appears to have been heard in relation to a question of leave under s 58(3), but in none of them does it appear that the bankrupt's right to be heard was raised as an issue: Taylor (liquidator) v Trustee, bankrupt estate of Heading, in the matter of Heading [2020] FCA 1450; Westpac Banking Corporation v Victor Warren Ollis [2007] FCA 1194; Otvosi v Ferella [2008] FMCA 1250; (2008) 219 FLR 472. In three of the other cases on which Mrs Frigger relied, it appears that orders had been made for the service on the bankrupts of the application for leave, but none of the decisions indicate why that was thought to be necessary or appropriate: Van Dyke v Lo Pilato, in the matter of Sidhu [2016] FCA 1347 at [16]; Wilson v Sellers [2016] FCCA 1425; 7Steel Building Solutions Pty Ltd v Wright [2011] FCA 328 at [5]. In the final case on which Mrs Frigger relied, Pedersen v Delaveris [2010] FCA 536, there was simply no appearance by the bankrupt.

16    I therefore do not accept Mrs Frigger's submission that these cases show that the law on whether a bankrupt must be heard is unsettled. The law is settled as set out in Yeo No 2. It may be that in other cases the court considers it appropriate to exercise a discretion to permit the bankrupt to be heard. But Mrs Frigger's submissions advanced no reason why any such discretion should be exercised in her favour in the present case. Instead, her written submissions traversed the question of whether the counterclaim in CIV 2675 of 2010 was complex and other matters said to be relevant to whether leave under s 58(3) should be given, and the underlying merits of the counterclaim. None of these matters are relevant to the preliminary issue of whether Mrs Frigger must or should be heard in opposition to the application.

17    For those reasons I determined that Mrs Frigger was not to be heard in the present application.

Application for leave to proceed - principles

18    In Hudson v Sigalla [2015] FCAFC 140; (2015) 235 FCR 122 at [25] the Full Court set out the purposes of the requirement for leave to proceed under s 58(3) of the Bankruptcy Act as:

to assist in the orderly administration of the insolvent estate by protecting a bankrupt, and the property of the erstwhile debtor (as now vested in the trustee), against the enforcement of remedies. This is done by enabling the court to supervise the handling of claims through the procedure of proof of debt (administered by the trustee or liquidator), by ensuring that the assets of the estate are not expended on costs in a multiplicity of litigation, and by ensuring that no one creditor gets an advantage over the others …

And see also [13(2)] above.

19    For leave under s 58(3) to be necessary, the claim must be 'in respect of a provable debt'. The phrase 'in respect of' in s 58(3)(b) has a wide meaning: Melnik v Melnik [2005] FCAFC 160; (2005) 144 FCR 141 at [34]-[35] (Spender, Hill and Finn JJ), citing Re McMaster; Ex parte McMaster (1991) 33 FCR 70 (Hill J).

20    Whether a liability is a provable debt or not is determined by reference to s 82(1) of the Bankruptcy Act, which provides that:

… 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.

21    Section 82(2), however, provides that 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'. So it will not always be clear what is a provable debt; there is, for example, uncertainty about whether a claim for damages for breach of statutory directors' duties falls within s 58(3): see SBA Music Pty Ltd v Hall (No 2) [2014] FCA 1116 at [23]-[24] (Wigney J).

22    The discretion conferred on the Court by s 58(3) is unfettered: Health Services Union v Jackson (No 3) [2015] FCA 694 at [17] (Tracey J). The relevant factors affecting the exercise of the discretion to grant leave to proceed cannot be stated exhaustively: see Zervas v Burkitt [2019] NSWCA 112 at [16].

Consideration

23    I am satisfied that there is at least one claim made by the applicants in the Supreme Court counterclaim which makes it a 'legal proceeding in respect of a provable debt'. That is the claim to the balance of the loan account which, straightforwardly enough, is a claim for debt.

24    The status of other claims as claims in respect of provable debts is less certain. For example, it may be doubted whether the claims for breach of fiduciary duty are claims for 'breach of trust' within the meaning of s 82(2), so that even if they are claims to unliquidated damages, they are still provable debts: see Re Sharp; Ex parte Tietyens Investments Pty Ltd (in liq) [1998] FCA 1367 at 4; and Health Services Union at [15]; but, contra, Auto Group Ltd v England [2008] NSWSC 402 at [21]; and Mercedes Holdings Pty Ltd v Waters (No 5) [2011] FCA 1428 at [158]. It may be that a claim for breach of fiduciary duties can be provable if it can be characterised as a claim for an equitable debt: see Auto Group at [4], [23]. Similarly, as I have already indicated by reference to SBA Music, there is doubt about whether claims for damages for breach of statutory directors' duties are provable. There are similar doubts about unfair preference claims: see e.g. Ashala v Featherstone [2016] QSC 121; [2017] 2 Qd R 1 at [2]-[8]. But it is not necessary for the court on an application for leave to finally determine complex questions of fact and law which may thus arise; it is appropriate for the court to proceed on the assumption that leave is required: SBA Music at [24].

25    If the claim in debt were a minor or severable part of the counterclaim, that would point against exercising the discretion in favour of granting leave to proceed. But, to the contrary, the claim is a significant part of the overall claims, and is entangled with the factual and legal issues that arise in other aspects of the counterclaim. The quantum of the claim in debt is substantial. And the description of the issues I have given above shows the entanglement of that claim with other issues. To quantify the claim requires characterisation of the first two transactions mentioned in [7] above as loans to CAT for the acquisitions of the real property, or not. That directs attention to the circumstances surrounding those acquisitions which will bear on the (non-provable) claims that CAT owns or owned the properties in its own right. For example, one alternative pleaded is that the correct conclusion is that CAT acquired the properties, not in its own right, but on resulting trust for the Friggers. If so, then the moneys they are said to have contributed would not be accounted for as a loan to CAT, but would simply be the payments which gave rise to resulting trusts in their favour. That would affect the balance of the loan account. Similarly, resolution of the dispute about ownership of the St George Bank account of $80,000 may affect whether that amount was a loan from Mrs Frigger to CAT and so may affect the balance of the loan account.

26    Further, the circumstances of the alleged payments of part or all of the judgment sum and the $999,999 held in the ING account may determine whether those should be treated as amounts owing by the Friggers to CAT. And I have already described how the outcome of the claims that those payments were unfair preferences or otherwise voidable may affect the balance of the account. A link can also be seen between the factual and legal issues that need to be determined in relation to those claims and aspects of the claims for breach of fiduciary or statutory directors' duties; for example, the question of whether CAT was insolvent at the time of the payments of the judgment sum and the ING amount, or became so as a result of those payments, may be relevant to both the preference claims and the claims that the Friggers breached duties in connection with them.

27    It is not necessary to multiply the examples further. I was satisfied that the undoubtedly provable claim in debt which the applicants wish to pursue against the Friggers is a substantial part of a complicated web of claims, so that it would be impracticable to try to separate it out. If, for example, leave to proceed was not given, then the applicants would need to prove for that claim in the bankruptcy, but quantification of that proof may require determination of numerous other non-provable aspects of the counterclaim. The complexity and contestability of many of those aspects make them unsuited to determination as part of the bankruptcy administration and it is likely that they would end up back in court, especially since the bankrupts have a right to apply to the court for review of any decision of the trustee in bankruptcy to admit a proof of debt: s 104(1). That situation would be contrary to the orderly administration of the bankrupt estate, would in the end have little or no effect in protecting the estate from costs and a multiplicity of claims, and would be likely to produce delay.

28    It is also relevant to the exercise of the discretion that the Supreme Court proceedings have been on foot for more than 10 years and it is likely to add to waste of time and cost if further aspects of them are permanently stayed. The uncertainty I have noted about whether other claims are provable is likely to compound that cost considerably if leave is not granted.

Conclusion

29    For those reasons, I determined that it was appropriate to grant CAT and Mr Kitay leave to proceed with the counterclaim in the Supreme Court Action, if and to the extent that such leave was necessary under s 58(3) of the Bankruptcy Act.

Associate:

Dated:    13 May 2021