ABOUSLIEMAN v Mercantile Mutual - [2003] FMCA 594

FEDERAL MAGISTRATES COURT OF AUSTRALIA

ABOUSLIEMAN v MERCANTILE MUTUAL & ORS

[2003] FMCA 594

BANKRUPTCY – Part X Deed – whether a claim arising out of statutory warranties is a claim capable of being admitted to proof or is excluded by
s.82(2) of the Bankruptcy Act.

Bankruptcy Act 1966 (Cth), s.82(1), (2)
Home Building Act 1989 (NSW), s.95(1)

Trade Practices Act 1974

Hide Ex parte: Llynvi Coal and Iron Company (1871) 7 Chancery Appeals 28
Alferis v Kyriacou (2000) 1VR 447
Reid v Interarch Australia Pty Limited (2000) FCA 1328

Applicant:

HAMID ABOUSLIEMAN

First Respondent:	MERCANTILE MUTUAL INSURANCE (AUSTRALIA) LIMITED
Second Respondents:	ZEYNAP and NURI BASIAK
Third Respondent:	GEOFFREY MCDONALD

File No:

SZ 1976 of 2003

Delivered on:

19 December 2003

Delivered at:

Sydney

Hearing date:

28 October 2003

Judgment of:

Raphael FM

REPRESENTATION

Counsel for the Applicant:

Mr J Chippindall

Solicitors for the Applicant:

CK Lawyers

Counsel for the Respondent:

Mr R Gye

Solicitors for the Respondent:

AR Conolly & Company

ORDERS

Application dismissed.
Applicant to pay respondent’s costs to be taxed if not agreed pursuant to the Federal Court Act and Rules.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SZ 1976 of 2003

HAMID ABOUSLIEMAN

Applicant

And

MERCANTILE MUTUAL INSURANCE (AUSTRALIA) LIMITED

First Respondent

ZEYNAP & NURI BASIACIK

Second Respondents

GEOFFREY MCDONALD

Third Respondent

REASONS FOR JUDGMENT

The applicant in this matter entered into a Deed under Part X of the Bankruptcy Act 1966 (Cth) on 28 June 2002. The Deed was in a familiar form and provided for the debtor to bring in for the payment of his creditors the sum of $16,000.00. This was done. The terms of the Deed and the manner in which the obligations of the trustee in relation to it were carried out are not the subject of any criticism in these proceedings.
In about 1997 the applicant commenced building on land owned by him at 6 Statham Street Belfield in New South Wales. He proposed to construct a 356.8 square metre double storey domestic dwelling of double brick walls/concrete floors and terracotta tile roof including verandah and garage. The applicant carried out this work as an owner builder. Section 95(1) of the Home Building Act 1989 (NSW) is in the following form:
“95 Owner-builder insurance
(i)An owner-builder must not enter into a contract for the sale of land on which owner-builder work is to be or has been done by or on behalf of the owner-builder unless a contract of insurance that complies with this Act is in force in relation to the work or proposed work.”
In compliance with that provision the applicant obtained on 15 May 1998 (Ex 2) an Owner Builder Home Warranty Insurance Policy No 22 OB00241 NSW from the first respondent. The terms of the policy are set out in the home warranty insurance policy insurance document, a copy of which is Ex 1 in these proceedings. That policy states that the beneficiary means the person:
“1.1.3who is a purchaser of land on which Owner-Builder Work, or work required by section 95 or 96 of the Home Building Act 1989 to be insured and covered by the contract, is done, or a successor entitled to any person in sub-clauses 1.1.1, 1.1.,2 or 1.1.3.”
Under the section headed “Losses Indemnified” the policy states:
“2.1 We will indemnify the beneficiaries under the insurance contract for the following losses or damage in respect of residential building work covered by the insurance contract;
2.1.1 …;
2.1.2Loss or damage from a breach of statutory warranty referred to in Part 2C of the Home Building Act 1989. An extract of the statutory warranties is contained in Schedule 1 at the end of this insurance contract.”
It is common ground that the statutory warranties referred to in the policy were breached, that the applicant sold the property to Mr and Mrs Basiacik who thereby became beneficiaries thereunder, that the beneficiaries made a claim under the policy and that they were paid out a sum of approximately $64,155.80. An amount of $19,557.14 was expended by the first plaintiff in advising and administering in respect of the rectification works for which the larger sum had been paid.
The first respondent was invited to submit a proof of debt under the terms of the Part X Deed. It declined to do so. I understand that the moneys under the Part X Deed have now been distributed.
Instead of making a claim under the Part X Deed the first respondent sought to commence proceedings against the applicant in the District Court of New South Wales. The history of those proceedings has not been entirely happy. Suffice to say that after hearings in court and judgment of His Honour Judge Naughton the first respondent (and the second and third respondents who have been joined in the proceedings), are now on their Second Further Amended Ordinary Statement of Claim.
The applicant in these proceedings seeks a declaration:
“1.That the amount claimed against Hamid Abousleiman in the Second Further Amended Ordinary Statement of Claim filed on 18 March 2003 in the District Court of New South Wales at Sydney being proceedings No 10829 of 2001 between Mercantile Mutual Insurance (Australia) Limited, first plaintiff and Zeynap Basiacik, second plaintiff and Nuri Basiacik third plaintiff [against Hamid Abousleiman] is a debt properly provable in the administration of the affairs of Hamid Abousleiman pursuant to a Deed under Part X of the Bankruptcy Act and dated 28 June 2002 and has not so proved.
2.An order that the abovenamed persons be restrained altogether and unconditionally from proceeding further in the said District Court action against the aforesaid Hamid Abousleiman.
3.…;
4.….”
Debts provable under Part X arrangements are the same as those which are provable in bankruptcy and subject to the provisions of s.82(1) of the Bankruptcy Act. That section is in the following form:
“82(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.
The section has been interpreted frequently in the courts but most vividly in the decision of James LJ in Hide Ex parte: Llynvi Coal and Iron Company (1871) 7 Chancery Appeals 28 at [31] and [32]:
“Every possible demand, every possible claim, every possible liability except for personal torts is to be 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 (English Bankruptcy Act s 31 of 1869) 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 whom those 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.”
Section 82(2) of the Bankruptcy Act is in the following form:
“82(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.”
The short point argued by the applicant in these proceedings is that the claim which is the subject of the District Court proceedings falls within s.82(1). The case put by the first to third respondents is that it falls within s.82(2).
Both parties sought assistance from the decision of the Full Bench of the Victorian Court of Appeal in the case of Alferis v Kyriacou (2000) 1VR 447 which was followed by Hely J in Reid v Interarch Australia Pty Limited (2000) FCA 1328. It is as well to interpose here that whilst the first respondent first pleaded against the applicant a breach of his duty of disclosure that claim was abandoned and there has been substituted for it a claim made on behalf of the second and third respondents by way of subrogation and a claim for unjust enrichment on the part of the first respondent.
In Alferis at [9] Brooking JA said:
“In 1982 Michael Maxwell made a promise to his father-in-law, without consideration, that he would draw up a document to protect him. This was regarded in Chittick v. Maxwell [7] as important among the circumstances giving rise to a duty of care in tort. It was not, however, such a promise as the two Imperial Acts of the 1860's contemplated, and in my respectful opinion it was not such a promise as is contemplated by s.82(2) of the Bankruptcy Act 1966 of the Commonwealth. Nor can I accept that the words "arising ... by reason of" in s.82(2) are a loose expression, intended to comprehend some connection with an underlying transaction. When the looseness of the notion of "promise" accepted in Chittick is coupled with the looseness of the notion of some connection, or some causal connection, between the "demand" and the "promise", or between the "demand" and some "transaction" associated with the "promise", I find myself constrained, with respect, to differ from the view taken by Young, J. in Chittick, endorsed by Weinberg, J. in Re Sharp; ex parte Tietyens Investments Pty. Ltd. (in liq.) & Anor [8] and expressed by Vincent, J. in Re Pyramid Building Society (in liq.)[9]. What is required by s.82(2), so far as is presently relevant, in order that the demand shall not be provable, is that a "contract" or "promise" (in the sense I have already attributed to those expressions) shall not be an element of the cause of action.”
And at [14] he said:
“I consider that a demand arises otherwise than by reason of a contract or promise within the meaning of s.82(2) if there is no actual contract (whether express or tacit) which is an element of the cause of action.”
Charles JA at [46] discussed the judgment in Chittick and those that followed it and states:
“Notwithstanding this endorsement of the decision in Chittick insofar as the judgment suggests that the present claim is one for a provable debt and accordingly not excluded by the general release by s 82(1), I would with great respect, not follow it. It seems to me rather that the correct test to apply for the purpose of deciding whether a demand is within the exclusion provided by s 82(2), leaving a breach of trust to one side, is whether a contract or promise constitutes an essential element of the cause of action.”
It will be recalled that Alferis was a case in which a solicitor was being sued in negligence rather than for breach of contract and the continuation of the claim was allowed notwithstanding his bankruptcy.
The decision in Alferis was approved by Hely J in Reid where His Honour said:
“[20] Second, in Kyriacou the Court of Appeal of the Supreme Court of Victoria, unanimously held that the correct test to apply for the purpose of deciding whether a demand is within the exclusion provided by s 82(2), leaving breach of trust to one side, is whether a contract or promise constitutes an essential element of the cause of action. In that case, a claim against a solicitor for damages for negligence was held not to be a demand which arises by reason of a contract because, although there was a contract between solicitor and client, the contract was not an essential element in the plaintiff's cause of action in negligence.
[21] The Court of Appeal declined to follow earlier first instance decisions that it was sufficient for a claim to fall within the exception to s 82(2) that the claim be causally connected to the contract or promise, such that it could be said that the claim arises by reason of the contract or promise, even though the contract or promise is not an essential element of the cause of action relied upon.
[22] In those circumstances, it seems to me that I should simply follow a recent decision of an appellate court reached after a consideration of the history of the legislation and the authorities, rather than adding what could be no more than another decision at first instance on the question.”
Reid was a case where a claim was made for statutory damages under the Trade Practices Act 1974. At [16] and [17] His Honour says:
“[16] The claim against the second respondent is not a claim in contract. There is no contract between the second applicant and the second respondent. However, the respondents submit that the contract between the second applicant and the first respondent is an essential part of the factual substratum which gives rise to the claim against the second respondent. The conduct of the second respondent is conduct in purported performance of the contract between the second applicant and the first respondent, and it is the fact of that contract which induced the second applicant to rely upon the representations as to the granting of council approvals. It is not necessary, it is said, that the contract be an element of the cause of action; it is sufficient if the demand arises by reason of a contract, even though the cause of action is not for breach of contract.
[17] There are at least two answers to this submission. First, s 82(2) is concerned with claims for damages for breach of the bankrupt's contract or promise, and not with the contracts or promises of third parties. The intention of the bankruptcy legislation was to grant the bankrupt a discharge from all pecuniary liabilities arising contractually (Victor v Victor [1912] 1 KB 247, 252-253). The contrast is with demands for damages for personal torts. The cases referred to by Brooking JA in Aliferis v Kyriacou [2000] VSCA 123 at par [8] proceed upon the basis that s 82(2) is concerned with the claims for damages for breach of the bankrupt's contract or promise.”
The relationship between the second and third respondents and the applicant which is the subject of the first respondent’s rights of subrogation, is not a relationship which arises out of a contract, although it is true that it arises as a consequence of the existence of a contract of sale. The relationship under which those parties can proceed against the applicant arises out of the statutory warranties granted to the successors in title of an owner builder. They seem to me to have much in common with the statutory liability under the Trade Practices Act considered by Hely J in Reid. It is that statutory obligation which the first respondent as insurer fulfilled and in respect of which it is entitled to be subrogated. Looked at in this way it seems to me that it can be properly said that the contract of insurance does not constitute an essential element of the cause of action.
Insofar as the first respondent has an alternative claim in respect of unjust enrichment I am satisfied that such a claim would be excluded from s 82(1) see Alferis at [21].
I would therefore dismiss the application and order that the applicant pay the respondent’s costs to be taxed if not agreed in accordance with the Federal Court Act and Rules.

I certify that the preceding sixteen (16) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate:

Date: