Darwin Food Pty Ltd v Gray

Case [2018] SASCFC 84

SUPREME COURT OF SOUTH AUSTRALIA

(Full Court: Civil)

DARWIN FOOD PTY LTD v GRAY

[2018] SASCFC 84

Judgment of The Full Court

(The Honourable Chief Justice Kourakis, The Honourable Justice Blue and The Honourable Justice Hinton)

20 August 2018

BANKRUPTCY - SCOPE AND POLICY OF LEGISLATION - APPLICATION OF BANKRUPTCY LAWS

BANKRUPTCY - ADMINISTRATION OF PROPERTY - PROOF OF DEBTS - WHAT DEBTS PROVABLE - DAMAGES AND CONTINGENT LIABILITIES - CONTINGENT LIABILITIES

STATUTES - ACTS OF PARLIAMENT - INTERPRETATION - GENERAL APPROACHES TO INTERPRETATION

Appeal to the Full Court from the judgment of a single Judge of the Court allowing an appeal from the judgment of a Magistrate who found the appellant liable to pay the respondent the sum of $100,000 pursuant to a guarantee agreement.

On 11 November 2010 Oz North Food and Liquor Wholesalers (NT) Pty Ltd, as the appellant was then known, entered into an agreement with Omnyx Pty Ltd (Omnyx), for the supply of goods on credit (the credit agreement). That same day the respondent, who was a director of Omnyx, entered into a guarantee and indemnity agreement with the appellant (the guarantee agreement) in which he guaranteed payment for any supplies made by the appellant to Omnyx under the credit agreement that Omnyx did not pay for in accordance with the terms and conditions of the credit agreement.

Between 1 April 2012 and 22 May 2012 the appellant supplied Omnyx with goods to the value of $87,293.30 inclusive of GST. On 28 May 2012 receivers and managers were appointed to Omnyx and on 14 August 2012 the company ceased trading. When a letter of demand was sent to the respondent, he did not pay. Proceedings were instituted in the Magistrates Court.

Before the Magistrate the respondent contended he was released from all obligations under the guarantee agreement by virtue of his having executed a Personal Insolvency Agreement on 12 January 2012 under Part X of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act). In reply it was contended that the action taken by the respondent under the Bankruptcy Act only protected him from action taken in relation to provable debts within the meaning of s 82 of that Act. The debt incurred by Omnyx between 1 April 2012 and 22 May 2012 was not, the appellant submitted, a provable debt.

The issue on appeal to the Full Court was whether under the guarantee agreement the respondent was subject to a contingent liability by reason of an obligation arising before the date of execution of the Personal Insolvency Agreement. The relevant question was did the guarantee agreement impose an obligation in relation to a contingent liability absent a supply of goods? If the answer to that question was yes the debt incurred by Omnyx was a provable debt for the purposes of s 82.

Held, allowing the appeal:

1.  As the guarantee agreement was divisible it gave rise to no obligation upon which a contingent liability was founded for supplies made after the date that the…

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Darwin Food Pty Ltd v Gray [2018] SASCFC 84
Case
[2018] SASCFC 84
Decision Date

CaseChat Overview and Summary

Darwin Food Pty Ltd (the appellant) appealed to the Full Court of the Supreme Court of the Northern Territory against a decision of a single judge, which had overturned a decision of the Magistrates Court. The dispute concerned whether the respondent, Mark Gray, was released from his obligations under a guarantee agreement by virtue of having entered into a Personal Insolvency Agreement (PIA) under Part X of the *Bankruptcy Act 1966* (Cth). The appellant had supplied goods on credit to a company, Omnyx Pty Ltd, of which the respondent was a director. The respondent had personally guaranteed Omnyx's debts. Omnyx incurred a significant debt to the appellant after the respondent entered into the PIA. The appellant sought to enforce the guarantee, but the respondent contended that the PIA released him from all provable debts, including the debt arising from the guarantee.

The central legal issue before the Court was whether the respondent's liability under the guarantee agreement for debts incurred by Omnyx after the execution of the PIA constituted a "provable debt" within the meaning of section 82(1) of the *Bankruptcy Act 1966* (Cth). The appellant argued that the debt was not provable, while the respondent contended that it was, and therefore he was released from his obligation by the PIA.

The Court considered the historical scope and policy of bankruptcy legislation, tracing its origins to English legislation from 1869. It noted that the broad purpose of such legislation is to free the bankrupt from all manner of liabilities, including contingent obligations, so that they may have a fresh start, while ensuring that creditors share in the distribution of assets. The Court drew an analogy to cases concerning companies in administration, such as *Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd*, where debts arising after administration but subject to a pre-administration guarantee were extinguished. The Court reasoned that the respondent's liability under the guarantee was a contingent liability that existed at the time of the PIA, even though the specific debt had not yet been incurred. Therefore, it was a provable debt.

The appeal was allowed. The Court set aside the orders of the single judge and restored the orders of the Magistrates Court, finding in favour of the appellant.

Orders

Orders of the court

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Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

A consideration of previous authorities does not alter the conclusions reached above.Conclusion The appeal should be allowed. The orders of the single Judge should be set aside and the orders of the Magistrate should be restored. HINTON J: On 11 November 2010 Oz North Food and Liquor Wholesalers (NT) Pty Ltd, as the appellant was then known, entered into an agreement with Omnyx Pty Ltd (Omnyx) trading as Kitty O’Sheas, for the supply of goods on credit (the credit agreement).[16] That same day the respondent, Mark Gray, who was a director of Omnyx, entered into a guarantee and indemnity agreement with the appellant (the guarantee agreement) in which he guaranteed payment for any supplies made by the appellant to Omnyx under the credit agreement that Omnyx did not pay for in accordance with the terms and conditions of the credit agreement.[16] The appellant changed its name after the proceedings were instituted. Between 1 April 2012 and 22 May 2012 the appellant supplied Omnyx with goods to the value of $87,293.30 inclusive of GST. On 28 May 2012 receivers and managers were appointed to Omnyx and on 14 August 2012 the company ceased trading. As at 14 August 2012 Omnyx still owed the appellant $87,293.30. On 7 November 2014 the appellant sent a letter of demand to the respondent demanding payment under the guarantee agreement of the outstanding $87,293.30 owed by Omnyx. The respondent did not pay. Subsequently the appellant instituted proceedings in the Magistrates Court seeking the enforcement of the guarantee agreement in addition to interest and costs, amounting in total to in excess of $125,000. In those proceedings the respondent did not dispute that the amount owed fell within the terms of the guarantee agreement. He contended, however, that he was released from all obligations under the guarantee agreement by virtue of his having executed a Personal Insolvency Agreement on 12 January 2012 under Part X of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act).[17] In reply the appellant contended that the action taken by the respondent under the Bankruptcy Act only protected him from action taken in relation to provable debts within the meaning of s 82 of that Act. The debt incurred by Omnyx between 1 April 2012 and 22 May 2012 was not, the appellant submitted, a provable debt.[17] Bankruptcy Act 1966 (Cth), s 230(1). Clause 3 of the Deed of Personal Insolvency Agreement executed by the respondent released him from all provable debts upon the payment contributions set out in clause 1 of the same agreement being made. In the Magistrates Court the appellant succeeded. On appeal to a single Judge of this Court that decision was reversed. The appellant now appeals with permission to this Court. The sole question for the Court is whether the respondent’s liability under the guarantee agreement for any debt incurred by Omnyx after 12 January 2012 under the credit agreement constitutes a provable debt within the meaning of s 82(1) of the Bankruptcy Act.

Ratio Decidendi

Legal Principle Established

The respondent added that the analogous cases to which the appellant referred were distinguishable; the costs cases because they involved the exercise of an independent discretion, and compensation and reparation orders and retrospective taxation liabilities because they are excluded by s 82(2). By contrast assistance was to be gained from the treatment in Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd at first instance and on appeal of debts owed by a company in administration pursuant to a guarantee given prior to the company entering administration.[40] In that case under the Corporations Act 2001 (Cth) debts arising after administration but subject of a guarantee given prior to administration were extinguished by the administration. The Western Australian Court of Appeal added that insofar as it was necessary to determine the value of the obligation at the time of administration, there being no call upon the guarantee, it could be valued at nil.[41] [40] [2014] WASC 89 (Le Miere J); (2015) 297 FLR 1 (Court of Appeal).[41] Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd [2015] WASCA 95 at [234].Consideration The origins of s 82 of the Bankruptcy Act 1966 can be traced to s 31 of the Bankruptcy Act 1869 (UK) (the 1869 Act).[42] In each instance the breadth of the concept of a provable debt is informed by the history of the bankruptcy legislation preceding the 1869 Act and the cases considering the application of the progenitors to s 31.[43] That history:[44]…reflected the shifting accommodation made from time to time between a number of competing considerations. What debtors could take advantage of the legislation? Was it to be available only to traders or to debtors more generally? Was there to be official control of the bankrupt’s estate or were creditors to have control? What was to be done about contingent obligations or unliquidated claims? These questions provoked great public debate and considerable public controversy.[42] Coventry v Charter Pacific Group (2005) 227 CLR 234 at [22]-[27] (Gleeson CJ, Gummow, Hayne and Callinan JJ). [43] Coventry v Charter Pacific Group (2005) 227 CLR 234 at [22] (Gleeson CJ, Gummow, Hayne and Callinan JJ). [44] Coventry v Charter Pacific Group (2005) 227 CLR 234 at [23] (Gleeson CJ, Gummow, Hayne and Callinan JJ). See also George Hardy and Another v Fothergill (1888) 13 AC 351 at 355 (Lord Halsbury LC), 363-364 (Lord FitzGerald). Of the 1869 Act James LJ said in Ex parte Llynvi Coal and Iron Co; In re Hide:[45]A great number of cases occurred before the passing of the late Act, in which the bankrupt was left liable to several claims of various kinds, and the persons who had those claims were entirely excluded from any participation in the general division of the assets. Then came the Act of Parliament, which – dealing in express terms with almost every one of these cases which had ever previously occurred, and excluding nothing but demands for damages for personal torts – provided that there should be nothing whatever for which a right to proof should not be given. Every possible demand, every possible claim, every possibility liability, except for personal torts, is to be subject of proof in bankruptcy…The broad purview of this Act 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 whose 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.[45](1871) LR 7 Ch App 28 at 31-32.