Free v Ma

[2020] FCA 226

FEDERAL COURT OF AUSTRALIA

Free v Ma [2020] FCA 226

File number:

NSD 2140 of 2019

Judge:

ABRAHAM J

Date of judgment:

28 February 2020

Legislation:

Bankruptcy Act 1966 (Cth), s 58(3)

Cases cited:

Health Services Union v Jackson (No 3) [2015] FCA 694

Taylor v Rudaks [2007] FCA 1962; (2007) 166 FCR 451

Lawrence & Hanson Group Pty Ltd, in the matter of Pugliese v Pugliese [2016] FCA 1278

Kattirtzis v Zaravinos [2001] FCA 1158

Commissioner of Taxation v Yeo (Trustee) [2018] FCA 635

Commissioner of Taxation v Yeo (Trustee) (No 2) [2019] FCA 1188

Allnation Corporation Pty Ltd, in the matter of Maddy v Maddy [2017] FCA 1258

Date of hearing:

12 February 2020

Registry:

New South Wales

Division:

General Division

National Practice Area:

Commercial and Corporations

Sub-area:

General and Personal Insolvency

Category:

No Catchwords

Number of paragraphs:

19

Counsel for the Applicants:

Mr M Karam with Mr Noakhtar

Solicitor for the Applicants:

Keypoint Law

Counsel for the Respondents:

The respondents did not appear

ORDERS

NSD 2140 of 2019

BETWEEN:

STEWART WILLIAM FREE

First Applicant

HANAMA COLLECTION PTY LTD (IN LIQUIDATION) ACN 097 300 073

Second Applicant

AND:

HANA MA

First Respondent

ANDREW SCOTT

Second Respondent

JUDGE:	ABRAHAM J
DATE OF ORDER:	28 FEBRUARY 2020

THE COURT ORDERS THAT:

1.Pursuant to s 58(3) of the Bankruptcy Act 1966 (Cth), the applicants are granted leave to commence and prosecute proceedings in respect of the claims in the draft originating process annexed to the affidavit of Mark Addison dated 7 February 2020.

2.The applicants’ costs of the application are costs in the bankrupt estate of Hana Ma.

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

REASONS FOR JUDGMENT

ABRAHAM J:

1. The applicants, Hanama Collection Pty Ltd (In Liquidation) (Company) and its liquidator, Stewart Free seek leave pursuant to s 58(3)(b) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) to commence proceedings in the NSW Supreme Court (Equity Division). The respondents are Hana Ma, who was the Company’s sole director prior to her bankruptcy, and Andrew Scott, the Trustee in Bankruptcy to the Estate of Ms Ma (Trustee).

2. The Company operated retail clothing stores in Australia, with the clothing sold by the company being imported by MHN Trading Pty (MHN). The Company and MHN were beneficiaries of an insurance policy with AIG Australia Limited (AIG), which covered them for “Management Liability” on the part of their directors.  Ms Ma and the director of MHN were cousins.

3. On 22 July 2016, Mr Free was appointed as liquidator of the Company. On 24 April 2018, Ms Ma was made bankrupt by order of the Federal Court.

4. Mr Free investigated the Company’s affairs and formed the view that it had incurred significant debts at a time when it was insolvent. It is alleged that Ms Ma breached her director’s duties in permitting this to occur and that the “Management Liability” provisions of the AIG policy are enlivened. The applicants have outlined the allegations to AIG and Ms Ma.

5. The applicants, the Company and its liquidator Stewart Free, seek to commence proceedings against AIG in the NSW Supreme Court pursuant to the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (CLTPA) seeking declarations as to Ms Ma’s liability and orders for recovery from AIG to the extent of the policy’s coverage.

6. The applicants apply for leave pursuant to s 58(3)(b) of the Bankruptcy Act to enable them to commence those proceedings in the NSW Supreme Court (Equity Division). The respondents are Hana Ma, who was the Company’s sole director prior to her bankruptcy, and Andrew Scott, the Trustee in Bankruptcy to the Estate of Ms Ma (Trustee).

7. The applicants rely on the following evidence in support of the application:

   (1)affidavit of Mr Free dated 18 December 2019 and its exhibit SWF1;

   (2)affidavit of service of David Anderson dated 23 January 2020;

   (3)affidavit of Mark Addison dated 7 February 2020; and

   (4)letter dated 21 January 2020 from Andrew Scott to Mr Addison.

8. The Trustee consents to the orders sought by the applicants (save as to costs).

9. Section 58(3) of the Bankruptcy Act relevantly provides:

   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.

   Consideration

10. The question, then, is whether, as a matter of discretion, the Court should grant leave.

11. The discretion conferred on the Court by s 58(3) is unfettered: Health Services Union v Jackson (No 3) [2015] FCA 694 at [17]. Leave may be granted even if only “some of the claims made by the [applicants] are caught by s 58(3)(b)”: Health Services Union v Jackson (No 3) [2015] FCA 694 at [16].

12. The applicants’ proposed proceedings allege breaches of the insolvent trading provisions of the Corporations Act 2001 (Cth). A director’s liability for insolvent trading is provable as a debt in the director’s bankruptcy: eg, Taylor v Rudaks [2007] FCA 1962; (2007) 166 FCR 451 at [34]. Leave may be granted without the Court “finally determining whether, as a matter of fact or law, the need for such leave has arisen”: Lawrence & Hanson Group Pty Ltd, in the matter of Pugliese v Pugliese [2016] FCA 1278 at [26], citing: Allanson v Midland Credit Ltd (1977) 30 FLR 108.

13. I note also that a “bankrupt is not a necessary party to proceedings under s 58(3) of the [Bankruptcy] Act”: Kattirtzis v Zaravinos [2001] FCA 1158 at [5]; Commissioner of Taxation v Yeo (Trustee) [2018] FCA 635 at [3]; Commissioner of Taxation v Yeo (Trustee) (No 2) [2019] FCA 1188 at [43], and even when named as respondent to a s 58(3) leave application, a bankrupt has no right to be heard, and the application need not be served on a bankrupt. Ms Ma is believed to be overseas.

14. In my view leave should be granted.

15. First, in order to recover against AIG under the insurance policy, it is necessary for the applicants to commence proceedings pursuant to the CLTPA.

16. Second, the factual and legal issues that are likely to arise in the proposed legal proceedings are such that they are better dealt with through the court process than pursuant to the proof of debt process under the Bankruptcy Act: Health Services Union v Jackson (No 3) [2015] FCA 694 at [18]; Allnation Corporation Pty Ltd, in the matter of Maddy v Maddy [2017] FCA 1258 at [19]. The allegations made against Ms Ma involve financial dealings that also involve the Company, MHN and MHN’s director. The proceedings involve AIG, the interpretation of the AIG policy and issues relating to the CLTPA.

17. Third, the Trustee consents to the grant of leave.

18. Fourth, there is no suggestion that the applicants seek to gain any advantage over Ms Ma’s other creditors.

    Conclusion

19. I grant leave in the terms sought.

I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Abraham.

Associate:

Dated:       28 February 2020