Glass, R.J. v Tarea Management (North Shore) Pty Ltd

Re: RORY JAMES GLASS
And: TAREA MANAGEMENT (NORTH SHORE) PTY LIMITED (IN LIQUIDATION) and JOHN
EDWARD WALKER
No. W 708 of 1986
FED No. 324
Bankruptcy
25 FCR 242
4 ACSR 266

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Beaumont J.(1)

CATCHWORDS

Bankruptcy - stay of proceedings - Bankruptcy Act 1966, s.60(1).

Words and Phrases - "in respect of".

Companies - Companies Code, s.371(2) - leave to proceed against company ordered to be wound up.

HEARING

SYDNEY

#DATE 29:6:1990

Counsel and Solicitors for applicant: B.M. Skinner

Instructed by: Messrs Kemp, Strang and

Chippindall

Counsel and Solicitors for First
and Second respondents: J. Chippindall

Instructed by: Roxburgh and Co.

ORDER

Grant leave to the applicant to proceed against the first respondent until further order; order that the applicant pay the costs of the first respondent of the application for leave to proceed.

Order that the second respondent be dismissed from the proceedings. Further order that the applicant pay the costs of the second respondent.

Order that proceedings in the Local Court to enforce the orders for compensation in the sums of $60,000 and $40,000 dated 1 March 1990 be stayed until further order.

Order that the costs of the application, except the costs already specifically dealt with, be reserved.

Note: Settlement and entry of orders is dealt with in rule 124 of the Bankruptcy Rules.

JUDGE1

This is an application by the applicant, Rory James Glass, made under s.60(1)(b) of the Bankruptcy Act 1966 ("the Act") for a stay of certain proceedings in a Local Court.

So far as presently relevant, s.60(1) provides as follows:

"60.(1) The Court may, at any time after the presentation of a petition, upon such terms and conditions as it thinks fit -

(a) . . .

(b) stay any legal process, whether civil or criminal . . . , against the person or property of the debtor -

(i) in respect of the non-payment of a provable debt or of a pecuniary penalty payable in consequence of the non-payment of a provable debt; or

(ii) in consequence of his refusal or failure to comply with an order of a court, whether made in civil or criminal proceedings, for the payment of a provable debt . . . "

A "provable debt" is defined, in s.5(1) of the Act, to mean a debt or liability that is under the Act, provable in bankruptcy.
The background
The present application arises in the following circumstances. On 23 June 1986, a sequestration order was made against the estate of Mr Glass. By virtue of the provisions of s.149(1) of the Act, Mr Glass was discharged from bankruptcy on 24 June 1989.
Prior to his bankruptcy, Mr Glass was a director of the first respondent, Tarea Management (North Shore) Pty Limited (in liquidation) ("Tarea"). In 1984, proceedings were instituted by a creditor for the winding up of Tarea. Subsequently, the Supreme Court of New South Wales ordered that Tarea be wound up and that the second respondent, John Edward Walker, be appointed liquidator.
In July 1989, two summonses were issued to Mr Glass out of a Local Court alleging offences against s.229(1) of the Companies (New South Wales) Code.
(By s.229(1) it is provided that an officer of a corporation shall at all times act honestly in the exercise of his powers and the discharge of the duties of his office. By s.229(6) it is provided that where a person is convicted of an offence under this section and the court is satisfied that the corporation has suffered loss or damage as a result of the act or omission that constituted the offence, the court by which he is convicted may, in addition to imposing a penalty, order the convicted person to pay compensation to the corporation of such amount as that court specifies, and any such order may be enforced as if it were a judgment of that court.)
In one summons, it was alleged that on or about 31 August 1984 Mr Glass failed to act honestly in the discharge of his duties as an officer of Tarea "in that he did apply for a purpose other than a purpose of . . . (Tarea) a cheque in the amount of $60,000." In the other summons, a similar allegation was made in respect of the application of a cheque for $30,000 on or about 6 March 1985.
On 1 March 1990, Mr Glass was convicted by the Local Court of each of the offences alleged and fined $10,000. The Local Court also made two orders for the payment of compensation in favour of Tarea. In one matter, the Local Court ordered payment of the sum of $60,000. In the other matter, Mr Glass was ordered to pay $40,000 by way of compensation. There is no evidence in this application of the reasons for judgment of the Local Court. In particular, it is not clear how the figure of $40,000 was arrived at. It will be recalled that the cheque in question was in the sum of $30,000 only. It is possible that the Local Court intended to order compensation in the sum of $30,000 only.
The present application
Mr Glass now seeks an order pursuant to s.60(1)(b) of the Act for the stay of any proceedings to enforce the order of the Local Court for the payment of compensation to Tarea. The application is resisted on several grounds, including discretionary grounds.
Leave to proceed against Tarea
It will be recalled that Tarea was ordered to be wound up. By s.371(2) of the Companies Code, no proceeding may be taken against a company ordered to be wound up except with the leave of the court. By virtue of the cross-vesting legislation, the jurisdiction to grant leave under s.371(2) may be exercised by this Court in an appropriate case (see Jurisdiction of Courts (Cross-Vesting) Act (N.S.W.), s.4(1)); Australian Trade Commission v. Film Funding and Management Pty. Ltd. (1987) 87 ALR 49 at p 54).
A separate question, one of discretion, is whether leave ought to be granted. The general legislative object found in s.371(2) is to prevent a creditor from gaining an advantage over the general body of creditors by proceeding to judgment and execution against the property of an insolvent company (see Practice Note 47 WN (N.S.W.) 154). Except possibly in respect of costs, no such benefit would flow to any creditor of Tarea as a result of the present proceedings. On the contrary, what is sought is to restrain Tarea from recovering the benefit of a judgment it has obtained in its favour. Mr Glass is a debtor, not a creditor, of Tarea. In the circumstances, leave to proceed should be granted until further order.
Is Mr Walker a proper party?
In the absence of any vesting order under s.374(2) of the Companies Code, the liquidator of Tarea is not a proper party to, and should be dismissed from, the proceeding.
Should s.60(1)(b) apply in the present circumstances?
The meaning and operation of s.60(1) has been considered in a number of cases (see, e.g. Storey v. Lane (1981) 147 CLR 549; Re Hollis (1968) 15 FLR 386; Re Lenske; Ex parte Lenske (1986) 9 FCR 532; Re Sutherland-Cropper (1985) 11 FCR 156).
On behalf of Mr Glass, it is submitted that the order for the payment of compensation is a "legal process . . . in respect of the non-payment of a provable debt." Counsel for Tarea disputes this characterisation.
As has been said, a "provable debt" includes a liability that is provable in bankruptcy. By s.82(1) of the Act, all liabilities to which a bankrupt was subject at the date of the bankruptcy are provable in the bankruptcy. However, some liabilities are expected. By s.82(2), it is provided that 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. It has been held that "breach of trust" where used in the precursor of s.82(2) includes breach of a constructive trust, as well as breach of an express trust (see Emma Silver Mining Company v. Grant (1880) 17 ChD 122 at p 129; Britter v. Sprigg (1900) 26 VLR 65 at p 82; Barewa Oil and Mining N.L. (in liq.) v. Isim Mineral Development Pty. Ltd. (1981) 38 ALR 288 at p 292).
Can it be said that there is here a demand in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust within the meaning of s.82(2)?
In an affidavit filed in these proceedings, Mr Glass states that he applied the cheques for $60,000 and $30,000 for purposes other than the purposes of Tarea. This conclusion was not contested by Tarea in this application. It follows, in my opinion, that Mr Glass was liable to Tarea in equity for breach of trust, arising from breach of his fiduciary duty to the company, in the sums of $60,000 and $30,000 respectively. It further follows, in my view, that these liabilities were liabilities which were provable in the bankruptcy of Mr Glass.
In determining the construction of s.60(1)(b) for present purposes, it is, I think, of assistance to refer to the explanatory memorandum accompanying the Bankruptcy Amendment Bill 1979 which introduced the provision. In clause 35 of the memorandum, it was stated that under the provision, the Court will be able to stay any legal process, whether civil or criminal against the person or property of the debtor in respect of a provable debt. It was further stated that the purposes of the amendments were, inter alia-

"- to overcome the use of criminal procedures to collect provable debts when bankruptcy

proceedings have intervened;

- to ensure that legal proceedings against

bankrupts for the recovery of provable

debts are brought pursuant to the

Bankruptcy Act".

See also Re Sutherland-Cropper (1985) 11 FCR 156 at p 159.

It will be recalled that s.60(1)(b)(i) empowers the court to stay any legal process. . . in respect of the non-payment of a provable debt. . .". In my opinion, the phrase "in respect of" should, in the present context, be given a wide construction. It has been said that the phrase has the "widest possible meaning of an expression intended to convey some connection or relation between the two subject matters to which the words refer" (per Mann C.J. in Trustees Executors and Agency Co Ltd v. Reilly (1941) VLR 110 at 111; and see State Government Insurance Office v. Rees (1979) 144 CLR 549 at p 561; see also Sutherland-Cropper, above at p 161.
The question is thus one of nexus, if any, between the admitted breach of fiduciary duty or breach of trust which created provable debts owed by Mr Glass, on the one hand, and the orders made by the Local Court for compensation, on the other: it is clear that a stay would have been granted if proceedings had been brought by Tarea under the general law to recover the sums of $60,000 and $30,000 because they were provable debts. The issue for determination here is whether the orders made by the Local Court can be said to be "in respect of" those provable debts.
In my opinion, the requisite nexus is established in the circumstances of the present case. It may be accepted that it is possible that an order for compensation under s.229(6) of the Companies (New South Wales) Code may be made in circumstances where no remedy is available under the general law. It is also true that the making of an order under s.229(6) is discretionary. But, in the present case, the statutory summary remedy provided for by the Code does in the statutory summary remedy provided for by the Code does in fact coincide with the liability of Mr Glass to Tarea under the general law. It must follow, in my view, that, because this nexus exists here, the process in the Local Court is "in respect of the non-payment of a provable debt" and that s.60(1) may apply.
Whether a stay should actually be granted pursuant to s.60(1)(b) is a different question, and is a matter for the discretion of the Court.
Discretion
Mr Glass was briefly cross-examined by counsel for Tarea with respect to certain matters arising in the winding up of Tarea. It was suggested that Mr Glass, as an officer of Tarea, had failed to co-operate in the winding up. It was then said that the conduct of Mr Glass in this respect should be taken into account in the exercise of the Court's discretion under s.60(1)(b). But the matters relied on by Tarea, even if established in some respects, cannot, on any view of the matater, bear upon the exercise of the discretion under s.60(1)(b). The personal conduct of Mr Glass in a collateral context such as the winding up of Tarea is, in my view, irrelevant to the exercise of the Court's discretion in the bankruptcy of Mr Glass. The evident object of s.60(1) is to ensure an orderly administration of the assets of a bankrupt in the interests of the general body of creditors. The grant of a stay should not depend upon the personal conduct of the bankrupt in another context.
The grant of a stay
It follows, in my opinion, that a stay should be granted pursuant to s.60(1)(b).

[1990] FCA 324

29 JUNE 1990