Emilco

[2001] NSWSC 1035

Reported Decision: (2002) 20 ACLC 388

New South Wales

Supreme Court

CITATION:	Emilco [2001] NSWSC 1035
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 1869/91
HEARING DATE(S):	07/11/01
JUDGMENT DATE:	19 November 2001
PARTIES :	Emilco Pty Limited (In Liquidation) - Applicant Emile Jaa Jaa - Respondent Wahib and Nehia Jaa Jaa - Creditors Mr T. Dixon - Trustee for Emile Jaa Jaa
JUDGMENT OF:	Barrett J

COUNSEL :	Mr J.B. Whittle SC/Mr H.F. Woods - Applicant Mr M.K. Rollinson - Defendant Mr B.A.J. Guest - Creditors Mr Winter - Solicitor for Mr T. Dixon
SOLICITORS:	Clinch Neville Long Lawyers - Applicant Carters Law Firm - Respondent Egisto Solicitors - Creditors
CATCHWORDS:	EQUITY - trusts and trustees - creation of trust - whether agreement by assignee of chose in action from company in liquidation to remit net proceeds of recovery to liquidator for benefit of creditors causes chose to be held in trust - significance of assignee's promise not to assign chose without consent - significance of distinction between company and liquidator - significance of statement of purpose - BANKRUPTCY - property of bankrupt - whether chose in action held in trust by trustee entitled to recoup expenses out of proceeds of recovery is excluded from property vesting in official trustee because held in trust for another person - CORPORATIONS - whether creditor taking assignment of chose in action from company in liquidation subject to trust to remit net proceeds of recovery to liquidator for benefit of creditors thereby protects or preserves property of company - application by such creditor for preferred position in winding up cannot be addressed until relativity of creditors' claims established - possible significance of break in creditor status between time of protecting or preserving and time of application - BANKRUPTCY - upon bankruptcy of creditor to whom debt owed by company in liquidation the debt vests in official trustee - creditor status as against company thereby lost by bankrupt - subsequent discharge from bankruptcy does not restore debt or creditor status - whether official trustee might assign debt to discharged bankrupt
LEGISLATION CITED:	Trustee Act 1925 Bankruptcy Act 1966 (Cth) Corporations Act 2001 (Cth)
CASES CITED:	Hall v Busst (1960) 104 CLR 206 Official Receiver in Bankruptcy v Todd (1986) 14 FCR 177 Re Matheson; Ex parte Worrell (1994) 49 FCR 454 Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550 Willoughby v Official Trustee in Bankruptcy (2000) 102 FCR 261 Re Kyra Nominees Pty Ltd (1987) 11 ACLR 767 Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 State Bank of New South Wales v Brown (2001) 38 ACSR 715 Re Jones (1953) 16 ABC 169 Re Manson; Ex parte Official Assignee (1897) 18 LR (NSW) (B & P) 38 Pegler v Dale [1975] 1 NSWLR 265 Macdonald v Reuthlinger [1976] 1 NSWLR 88 Daemar v Industrial Commission of New South Wales (No 2) (1990) 22 NSWLR 178 Nominal Defendant v Manning (2000) 50 NSWLR 139 Jamoon Pty Ltd v Bow [1997] 2 Qd R 62 Bell Group v Westpac Banking Corporation (1996) 18 WAR 21 Stott v Milne (1884) 25 ChD 710 Re Beddoe; Downs v Cottam [1893] 1 Ch 547 In re a Solicitor [1952] Ch 328 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 Haq v Singh [2001] 1 WLR 1593 Agnew v Commissioner of Inland Revenue [2001] 3 WLR 454
DECISION:	Refer to paragraphs 41 and 42

16

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BARRETT J

MONDAY, 19 NOVEMBER 2001

1869/91 – RE EMILCO PTY LIMITED (IN LIQUIDATION)

JUDGMENT

HIS HONOUR:
Background

1 Emilco Pty Limited, which I shall call “the Company”, was incorporated in 1987. It carried on a bakery business. At the times material to the events I am about to describe, its directors were Mr Emile Jaa Jaa, his wife Mrs Nagah Jaa Jaa, his brother Mr Wahib Jaa Jaa and the brother’s wife Mrs Nehia Jaa Jaa. Mr Emile Jaa Jaa and Mrs Nagah Jaa Jaa were the shareholders. Because it will be necessary to mention Mr Emile Jaa Jaa throughout, I shall, for convenience, refer to him as “Mr Jaa Jaa” and to the others by their first and family names.

2 In September 1990, the Company’s business premises and plant were destroyed by fire. A claim was made against Sun Alliance Australia Limited under a fire insurance policy. Liability was denied and the Company subsequently commenced an action at common law against the insurer in this Court, being proceedings S50208 of 1991. In May 1991, with that action pending, the Company was wound up by order of this Court.

3 On 13 March 1992, a transaction of central importance to the present applications took place. It was conceived in a context where Sun Alliance had indicated a willingness to compromise the common law action for $55,000 and the liquidator, on behalf of the Company, was minded to accept such a compromise. Mr Jaa Jaa, however, was willing to pay $55,000 to the Company on condition that the chose in action represented by the claim against Sun Alliance was assigned to him upon particular terms. Such an assignment was effected by deed dated 13 March 1992 in conformity with an agreement of the same date. Notice of the assignment was given to Sun Alliance and it is accepted, as I understand it, that the assignment took effect as a legal assignment pursuant to s.12 of the Conveyancing Act 1919.

4 The agreement of 13 March 1992 contained a provision, to be examined in greater detail later, to the effect that, if Mr Jaa Jaa should receive money from Sun Alliance in relation to the claim, he would account to the liquidator of the Company for any balance remaining after payment of his legal expenses. Mr Jaa Jaa gave to the court in the present proceedings (S1869 of 1991) an undertaking in terms corresponding with those of the provision in the agreement to which I have just referred. The undertaking was dated 16 March 1992. It was given in accordance with a provision of the agreement. The evidence does not disclose the intentions of the parties to these arrangements. It may be inferred, however, that Mr Jaa Jaa, being vitally interested as a major creditor (and perhaps with an eye also to the interests of his wife and perhaps other family creditors), formed the view that the claim against Sun Alliance could yield more than $55,000; and, to satisfy both the liquidator’s desire that that amount be available immediately and his own desire to preserve the foreseen potential for the benefit of creditors, Mr Jaa Jaa saw fit to spend money to keep that potential alive.

5 Little of relevance happened for several years. Despite receipt of the $55,000, the liquidator had virtually no funds remaining after payment of expenses. He therefore did not consider it necessary or appropriate to call for proofs of debt. Some persons claiming to be creditors nevertheless took steps to prove, while others made their claims known in a less formal way. The persons principally concerned are Mr Jaa Jaa, Nagah Jaa Jaa, Wahib Jaa Jaa, Nehia Jaa Jaa, the ANZ Bank, Mr Amour (a former employee) and certain trade suppliers. The family members and the bank account for the vast bulk of the indicated claims. The liquidator has not assessed those claims. The evidence before me shows that some are disputed and that there are different views about various amounts. The position with respect to creditors and claims cannot be regarded as at all clear.

6 About three months ago, the liquidator became aware that, as a result of mediation, Mr Jaa Jaa had achieved a substantial success in the claim against Sun Alliance, having received a payment of some $550,000. This caused the liquidator to refer back to the agreement of 13 March 1992 and Mr Jaa Jaa’s undertaking to the court of 16 March 1992 both of which envisaged benefit to the liquidator in such an event.

7 I should record at this point that Mr Jaa Jaa became a bankrupt on 23 July 1993 and obtained his discharge from bankruptcy on 3 August 1996. When the present applications, which I am about to describe, came before the Court on 24 September 2001, Young CJ in Eq directed that Mr Jaa Jaa’s trustee in bankruptcy be given notice. A similar direction was made in relation to Wahib Jaa Jaa and Nehia Jaa Jaa. All were represented when the applications were called on before me on 7 November 2001, although the solicitor for Mr Jaa Jaa’s trustee in bankruptcy sought and was granted leave to withdraw after confirming that Mr Jaa Jaa’s discharge had taken effect in 1996.

8 The funds received by Mr Jaa Jaa from Sun Alliance are, to the extent of $475,000, currently held in a separate trust bank account. This is in accordance with a temporary holding regime put in place by orders made by Young CJ in Eq on 24 September 2001.

The applications

9 Two applications initiated by interlocutory process were heard by me on 7 November 2001. The first was an application by the Company for a declaration that, upon the true construction of the agreement on 13 March 1992, Mr Jaa Jaa holds on trust for the Company the balance of the funds received by him from Sun Alliance after payment of reasonable solicitor/client legal costs and disbursements. The Company also seeks an order that Mr Jaa Jaa pay that balance to the Company.

10 Mr Jaa Jaa, anticipating that the orders sought by the Company may be made, himself seeks orders having the effect of affording debts owing to him by the Company a preferred position in the winding up. The orders Mr Jaa Jaa seeks, if made, would also cause the net balance received from Sun Alliance to be applied in meeting his debts to which the preferred position is afforded (subject only to claims having statutory priority), with other creditors taking their place in the order of priorities after Mr Jaa Jaa has been satisfied. Mr Jaa Jaa’s application is founded on s.564 of the Corporations Act 2001 (Cth).

Is there a trust ?

11 This question involves an examination of the agreement of 13 March 1992 in the whole of its context. The parties to the agreement are the Company and Mr Jaa Jaa. Aspects of the parties are referred to in the recitals. Recital A says that Peter David Rodgers was appointed liquidator of the Company by order of this Court on 16 May 1991 and is authorised to enter into the agreement on behalf of the Company. Recital B says that the Company wishes to sell the chose in action (which is described) and that Mr Jaa Jaa “as trustee of the Jaa Jaa Trust wishes to purchase” it. After provisions containing definitions and dealing with the sale, the price and associated matters, there appears clause 7.1:

“The Purchaser agrees that should he receive any funds whatsoever from Sun Alliance (or from any other personal or corporation assuming the engagements of Sun Alliance) in relation to the chose in action whether by way of judgment or settlement in the proceedings referred to in clause 1.1 above or otherwise he shall, after payment of reasonable solicitor/client legal costs and disbursements of those proceedings remit to the Liquidator the balance, if any, of such moneys, such moneys to be paid to the Liquidator for the benefit of creditors of the Vendor generally.”

12 There follow machinery clauses about quantification of costs. There is a provision requiring Mr Jaa Jaa to provide such information as the Company may reasonably require about progress in relation to recovery of the chose in action. It is relevant to note clause 8:

“The Purchaser agrees that he shall not without the prior written consent of the Vendor assign transfer or otherwise dispose of the chose of action.”

13 The question arising in relation to clause 7.1 and the agreement more generally is whether the proceeds received by Mr Jaa Jaa from Sun Alliance upon settlement of the claim came to him beneficially or in such a way as to become subject to a trust in his hands. The answer depends, of course, upon the intention of the parties discovered from the document construed in the whole of the surrounding circumstances.

14 Clause 8, as already noted, contains an undertaking by Mr Jaa Jaa not to dispose of the chose in action without the Company’s consent. In some circumstances, a promise given by a transferee of property to the transferor not to alienate the property without the consent of that transferor is void: Hall v Busst (1960) 104 CLR 206. That rule applies to personal property as well as real property: Macdonald v Reuthlinger [1976] 1 NSWLR 88. As Dixon CJ explained in Hall v Busst, the rule proceeds on the footing that a contractual restriction upon the alienation of “an absolute estate”, if unqualified, is repugnant to the common law rights of the owner. One circumstance where a restriction will be valid is where the party in whose favour it operates has a collateral interest validly warranting protection: Macdonald v Reuthlinger (above). Clause 8 may thus be taken to show an intention that Mr Jaa Jaa was not to have “an absolute estate” in the chose in action. He accepted a qualification upon his dominion over it – a qualification framed in such a way as to show that the Company had an interest in his retaining it. This, coupled with the provision giving the Company a right to receive information from Mr Jaa Jaa as to progress with recovery, tends to show that the chose was not intended to be Mr Jaa Jaa’s property in a full and absolute sense. It may readily be inferred that the provision against assignment and the provision for the furnishing of information were included in support of the substantive operation of clause 7.1.

15 Clause 7.1 subjects Mr Jaa Jaa to an obligation in respect of funds he receives from Sun Alliance. Upon receipt of any such funds, it becomes the duty of Mr Jaa Jaa to “remit to the Liquidator” the balance remaining after recoupment of relevant legal costs and disbursements, “such moneys to be paid to the Liquidator for the benefit of creditors of the Vendor generally”.

16 It is important to note the distinction drawn here between “the Vendor” (defined as meaning the Company) and “the Liquidator”. The agreement contains no definition of “Liquidator” but does, as already mentioned, recite the appointment of Mr Rodgers as liquidator of the Company by order of the Court. It may be concluded, therefore, that the remittance clause 7.1 envisages is remittance to the liquidator for the time being of the Company on the footing that receipt by that liquidator will be for the benefit of the general body of the Company’s creditors. (I should interpolate here that Mr Rodgers is no longer liquidator and that the current liquidator is Mr G. Crisp.)

17 The requirement in clause 7.1 that the balance be remitted to the liquidator for the benefit of the Company’s creditors is distinguishable in concept from a simple requirement that the balance be paid to the Company. Had the clause been framed in that way, it would have been fairly apparent (leaving aside the indications already mentioned as arising from clause 8) that the Company itself, as a party to the contract, thereby acquired a contractual right to be paid. The introduction of the liquidator, as distinct from the Company, and the reference to the purpose or object of the remittance add an important dimension. They show that moneys received by Mr Jaa Jaa from Sun Alliance were intended to become, at the moment of receipt, subject to a personal liability on his part to apply the balance after expenses for the limited and specific purpose of accounting to the Company’s fiduciary agent charged with administering the claims of the Company’s creditors and that that balance should be received in augmentation of the fund available to ascertain and meet the claims of those creditors.

18 The intention of the parties, as manifested in clause 7.1, was that Mr Jaa Jaa should participate in the proceeds of successful prosecution of the claim against Sun Alliance only to the extent necessary to make him whole for costs and disbursements actually incurred. Otherwise, the fruits of that success should be enjoyed by the creditors of the Company as a result of transfer of those proceeds to the Company’s liquidator. This, coupled with the indications in clause 8 that Mr Jaa Jaa did not intend to assume unfettered ownership of the chose in action, points clearly to the conclusion that, once the proceeds of the claim came into Mr Jaa Jaa’s hands, they would not become his beneficial property. Rather, he would hold them subject to a trust resembling a “Quistclose trust” (Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567) requiring him to pay to the liquidator for the benefit of the Company’s creditors the balance remaining after recoupment of relevant expenses.

19 Because the proceeds, when received, became subject to such a trust, the chose in action as it existed before realisation of its proceeds was also subject to a trust. The chose came into Mr Jaa Jaa’s hands upon a mutual and expressed understanding that it was not his to do with as he wished. He was obliged to keep it unless the Company consented to his disposing of it. It is true that he was under no express duty to seek to enforce or realise upon it but the possibility of his choosing to do so was the subject of the duty he assumed with respect to the application of the proceeds. He was not free to apply those proceeds except by payment to the specified person for the specified purpose, subject to prior recoupment of his expenses. This caused the chose itself to be impressed with a trust.

20 This conclusion that not only the proceeds, as and when received, but also the chose in action became subject to a trust in Mr Jaa Jaa’s hands is, I think, consistent with the recent decision in Agnew v Commissioner of Inland Revenue [2001] 3 WLR 454 to which Mr Whittle SC, senior counsel for the Company, drew my attention. The advice of the Privy Council in that case contains the following passage:

“While a debt and its proceeds are two separate assets, however, the latter are merely the traceable proceeds of the former and represent its entire value. A debt is a receivable; it is merely a right to receive payments from the debtor. Such a right cannot be enjoyed in specie; its value can be exploited only by exercising the right or by assigning it for value to a third party. An assignment or charge of a receivable which does not carry with it the right to the receipt has no value.”

21 It seems to me that, by similar reasoning, one must conclude that, if the proceeds of a chose in action in the nature of a debt are seen to be intended to be the subject of a trust which will attach to them immediately they materialise, the chose in action must be taken to be likewise subject to a trust. It would be contrary to principle for the person in whom the chose was vested to be regarded as free to deal with it for his own benefit or, for example, simply to release the debt by deed without regard for the duty in respect of the future proceeds.

The effect of subsequent bankruptcy

22 These conclusions with respect to a trust affecting the chose in action are significant when it comes to considering the effect of Mr Jaa Jaa’s bankruptcy in 1993. Upon that bankruptcy, the “property of the bankrupt” vested immediately in the official trustee. This is the effect of s.58(1)(a) of the Bankruptcy Act 1966 (Cth). Under s.5 of that Act, the “property of the bankrupt” includes “the property divisible among the bankrupt’s creditors”, that is, property which s.116(1) makes so divisible. Excluded from such property by s.116(2)(a) is “property held by the bankrupt in trust for another person”. This reference to “another person” makes it necessary to consider whether, when the chose in action became vested in Mr Jaa Jaa upon completion under the agreement of 13 March 1992, that chose in action could properly be said to have been held in trust exclusively for persons who did not include Mr Jaa Jaa himself. This focuses attention upon the provision for recoupment of expenses by him.

23 It is, of course, a normal function of a trustee to incur expenses in the due administration of the trust. A right of reimbursement or indemnity out of trust property in respect of expenses properly incurred has long been recognised by equity and is now expressly conferred by the Trustee Act 1925. This right of reimbursement and indemnity is “the price paid by the cestuis que trust for the gratuitous and onerous services of the trustees”: Re Beddoe; Downs v Cottam [1893] 1 Ch 547. The right is a first lien or charge on the trust property (Stott v Milne (1884) 25 ChD 710) and causes the trustee to have a beneficial interest in that property accordingly.

24 In light of the characterisation of the terms of the agreement as they affect the chose in action which passed to Mr Jaa Jaa, the express provision in clause 7.1 for deduction of legal expenses confirms the right of reimbursement and indemnity which is the ordinary entitlement of a trustee. It also confirms the lien or charge on the trust property which accrues to the trustee in such circumstances. But Mr Jaa Jaa’s right in relation to the proceeds, although amounting to a beneficial interest, should not be seen as calling in question the proposition that, after the chose in action became vested in him, he held it “in trust for another person”. His beneficial interest was not that of a person in trust for whom he held the property. It was an interest of the trustee as trustee. It follows that the chose in action was excluded by s.116(2)(a) from the operation of s.116(1) and did not vest in the trustee in bankruptcy.

25 In reaching this conclusion, I have taken a view of the words “in trust for another person” which is probably narrower and more conservative than that suggested by the decisions in In re a Solicitor [1952] Ch 328, Re Jones (1953) 16 ABC 169 and Jamoon Pty Ltd v Bow [1997] 2 Qd R 62. Those cases would tend to suggest that the holding of the property in a fiduciary capacity is sufficient to bring the situation within s.116(2)(a). On that basis, the conclusion I have reached is even more supportable.

26 I have not so far dealt with the point that, when Mr Jaa Jaa acquired the chose in action, he purchased “as trustee of the Jaa Jaa Trust”. The relevant trust deed is in evidence. It shows the Jaa Jaa Trust to be a typical family trust of the discretionary kind. Because of my conclusion that the chose in action, once received by Mr Jaa Jaa, was impressed with a trust in favour of the liquidator for the benefit of the Company’s creditors, it is not necessary to consider whether Mr Jaa Jaa’s having purchased ostensibly as trustee of the Jaa Jaa Trust had the effect that s.116(2)(a) excluded the chose in action from the property which vested in his trustee in bankruptcy pursuant to s.58(1)(a). That question does, however, arise in relation to Mr Jaa Jaa’s beneficial interest arising from his lien or charge in support of the right of reimbursement which, unless excluded by s.116(2)(a) by reason of Mr Jaa Jaa’s having acted in relevant respects as trustee of the Jaa Jaa Trust, passed to his trustee in bankruptcy: cf Re Matheson; Ex parte Worrell (1994) 49 FCR 454. But that is not a question which needs to be determined in these proceedings.

The Company is entitled to relief

27 As beneficiary of the trust to which the chose in action became subject in the hands of Mr Jaa Jaa by operation of the agreement of 13 March 1992, the liquidator of the Company is entitled to the whole of the sum Mr Jaa Jaa received in consequence of the settlement with Sun Alliance, subject to deduction and retention of the costs and disbursements to which clause 7.1 refers. Whether the retained part accrues to Mr Jaa Jaa or to his trustee in bankruptcy is, as I have said, something I do not have to decide. The Company is entitled to declarations generally in the form it seeks although, in view of the terms of clause 7.1, it is the liquidator by name to whom the entitlement accrues and it should be declared that he, taking as liquidator, is both entitled and bound to apply the moneys received for the benefit of the creditors generally. The precise form of the declaration is something on which the parties should attempt to agree. The question whether Mr Crisp, in his capacity as liquidator, should formally be made a party should be dealt with in the same way. If necessary, I shall hear submissions on both these issues.

28 The terms of the trust I have found to exist are delineated by reference to the interests of the Company’s creditors. The words “for the benefit of the creditors of the Vendor generally”, while specifying that the funds concerned are to be applied for the benefit of creditors only, are plainly wide enough to encompass not only payments in or towards satisfaction of creditors’ claims as proved and admitted but also the defraying of costs of bringing the winding up to a point of finality so far as the claims of creditors are concerned. This too should be appropriately reflected in the terms of the declaration.

29 It is, of course, possible that the balance subject to that trust will be more than sufficient to pay creditors’ claims in full and the liquidator’s expenses of dealing with creditors’ claims. The question which then arises is whether any surplus remaining will be retained in the hands of the liquidator to meet the claims of contributories or will more properly find its way to some other destination, one possibility being, no doubt, that it will revert to Mr Jaa Jaa beneficially. That too is a matter which it is not at this point necessary to decide, particularly as there has been no argument on it. The appropriate course will be for the declaration of the liquidator’s entitlement to the funds to incorporate a measure to ensure that, if there is any such surplus, the liquidator must apply to the court for directions so that the matter can be examined and argued in the context existing at the time.

30 The conclusion that the chose in action was held by Mr Jaa Jaa upon a trust and that the funds received by him from Sun Alliance are likewise held upon trust makes it unnecessary to consider submissions which were made on the footing that the obligation owed by him was instead a contractual obligation in the nature of a debt. Those submissions concerned other possible consequences of his intervening bankruptcy and subsequent discharge. There remains, however, Mr Jaa Jaa’s application.

31 Mr Jaa Jaa acknowledges that the order of application of funds and satisfaction of claims in the winding up is fixed by the Companies Act and that the court has no general power to alter it. He relies, however, on s.564 as a source of a broad power of the court to give a particular creditor an advantage over others in the particular circumstances with which that section is concerned. Mr Jaa Jaa says that access to s.564 is provided in the present case by the circumstance that he entered into and implemented the arrangements of 13 March 1992, particularly in light of the favourable outcome of the mediation with Sun Alliance. That means, he says, that property of the Company (being the chose in action against Sun Alliance) was, in the words of the second part of paragraph (a) of s.564, “protected or preserved by the payment of money or the giving of indemnity by creditors” – or, more precisely, a single creditor, being himself.

32 These contentions may well have merit, assuming that there is no reversion to Mr Jaa Jaa beneficially of any surplus of the funds received from him which remains in the hands of the liquidator once creditors have been paid in full. If any such surplus is available to the liquidator to meet claims of contributories, it can be seen that the chose in action, being property of the Company, was shielded by being put into the ownership of Mr Jaa Jaa within the legal framework created by the agreement of 13 March 1992. That a chose in action, in the form of a right to recover moneys, is property for the purposes of the second part of paragraph (a) of s.564 is confirmed by the decisions of Franklyn J in Re Kyra Nominees Pty Ltd (1987) 11 ACLR 767 and Templeman J in Bell Group Ltd v Westpac Banking Corporation (1996) 18 WAR 21. If, on the other hand, it is Mr Jaa Jaa who, on the correct interpretation of the terms of the trust, is entitled to any such surplus, the issue of protection or preservation becomes problematic since there will then be seen to have been a partial dissipation of the Company’s property into Mr Jaa Jaa’s hands.

33 Mr Jaa Jaa’s application is, in any event, premature. Section 564 permits the court to make such orders as it deems just with a view to giving the creditor or creditors whose money has been outlaid in protection or preservation “an advantage over others in consideration of the risk assumed by them”. The task of the court under this section (or, more precisely, a forerunner in New South Wales bankruptcy legislation) was said by Simpson J in Re Manson; Ex parte Official Assignee (1897) 18 LR (NSW) (B & P) 38 to be that of “weighing all the circumstances, the amount of risk run, the amount recovered, the proportion between the debts of indemnifying creditors, and those non-indemnifying creditors and all other matters”. A slightly expanded list of relevant considerations was adopted in relation to the provision in the companies legislation by Brownie J in Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294. His Honour’s approach was regarded as appropriate by both Spigelman CJ and Hodgson JA (with whom Handley JA agreed) in State Bank of New South Wales v Brown (2001) 38 ACSR 715.

34 One such consideration identified in all the formulations is the relativity between the debt of the indemnifying or protecting creditor and the debts of other creditors. The court is therefore unable to approach the matter of a claim under s.564 in any fully meaningful or reliable way until the respective positions of claimants have been considered by the liquidator. At the point this liquidation has reached, the position with respect to the debts of creditors has not been finally ascertained. Indeed, it has not proceeded beyond the collection of raw and perhaps incomplete and inaccurate information which has not been subjected to the appropriate scrutiny. The availability of new funds will no doubt enable the liquidator to advance matters.

35 I should refer briefly to the fact that Mr Jaa Jaa also seeks orders for the expeditious conclusion of the winding up. That too seems to me to be premature. The liquidator is currently without funds and, when he is placed in funds, there is, as the evidence now stands, nothing to suggest that he will not proceed in a diligent and orderly way.

But is Mr Jaa Jaa a creditor ?

36 I come now to a particular obstacle which lies in Mr Jaa Jaa’s path. I have proceeded so far on the assumption that he is a creditor of the Company. Only if he has that status is it open to the court to give him an advantage by order made under s.564.

37 The argument that Mr Jaa Jaa is not now a creditor relies upon the effect of the Bankruptcy Act provisions already mentioned. When he became a bankrupt, all property then belonging to or vested in him was, as already discussed, vested in the official trustee by operation of s.58(1)(a), subject to the exceptions in s.116(2) and elsewhere. Mr Jaa Jaa’s affidavits of 19 September 2001 and 11 October 2001 state that the debt owed to him by the Company at the date of the winding up order resulted from loans made by him personally to the Company before liquidation. There is therefore no apparent reason why the Bankruptcy Act provisions would not have operated to divest him of that debt when he subsequently became a bankrupt. It might be different if the loans had been made by him out of funds of the Jaa Jaa Trust. The debt might then be beyond the operation of the vesting provisions because of s.116(2)(a). But there is nothing in the evidence to suggest that the loans were made out of such funds and there is accordingly no need to consider the operation of s.116(2)(a) in relation to a discretionary trust such as the Jaa Jaa Trust.

38 The conclusion must be that the debt owed to Mr Jaa Jaa by the Company at the commencement of the winding up ceased to be vested in him at the commencement of his subsequent bankruptcy and became vested in the official trustee. Furthermore, Mr Jaa Jaa’s discharge from bankruptcy did not cause the debt to re-vest in him. This is made clear by the decision of the Court of Appeal in Daemar v Industrial Commission of New South Wales (No 2) (1990) 22 NSWLR 178 approving the decision of Needham J in Pegler v Dale [1975] 1 NSWLR 265. The reason is that nothing in the Bankruptcy Act effects any such re-vesting upon discharge. On the contrary, s.152, by dealing with duties to which a “discharged bankrupt” is, “even though discharged”, subject in relation to “such of his or her property as is vested in the trustee”, makes it plain that that property remains vested in the trustee after discharge.

39 In the absence of action by the official trustee to restore to him the debt owed by the Company, Mr Jaa Jaa is not a creditor in whose favour an order under s.564 of the Companies Act may be made. The theoretical possibility of such action on the part of the official trustee must, however, be recognised. Under s.134(1)(a) of the Bankruptcy Act, the official trustee has power to sell any part of the property of a bankrupt. That power includes a power to sell a chose in action, whether to a third party or to the bankrupt: Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550; Willoughby v Official Trustee in Bankruptcy (2000) 102 FCR 261. As has been noted already, the “property of the bankrupt” includes the property caught by s.116(1) including, in particular, property belonging to or vested in the bankrupt at the commencement of the bankruptcy. The power of sale under s.134(1)(a) thus appears to be available in relation to an item of property which became vested in the trustee at commencement of the bankruptcy and remains so vested at and after the bankrupt’s discharge. An example of the exercise of the power in similar case may be found in Willoughby (above). Discharge does not have the effect that the person concerned ceases to be within the Act’s definition of “bankrupt”: see the judgments of Fisher and Lockhart JJ in Official Receiver in Bankruptcy v Todd (1986) 14 FCR 177.

40 It may be possible for Mr Jaa Jaa to recapture his status as a creditor for the purposes of s.564 of the Corporations Act by an appropriate transaction with the trustee. But unless and until he does recapture that status, his s.564 application simply cannot succeed. And even then, the significance (if any) of a break in his creditor status between the time of the act of protection or preservation and the time of the application under s.564 will be something requiring consideration: cf Haq v Singh [2001] 1 WLR 1593. The only appropriate outcome in relation to Mr Jaa Jaa’s present application is that it be dismissed. If, in light of a change in circumstances, he acquires what he considers to be standing to initiate a similar application in the future, the fact that this one has been dismissed should not stand in his way: Nominal Defendant v Manning (2000) 50 NSWLR 139.

Conclusion

41 In relation to the Company’s interlocutory process, I direct that agreed short minutes of order covering the matters referred to in paragraphs 27, 28 and 29 above be filed by delivery to my Associate within 14 days. If the parties cannot agree, my Associate is to be informed within that period so that the matter may be listed for submissions on the form of the orders to be made.

42 Mr Jaa Jaa’s interlocutory process is dismissed. Mr Jaa Jaa must pay the Company’s costs of both interlocutory processes.

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Last Modified: 11/20/2001