Badcock v PriceWaterhouseCoopers (Reg) & Anor - [2006] SADC 101

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Appeal Against a Master's Decision)
BADCOCK v PRICEWATERHOUSECOOPERS (REG) & ANOR
[2006] SADC 101
Judgment of Her Honour Judge Simpson
1 September 2006
BANKRUPTCY - PROCEDURE AND EVIDENCE - PARTIES
Appeal against decision of a Master refusing relief sought by appellant/plaintiff and dismissing the action on grounds that the plaintiff is an undischarged bankrupt - appellant/plaintiff asserting that sequestration order made against his estate on 21 December 2001 of no effect - appellant/plaintiff was denied full opportunity to present evidence and submissions - the learned Master should have considered the applications of the appellant/plaintiff before the application to dismiss the action - the Master erred in not staying the action - Held: Appellant/plaintiff as an undischarged bankrupt had no standing to institute or maintain the proceedings - Action stands dismissed - Appeal dismissed
Bankruptcy Act 1966 (Cth) ss 5, 43, 54(1), 58(1), 60(2)-(4), 116(2)(g)(i), 74(5), 149(1), 149(4), 153A, 153B; District Court Act 1991 s 43(2)(a); District Court Rules 1992 r 97, referred to.
Re Nguyen; Ex parte Official Trustee (1992) 32 FCR 320; Cummings v Claremont Petroleum NL (1995-1996) 185 CLR 124; Faulkner v Bluett (1981) 52 FLR 115; Merry v R (1887) 13 VLR 264; Daemar v Industrial Commission of New South Wales and Others (1988) 12 NSWLR 45; Niord Pty Ltd v Adelaide Petroleum NL (1990) 54 SASR 87, applied.

BADCOCK v PRICEWATERHOUSECOOPERS (REG) & ANOR
[2006] SADC 101

This is an appeal from a judgment of a Master delivered ex tempore on 6 July 2006. The appellant is the plaintiff in the action and the respondents the defendants. I will refer to the appellant as the plaintiff and the respondents as the defendants.
The hearing before the learned Master related to the following applications:
1.An application by the plaintiff brought by Notice for Specific Directions filed on 10 March 2006 for an order for summary judgment against the defendants, or in the alternative, for leave to be granted for the plaintiff to act in the proceedings as the next friend of his parents, John Gordon Badcock and Lois Ilma Badcock;
2.An application by the defendants brought by Notice for Specific Directions filed on 16 March 2006 for an order extending the time within which a defence could be filed by 28 days; and
3.An application by the defendants brought by Notice for Specific Directions filed on 15 May 2006 for an order dismissing the plaintiff’s claim pursuant to r 3.01 on the grounds that the proceedings disclosed no cause of action known to law, or were frivolous or vexatious, or an abuse of the process of the Court, or in the alternative, for an order striking out the plaintiff’s statement of claim pursuant to r 46.18 of the District Court Rules 1992, as frivolous and vexatious.
The proceedings were instituted by the plaintiff on 3 February 2006 and served on or around 6 February 2006. By the statement of claim, the plaintiff relevantly alleges that:
·        A company Austfurn Pty Ltd (‘Austfurn’) had operated a business on behalf of the Rob Badcock Family Trust, of which the plaintiff is the appointor and beneficiary;
·       the plaintiff was the managing director of Austfurn until he appointed a voluntary administrator to Austfurn on 17 September 1998;
·       the defendants owed a duty of care to Austfurn, to the plaintiff as director of Austfurn, to secured creditors of Austfurn and to the Rob Badcock Family Trust and beneficiaries of the Trust, including the plaintiff in each case;
·       the first defendant, PricewaterhouseCoopers, and the second defendant, Mr Olifent, who was a partner in the firm of PricewaterhouseCoopers at the time, were responsible for the preparation of a report dated 10 September 1998 into the financial affairs of Austfurn, a report prepared at the request of Adelaide Bank;
·       the report was unprofessional, inaccurate and not prepared in accordance with the standard expected of a ‘top tier accounting firm’;
·        the second defendant deliberately used the report as a vehicle to obtain an appointment as receiver to Austfurn;
·       as a result of the report being provided to Adelaide Bank, the plaintiff was subjected to undue pressure and influence to appoint an administrator to Austfurn on 17 September 1998;
·       the second defendant obtained an appointment as joint receiver and manager of Austfurn with another person;
·       the defendants were negligent, not only in the preparation of the report, but also in the performance of their duties as receivers and managers of Austfurn.
The plaintiff claims damages, including general, exemplary and aggravated damages in respect of ‘financial loss to the extent of personal insolvency, stress and mental harm as a result of the negligent actions of the defendants, together with costs and interest.
The application for summary judgment brought by the plaintiff on 10 March 2006 was supported by his affidavit sworn on the same day. The grounds for the application were the failure by the defendants to file defences in the proceedings.
The application by the defendants for an extension of time within which to file a defence was supported by an affidavit of the solicitor for the defendants sworn on 16 March 2006, in which the defendants raised a potential issue arising under the provisions of the Limitations of Actions Act 1936 and the prospect of an application for the summary dismissal of the proceedings, in the absence of which a defence could be filed within 28 days. In the event, the application for the dismissal of the proceedings or, in the alternative, an order striking out the statement of claim, was brought on behalf of the defendants on 15 May 2006.
At the hearing before the Master on 6 July 2006, the grounds for the defendants’ application were that the plaintiff’s claim was not commenced within six years next after the cause of action accrued and no grounds were apparent on which an extension of time to institute proceedings could be granted, the pleadings did not disclose a basis for a duty of care owed by the defendants to the plaintiff, or any other persons who might be beneficiaries of the Rob Badcock Family Trust, and the pleadings in any event did not comply with the Rules.
By the time of the hearing, it had also come to the attention of the defendants that the plaintiff’s estate had been the subject of a sequestration order made in the Federal Magistrates Court of Australia on 21 December 2001 and that the plaintiff was currently an undischarged bankrupt.
The defendants’ application was supported by the affidavits of:
·       David John Olifent sworn 15 May 2006
·       Benjamin William Charles Renfrey sworn 30 May 2006 and 26 June 2006
·       Nicola Moretta sworn 31 May 2006
·       Melissa Jayne Short sworn 26 June 2006 and
·       Colin Louis Ambrose sworn 3 July 2006
An extract from the National Personal Insolvency Index of the Insolvency Trustee Service of Australia dated 22 June 2006, obtained by the solicitors for the defendants in relation to the financial status of the plaintiff, shows that the plaintiff is an undischarged bankrupt. It appears that a sequestration order was made on 21 December 2001. The petitioning creditor was Adelaide Bank and the trustee of the bankrupt estate is Mr Colin Ambrose.
In his affidavit, Mr Ambrose deposed to his appointment on 21 December 2001 as the trustee of the plaintiff’s bankrupt estate pursuant to section 156A(3) of the Bankruptcy Act1966 (Cth) (‘the Act’), following the sequestration order made on the same day. Mr Ambrose stated that to the best of his knowledge the plaintiff had not filed a statement of affairs with the Official Receiver and the plaintiff was an undischarged bankrupt. Mr Ambrose said that he had not assigned to the plaintiff any right vested in the trustee pursuant to the provisions of the Act to institute any form of proceedings.
An extract from the register of companies of the Australian Securities and Investment Commission obtained by the solicitor for the defendants shows that Austfurn was deregistered on 2 July 2002.
The plaintiff filed answering affidavits sworn on 28 June 2006 and 6 July 2006, exhibiting documents by way of evidence in support of the allegations made in the statement of claim. Strictly, the affidavit sworn on 6 July 2006 was not before the Master.
At the hearing before the Master on 6 July 2006, the plaintiff asked that his application for summary judgment and the defendants’ application for an extension of time within which to file a defence be determined before the defendants’ application to dismiss the proceedings was heard. The Master properly raised with the plaintiff the more fundamental issue raised on the application made by the defendants for an order dismissing the claim; that of the plaintiff’s standing to institute or maintain the proceedings.
The plaintiff’s submissions before the Master were that he had not acknowledged the bankruptcy order. He wished to challenge the bankruptcy proceedings, including the sequestration order, the appointment of Mr Ambrose as trustee and the status of the plaintiff as an undischarged bankrupt. The plaintiff submitted that it was not appropriate for the Master to determine the issue on the basis of the material currently before the Court. The plaintiff submitted that there might be other parties affected, on whose behalf the plaintiff was seeking relief in the proceedings, and on behalf of whom he was making an application to act in the capacity of next friend.
Although the plaintiff made submissions in which he raised various concerns regarding background events, or how the evidence produced by the defendants might be interpreted, the plaintiff did not refer to or rely on any evidence contradicting the fact of the sequestration order, or the appointment of Mr Ambrose as trustee of the plaintiff’s bankrupt estate, or the status of the plaintiff as an undischarged bankrupt.
The learned Master dismissed the plaintiff’s claim and gave the following reasons:
1.The plaintiff’s notice for specific directions (FDN 6) seeking that summary judgment be entered in his favour, the defendants’ notice for specific directions (FDN 8) seeking an extension of time within which to file their defences and the defendants’ notice for specific directions (FDN 9) seeking an order that the action be dismissed were adjourned to argument today.
2.On 3/7/06 the defendants filed and served an affidavit of Colin Louis Ambrose sworn 3/7/06. Mr Ambrose deposes to being appointed on 21/12/01 as the registered trustee of the plaintiff’s estate pursuant to an order of sequestration made against the plaintiff’s estate on 21/12/01. Mr Ambrose also deposes to not having assigned any rights to the plaintiff to commence any proceedings.
3.The plaintiff sought the opportunity to put further submissions regarding the sequestration order and the appointment of his trustee asserting in effect that the sequestration order made on 21/12/01 is of no effect. The plaintiff was informed that any complaint he has about the making of a sequestration order and the appointment of the trustee are not matters within the jurisdiction of this Court.
4.By reference to the exhibit to the affidavit of Melissa Jayne Short sworn 26/6/06, being an extract from the National Personal Insolvency Index dated 22/6/06, the plaintiff is recorded as an undischarged bankrupt.
5.Accordingly, these proceedings must be dismissed.
The plaintiff has appealed against the judgment of the Master. In broad terms, the grounds of appeal relevantly include:
1.The defendants had made no formal written application for an order dismissing the action;
2.The plaintiff should not have been found to be an undischarged bankrupt and to have no standing to bring the action;
3.The plaintiff did not have a proper opportunity to present affidavit evidence or to make oral or written submissions on the facts;
4.The parties proposed as plaintiffs were given no opportunity to be heard;
5.The proceedings should have been stayed;
6.The dismissal of the action was contrary to rules of procedure.
The appeal from the judgment given by the Master is brought pursuant to section 43(2)(a) of the District Court Act1991 and r 97 of the District Court Rules. Pursuant to r 97.10, there is a discretion on appeal, amongst other things, to receive further evidence on a question of fact, draw any inferences of fact, set aside or discharge any judgment appealed from and give any judgment which might have been made by the Master.
At the hearing of the appeal, the plaintiff submitted he was given no opportunity to put forward material relating to Federal Magistrates Court proceedings between the Adelaide Bank and the plaintiff relating to the bankruptcy of the plaintiff, or to refer to other actions instituted by the plaintiff.
The plaintiff did not dispute the evidence that he was an undischarged bankrupt. It was the plaintiff’s submission that notwithstanding that evidence, he challenged the assertion made that he was an undischarged bankrupt, he had since instituted proceedings in the Federal Court to have the sequestration order rescinded or annulled and, in any event, he had a right to pursue the action.
In addition to his affidavits already filed and included in two volumes of Appeal Books, the plaintiff sought to rely on an affidavit sworn on 14 August 2006. I exercised my discretion to receive the further evidence on which the plaintiff wished to rely, including the affidavit sworn on 6 July 2006 and the affidavit sworn on 14 August 2006. The plaintiff said in the affidavit sworn on 14 August 2006 that he filed an application in the Federal Court on 26 July 2006 for recision or annulment of the order for the sequestration of his estate made in the Federal Court on 21 December 2001, together with an application for an order restraining Mr Ambrose, as trustee of his estate, from involvement in delaying court actions in which the plaintiff is involved. In my opinion, the outcome of those proceedings in any event can have no effect on the determination of this Appeal.
The plaintiff submitted that the action was a professional negligence claim brought by the plaintiff as a person who has personally sustained financial loss. The plaintiff was entitled to maintain the proceedings unless and until the trustee in bankruptcy brought them to a halt. The plaintiff had commenced other actions without interference. No steps had been taken by Mr Ambrose to halt the proceedings. By inaction, the trustee has abandoned any right to interfere with the proceedings. His consent was unnecessary. The plaintiff submitted that on a proper interpretation, the Act did not explicitly prevent his instituting proceedings.
Further, the plaintiff submitted that the action should have been stayed to allow him an opportunity to join his elderly parents, for whom he had authority to act, as plaintiffs in the action.
Section 43 of the Act provides:
(1)     Subject to this Act, where:
(a)    a debtor has committed an act of bankruptcy; and
(b)at the time when the act of bankruptcy was committed, the debtor:
(i)was personally present or ordinarily resident in Australia;
(ii)had a dwelling‑house or place of business in Australia;
(iii) was carrying on business in Australia, either personally or by means of an agent or manager; or
(iv) was a member of a firm or partnership carrying on business in Australia by means of a partner or partners or of an agent or manager;
the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor.
(2)     Upon the making of a sequestration order against the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt until:
(a)    he or she is discharged by force of subsection 149(1); or
(b) his or her bankruptcy is annulled by force of subsection 74(5) or 153A(1) or under section 153B.
There is no evidence to contradict the sequestration order made against the estate of the plaintiff on 21 December 2001 or the appointment of Mr Ambrose as trustee of the bankrupt estate. The plaintiff became bankrupt on the making of the order and remains bankrupt until annulment of the bankruptcy or he is discharged.
There is no suggestion that the bankruptcy has been annulled, whether by force of section 74(5) of the Act, upon the passing of special resolution at a meeting of creditors, or section 153A(1) where the trustee is to be satisfied that all the bankrupt’s debts have been paid, or under section 153B, by order of the Court annulling the bankruptcy. There is no evidence of discharge pursuant to section 149(1) of the Act which provides that a bankrupt is discharged at the end of the period of 3 years from the date on which the bankrupt filed his or her statement of affairs.
It is not disputed that no statement of affairs has been filed. Accordingly, the plaintiff is an undischarged bankrupt and was an undischarged bankrupt at the time these proceedings were instituted in February 2006. Where the plaintiff has become bankrupt, the property of the plaintiff, not being after-acquired property, vests in the trustee of his bankrupt estate pursuant to section 58(1)(a) of the Act.
The property of the plaintiff is defined in section 5(1) of the Act to mean:
real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.
Upon the bankruptcy of the plaintiff, ‘everything answering the description of property vests in the trustee’. ‘Property’ includes the right to pursue or continue an action. (Re Nguyen; Ex parte Official Trustee (1992) 35 FCR 320 at 325)
In Cummings v Claremont Petroleum NL ((1995-1996) 185 CLR 124), the High Court said (at 132 per Brennan CJ, Gaudron and McHugh JJ):
The Act follows the pattern of earlier bankruptcy law. Broadly, and not precisely, the effect of bankruptcy is to divest a bankrupt of his property, to vest that property in a trustee and to make it available for the payment of provable debts. The right to commence or take a fresh step in legal proceedings or to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt are, in general, denied to creditors when sequestration is ordered. The right of the bankrupt to prosecute proceedings that he has commenced is restricted by s 60(2). The bankrupt's concerns as to the administration of his property and the payment of his creditors can be addressed by the Court in the exercise of its supervisory jurisdiction over the conduct of the trustee. Section 178 of the Act provides:
"If the bankrupt, a creditor or any other person is affected by any act, omission or decision of the trustee, he may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable." (footnotes omitted)
The plaintiff placed some reliance on subsections 60(2) – (4) of the Act, which provide:
(2)An action commenced by a person who subsequently becomes bankrupt is, upon his becoming bankrupt, stayed until the trustee makes election, in writing to prosecute or discontinue the action.
(3)If the trustee does not make such an election within 28 days after notice of the action is served upon him or her by a defendant or other party to the action, he or she shall be deemed to have abandoned the action.
(4)Notwithstanding anything contained in this section, a bankrupt may continue, in his or her own name, an action commenced by him or her before he or she became a bankrupt in respect of:
(a)any personal injury or wrong done to the bankrupt, his or her spouse or a member of his or her family;
‘Action’ is defined in section 5(1) of the Act to mean any civil proceeding whether at law or equity.

Although a bankrupt may continue in his own name an action to recover damages for personal injury or wrong done to him and already commenced before he became a bankrupt, the section does not apply to actions commenced by an undischarged bankrupt after he became a bankrupt.
The provisions of the section do not affect the interpretation to be placed on other sections of the Act, in particular, section 58 of the Act providing for the property of the bankrupt to vest in the trustee when the plaintiff became bankrupt. Subsection 60(4) of the Act applies only to actions commenced before a person became bankrupt and in any event does not apply to an action which is directly related to the property or estate of a bankrupt, and in which any damages would be estimated by immediate reference to his rights of property and not to pain felt by him in respect of his body, mind or character.
In this case, the plaintiff has sought to base his claim for damages on the professional negligence of the defendants in their dealing with property in which he claims a direct interest. It was not asserted by the plaintiff that the claim is other than one where the primary and substantial right of action is in relation to direct pecuniary loss to the property or estate of the bankrupt, ‘notwithstanding some personal inconvenience to the bankrupt’. The action does not come within the provisions of section 116(2)(g) of the Act, relating to property comprised in the right of a bankrupt to recover damages or compensation for personal injury or wrong done to him. Although the pleadings refer in the final paragraph to stress and mental harm suffered by the plaintiff as a result of negligent actions of the defendants, such an assertion cannot, in my opinion, affect the characterisation of the plaintiff’s action as one directly affecting his estate. (Cummings v Claremont Petroleum NL, above, at 142; Faulkner v Bluett (1981) 52 FLR 115 at 119-122; Merry v R (1887) 13 VLR 264; Daemar v Industrial Commission of New South Wales and Ors (1988) 12 NSWLR 45 at 49-50) The plaintiff did not directly contend otherwise.
It is not appropriate or necessary here to comment on whether or not a cause of action is in fact made out. The right to bring the action, if a cause of action were established, is one which vested in the trustee of the plaintiff’s bankrupt estate on 21 December 2001.
The defendants made application for an order dismissing the action by Notice for Specific Directions filed on 15 May 2006. The plaintiff had full notice of the grounds of the application, including the ground based on the fact that he was an undischarged bankrupt. He had every opportunity to present evidence and make submissions on the applications before the Master and on this appeal from the judgment of the Master.
The plaintiff did not refer to or produce evidence to contradict his status as an undischarged bankrupt at the time of instituting the proceedings. Pursuant to section 58(1) of the Act, the plaintiff had no right to institute or maintain these proceedings. The plaintiff has and had no standing to make any application in the proceedings once instituted, including an application for the proceedings to be stayed or to join other parties.
It was and is appropriate to deal with the question of standing at the outset and before considering any other application brought by the parties. Once it is determined that the plaintiff has no standing to institute or maintain the action, the action should be dismissed. (Niord Pty Ltd v Adelaide Petroleum NL (1990) 54 SASR 87 at 89, 107)
The appeal from the judgment of the Master is dismissed. The action instituted by the plaintiff stands dismissed.