Federal Court of Australia

Nelson v Thompson [2021] FCA 1055

ORDERS

THE COURT ORDERS THAT:

1.    To the extent such leave is necessary by reason of s 58(3) of the Bankruptcy Act 1966 (Cth), the applicant, Peter Nelson, has leave to continue and take fresh steps in proceedings instituted by him in the Supreme Court of Western Australia against Jarrod Thompson in action CIV 2404 of 2015 (the proceedings).

2.    The granting of leave in the preceding paragraph is conditional upon the applicant providing a written undertaking to this Court within 14 days that:

(a)    he will not seek final relief in the proceedings without having given seven days’ notice to the office of the Official Trustee in Bankruptcy;

(b)    he will not oppose any application by the Official Trustee in Bankruptcy to be joined or heard in the proceedings.

3.    Such leave does not extend to the taking of any step to enforce any judgment obtained in the proceedings without leave first being obtained from this Court.

4.    There be no order as to costs.

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

REASONS FOR JUDGMENT

DOWNES J:

INTRODUCTION

1    The applicant, Mr Peter Nelson, is the plaintiff in proceedings in the Supreme Court of Western Australia, being matter number CIV 2404 of 2015 (the proceedings).

2    The proceedings were commenced on 2 September 2015.

3    The defendant to the proceedings is Mr Jarrod Thompson who was the former solicitor of the applicant (Mr Thompson).

4    The claim brought against Mr Thompson stems from the applicant and his former business partner engaging Mr Thompson to prepare written agreements.

5    After the proceedings were commenced, Mr Thompson informed the applicant that he was referring the claim to his “compulsory insurer”.

6    A lawyer, who the applicant believes was instructed by the insurer, filed a defence in the proceedings on 24 October 2017.

7    The applicant’s position on the application is that Mr Thompson’s defence of the proceedings was and continues to be conducted by solicitors retained by Mr Thompson’s insurer. This position is not challenged or contradicted by the respondents.

8    The proceedings have been ordered to be heard at the same time as the proceeding brought by the applicant against the former business partner. One of the reasons given for that order being made is that there is an overlap of issues pleaded in each action: Nelson v Thompson [2020] WASC 261, [26], [27].

9    On 10 June 2021, the proceedings were stayed until further order, having regard to the bankruptcy of Mr Thompson.

10    The applicant brings an application in this Court seeking leave to continue and take fresh steps in the proceedings, on certain conditions. The leave is sought “to the extent such leave is necessary by reasons of the provisions of s 58(3) of the Bankruptcy Act 1966 (Cth)”.

11    The respondents do not oppose the orders sought by the applicant. This was noted in the orders of Markovic J made on 19 August 2021.

APPLICATION

12    Subsection 58(3) of the Bankruptcy Act 1966 (Cth) (Act) provides as follows:

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.

13    It is plain that the subsection is directed at whether the remedy or legal proceeding is in respect of a provable debt.

14    If the remedy or legal proceeding is not in respect of a provable debt, then s 58(3) of the Act “does not prevent the claimant, during the bankruptcy, from commencing a legal proceeding in respect of the claim or enforcing any remedy against the person or the property of the bankrupt in respect of that claim”: see Coventry v Charter Pacific Corporation Ltd (2005) 227 CLR 234, 238 [4]; [2005] HCA 67, [4] (Coventry).

15    Section 5 of the Act defines a “provable debt” as meaning “a debt or liability that is, under this Act, provable in bankruptcy”.

16    Section 82 of the Act relevantly provides as follows:

Debts provable in bankruptcy

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

…

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

17    While the applicant’s claim is for unliquidated damages, there is some uncertainty as to the precise claims being made against Mr Thompson in the proceedings.

18    Identification of the claims assists in informing the decision as to whether the applicant’s claim falls within the scope of s 82(2) of the Act and, in turn, whether leave under s 58(3) is required.

19    The applicant’s evidence is that his action against Mr Thompson claims “[Mr Thompson] was in breach of his contract with [the applicant] and in doing so was negligent”. That is, that his claim includes a claim for damages for breach of contract.

20    However, the applicant’s counsel submits that the applicant’s action alleges professional negligence against Mr Thompson, and no reference is made to a claim for breach of contract.

21    Whether a claim in pure negligence against a solicitor is a provable debt is a complex question. In Lovell v Penkin (A Bankrupt) and Another (2008) 101 ALD 335; [2008] FCA 637 (Lovell), on which the applicant’s counsel relied, McKerracher J referred to the reasons of the majority in Coventry and stated that “there remains some uncertainty at present as to whether the words in s 82(2) of the Act ‘by reason of the contract, promise or breach of trust’ dictate that a direct claim in negligence only – not in contract – by one client against his or her solicitor, is provable… But the emphasis in Coventry [may] well support the conclusion that such a claim is provable”. His Honour decided that leave was required on the facts of that case but also stated at page 347 [32] that “there may come a time when these matters require further consideration”.

22    In The Owners – Strata Plan 80647 v WFI Insurance Limited and another (2015) 299 FLR 77, 90 [58]; [2015] NSWSC 1161, [58], Darke J observed that, “It remains debatable whether claims brought against solicitors in tort for negligence are provable … That is so even where there is a contract between the claimant and the bankrupt”.

23    Having regard to the position taken by the respondents to this application, the form of wording in the proposed order which is sought by the applicant and the need for a relatively expeditious determination of this application to enable the proceedings in Western Australia to continue, I will proceed on the basis that leave under s 58(3) of the Act is necessary.

24    Such a course is appropriate in the circumstances of this case and is consistent with the decision of the Full Court of the Federal Court in Allanson v Midland Credit Ltd (1977) 30 FLR 108, 115; [1977] FCA 66 (Allanson), in which it was stated:

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

See also GFIN Pty Limited v Gooden, in the matter of GFIN Pty Limited (No 2) [2020] FCA 1440, [7] (GFIN).

25    For the following reasons, the discretion conferred by s 58(3)(b) of the Act should be exercised in favour of granting the relief sought:

(a)    the proceedings have been on foot in the Supreme Court of Western Australia since 2015. It may be inferred that there has been an investment of significant time and money by the applicant in relation to the proceedings, and that they are likely to be well advanced: see Lovell, 338 [15]; GFIN, [9], [11];

(b)    there is an overlap of issues between the proceedings and another proceeding involving another party, and the two proceedings have been ordered to be heard together. The involvement of other parties is a factor in favour of granting leave: see 7Steel Building Solutions Pty Ltd v Wright [2011] FCA 328, [10], [11]; GFIN, [9];

(c)    having regard to the nature of the claim brought by the applicant in the proceedings (being a claim brought against a solicitor relating to legal work performed by him), it is preferable for the factual and legal issues arising in the proceedings to be determined at a contested trial in the Supreme Court of Western Australia: see Allanson, 114; Lovell, 338 – 339 [14], [15];

(d)    the orders sought are not opposed by the respondents.

Associate:

Dated:    1 September 2021