Green v Schneller

[2001] NSWSC 897

CITATION:	Green v Schneller [2001] NSWSC 897
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 331/01
HEARING DATE(S):	10/10/01
JUDGMENT DATE:	16 October 2001
PARTIES :	Richard Green - Plaintiff Jennifer Ann Schneller - First Defendant Paul Ronald Schneller - Second Defendant
JUDGMENT OF:	Barrett J

COUNSEL :	Mr T.J. Morahan/Mr Kumar - Plaintiff Ms S. Nash, Solicitor - Official Trustee for First Defendant Mr B.J. Skinner - Second Defendant
SOLICITORS:	Harris & Company - Plaintiff Sally Nash & Co - Official Trustee for First Defendant Somerville & Co - Second Defendant
CATCHWORDS:	BANKRUPTCY - whether proceedings in Supreme Court to avoid allegedly fraudulent disposition is a "legal proceeding" for the purposes of the Bankruptcy Act (Cth) - whether such proceeding is "in respect of a provable debt" - whether Supreme Court has jurisdiction to grant leave to proceed under s.58(3)(b)
LEGISLATION CITED:	Bankruptcy Act 1966 (Cth)
CASES CITED:	Storey v Lane [1981] 147 CLR 549 Re Sharp; Ex parte Tietyens Investments Pty Ltd [1998] FCA 1367 Aliferis v Kyriacou (2000) 1 VR 447 Technical Products Pty Ltd v State Government Insurance office (1989) 167 CLR 45 Capel v Caram Finance Australia Ltd [2000] 2 QdR 126 Cannane v J Cannane Pty Ltd (1998) 192 CLR 557 Silvera v Savic (1999) 46 NSWLR 124 Langdon v Gruber [2001] NSWSC 276 Fraser v Commissioner of Taxation (1996) 69 FCR 99 Re McMaster; Ex parte McMaster (1991) 33 FCR 99 Sutherland v Brien (1999) 149 FLR 321 Scott v Bagshaw (2000) 99 FCR 573 Mechtler v P & E Phontas Pty Ltd [1998] NSWSC 513 Official Trustee as trustee of Miller v Edwards (unreported, NSWSC, Simos J, 5 December 1997) Geia v Palm Island Aboriginal Council [2001] 1 QdR 245 Re Killington; Ex parte Chisholm [1998] FCA 1474 Baxter v Commissioners of Taxation (NSW) (1907) 4 CLR 1087 Austral Pacific Group Ltd v Airservices Australia (2000) 74 ALJR 1184 Brackenridge v New Zealand [2000] 1 QdR 1 Adams v Cleve (1935) 53 CLR 185 R v Ward (19978) 140 CLR 584
DECISION:	Plaintiff's notice of motion dismissed. Second defendant's notice of motion adjourned.

12

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BARRETT J

TUESDAY, 16 OCTOBER 2001

3331/2001 – GREEN v SCHNELLER & ANOR

JUDGMENT
HIS HONOUR:

1 Before the Court are competing notices of motion. The plaintiff seeks leave pursuant to s.58(3)(b) of the Bankruptcy Act 1966 (Cth) to continue the proceedings. The second defendant seeks an order pursuant to Part 13 Rule 5(1)(c) of the Supreme Court Rules that the proceedings be permanently stayed or dismissed. Both applications are prompted by the fact that, on 1 August 2001, the first defendant became a bankrupt by virtue of the presentation of a debtor’s petition. The Official Trustee, as trustee for the estate of the first defendant, was represented on the hearing of the motions.

Background

2 The plaintiff is a creditor of the first defendant by virtue of judgments and orders of this Court and the District Court in various proceedings commenced in 1994 and 1995. The debts arose before the second defendant became a bankrupt. At the time of the bankruptcy, the present proceedings were on foot, having been commenced by summons dated 29 June 2001 and served on that day. The substantive relief sought is a declaration that an instrument of transfer by which the first defendant transferred to the second defendant (her husband) her interest in a residential property at Northwood owned by them is voidable as a fraudulent disposition and that, pending rectification of the register maintained under the Real Property Act 1900, an undivided one-half share in the property is held for the first defendant. Certain alternative and additional relief is sought but need not be detailed here. It is sufficient to say that it is directed towards the same end, namely, avoidance of the transfer made by the first defendant to her husband.

3 The transfer in question was made by instrument dated 6 May 1998. At that time, some of the orders requiring the first defendant to pay money to the plaintiff had already been made. The transfer is attacked by the plaintiff under s.37A of the Conveyancing Act 1919 on the basis that it was made “with intent to defraud creditors” and is accordingly voidable “at the instance of any person thereby prejudiced”, a description which the plaintiff says applies to him.

Issues

4 The question raised by each notice of motion concerns the operation and effect of s.58(3) of the Bankruptcy Act:

“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.”

5 The competing motions were argued on the basis that para (b) is the relevant provision and that it is not necessary to consider para (a). On that footing, three preliminary questions arise for determination: first, whether the substantive proceedings in which the plaintiff seeks to have the transfer of 6 May 1998 avoided is, for the purposes of the Bankruptcy Act, “any legal proceeding”; if so, second, whether the proceedings are “in respect of a provable debt”; and, if so, third, whether this Court has jurisdiction to deal with the question of leave under s.58(3)(b) on its merits.

“ Proceeding ”

6 According to the ordinary meaning of “legal proceeding”, no one could really entertain any doubt that these proceedings are within that description. Counsel have, however, drawn my attention to the fact that the Bankruptcy Act contains, in s.5, a definition of “proceeding”:

“ ‘proceeding’ means proceeding under this Act.”

There is therefore a question whether the only species of “legal proceeding” affected by s.58(3)(b) is one under the Bankruptcy Act itself.

7 The term “proceeding” is used in various provisions of the Bankruptcy Act either in unadorned form or with a qualification or descriptor such as “before the Court”, “before the Court under this Act”, “before it” (referring to “the Court”) and “in the Court”. I have no doubt that, in these instances, the defined meaning of “proceeding” applies. But the word “proceeding” also appears in contexts which, to my mind, activate the opening words of s.5, “unless the contrary intention appears”.

8 One such context is s.60. That section contains a number of provisions regulating legal processes by and against debtors. Several of the provisions operate by reference to the term “action” which is defined by s.60(5) as “any civil proceeding, whether at law or in equity”. It is, to my mind, plain that “proceeding” here does not have the special and limited meaning it is given by the s.5 definition. The additional words show that the net is cast more widely. A broad and general meaning of “proceeding” in the particular phrase is warranted by the purpose of the provisions which is, clearly enough, to collect and husband assets and co-ordinate debts and claims so that the estate may be administered by the official trustee within the confines of the scheme provided for by the Act, unaffected by the separate pursuit of individual claims, whether by or against a debtor. Section 60 plays an important part in the overall scheme of the Act. That scheme was described thus by Aickin J in Storey v Lane (1981) 147 CLR 549:

“An essential feature of any modern system of bankruptcy law is that provision is made for the appropriation of the assets of the debtor and their equitable distribution amongst his creditors, and for the discharge of the debtor from future liability for his existing debts. In Hill v East and West India Dock Co (1884) 9 App Cas 448, at p.456, Earl Cairns cited with approval the following passage from the judgment of James LJ in Ex parte Walton In re Levy (1881), 17 Ch D 746, at p.756:
‘Now, the bankruptcy law is a special law, having for its object the distribution of an insolvent’s assets equitably amongst his creditors and persons to whom he is under liability, and, upon this cessio bonorum, to release him under certain conditions from future liability in respect of his debts and obligations.’”

9 The same purpose underlies s.58. It too is part of the scheme of centralising assets and crystallising liabilities under the control and supervision of the official trustee so that orderly administration may occur in the interests of creditors generally. So much was made clear by Weinberg J in Re Sharp; Ex parte Tietyens Investments Pty Ltd [1998] FCA 1367. As in the case of s.60, the context in which the reference to “legal proceedings” occurs in s.58(3)(b) indicates, particularly by insertion of the word “legal” before “proceedings”, that it is not intended to adopt and apply the special meaning given to “proceedings” by the s.5 definition. The expression “legal proceedings”, when used in s.58(3)(b), has its ordinary and natural meaning.

10 This view is, by clear implication, confirmed by the decision of the Court of Appeal of Victoria in Aliferis v Kyriacou (2000) 1 VR 447, a case concerning the provision in relation to deeds of arrangement under the Bankruptcy Act corresponding with s.58(3). That provision is s.233(2). Like s.58(3)(b), it says that “any legal proceedings in respect of a provable debt” may not be commenced or continued without the leave of the Court. The Court of Appeal accepted without question that that provision applied to proceedings in the Supreme Court for breach of contract.

11 I am satisfied that the present proceedings in which the disposition of property by the first defendant is attacked under s.37A of the Conveyancing Act is a “legal proceeding” for the purposes of s.58(3)(b) of the Bankruptcy Act, even though not within the latter Act’s definition of “proceeding”.

“ In respect of a provable debt ”

12 It is now necessary to consider whether the proceedings are “in respect of a provable debt”. It cannot be doubted that the several debts arising from judgments and orders against the first defendant at the suit of the plaintiff are “provable debts” as defined by the Bankruptcy Act, being within the description of debts and liabilities in s.82. But these proceedings are not concerned with the direct recovery or enforcement of those debts. They are, rather, proceedings commenced by the person to whom the debts are owed with a view to augmenting the property of the debtor so as to enhance the prospects of successful recovery or execution.

13 The claim the plaintiff asserts in these proceedings (that is, the claim for a declaration that the disposition by the first defendant is void) cannot itself be regarded as a “provable debt”. While the categories of claims made provable by s.82 are wide, they share the common feature of personal obligation of the bankrupt to a particular person identifiable as entitled to the performance or fruition of the obligation. In the present case, the plaintiff, if successful, will not become entitled to anything. Nor will the first defendant become subject to any obligation. A successful outcome for the plaintiff will merely see the property of the second defendant reduced and the property of the first defendant correspondingly increased, to the general benefit of the body of her creditors but without any individual and separate benefit to the plaintiff as one of them.

14 Any conclusion that the present proceedings are “in respect of a provable debt” must therefore be founded on a connection between the claim for a declaration that the transfer by the first defendant is voidable and the debts owing by her to the plaintiff by virtue of the several court orders. The connector denoted by the words “in respect of” is, of course, one of wide import – so much so that the words have been said to “have a chameleon-like quality in that they commonly reflect the context in which they appear”: Technical Products Pty Ltd v State Government Insurance Office (1989) 167 CLR 45 per Brennan, Deane and Gaudron JJ. See also Capel v Caram Finance Australia Ltd [2000] 2 QdR 126

15 Again, therefore, it is necessary to consider the context in which s.58(3)(b) operates and to ask whether the debts owing to the plaintiff can be said to bear to the present proceedings such a relationship as that context shows to be contemplated by the section. The only connection s.37A of the Conveyancing Act might be considered to make between avoidance of a disposition of property and any debt comes from the description of the class of persons qualified to invoke the section: “ … at the instance of any person thereby prejudiced”. A creditor is, clearly enough, within that class. This is made clear by the following description by McHugh and Brennan JJ in Cannane v J Cannane Pty Ltd (1998) 192 CLR 557 of the several statutory provisions (now found in s.121 of the Bankruptcy Act and s.565 the Corporations Act 2001 (Cth), in addition to s.37A of the Conveyancing Act) which today reflect the measures against fraudulent dispositions first enacted in 1571 by the statute 13 Eliz I c 5:

“A disposition made with fraudulent intent is nonetheless a disposition. It is not without legal effect. Dixon CJ and Fullagar J pointed out in Brady v Stapleton that ‘[t]he truth seems to be that, although the statute uses, and most emphatically uses, the word “void”, the courts have always treated a fraudulent assignment as effective unless and until a creditor or creditors intervene by levying execution or taking legal proceedings’. But when the creditors (or the official receiver or liquidator) intervene and the disposition is avoided, the property fraudulently disposed of becomes available for distribution among the then existing general body of creditors.”

16 The reference here to intervention by “the creditors” shows that provisions such as s.37A available to any person “prejudiced” by the challenged disposition exist for the benefit of creditors as the class most obviously affected by diminution in the property of their debtor. They do not represent the whole of the membership of that class (prospective creditors, for example, are also included: Silvera v Savic (1999) 46 NSWLR 124; Langdon v Gruber [2001] NSWSC 276) but they certainly represent a very significant part of it. This is not surprising, when it is remembered that it is the countering of an intent to defraud creditors which is at the heart of the provisions.

17 Once it is recognised that s.37A is a means whereby a creditor can seek what is effectively enforced restoration of property to the debtor, it becomes relatively easy, I think, to say that it is the circumstance that a debt is owing to that creditor by that debtor which provides access to the section. On that footing, the section is to be regarded as intended to enhance the prospects of recovery of debts notwithstanding fraudulent action by the debtor to defeat or hinder such recovery. I therefore consider the right of action available to a creditor to invoke s.37A to be one which relates in a direct and substantial way to the creditor’s debt, with the result that legal proceedings by a creditor based on that right of action are proceedings “in respect of” the debt.

18 This conclusion is consistent with and supported by the decision of the Full Federal Court in Fraser v Commissioner of Taxation (1996) 69 FCR 99. Beaumont J, with whom Black CJ and Tamberlin J agreed on the point, there held that an application by the Commissioner of Taxation pursuant to s.79A of the Family Law Act to set aside certain orders with respect to property made by the Family Law Court with the consent of the parties to the marriage was a step towards satisfaction of a debt owing to the Commissioner by one of those parties because it sought to augment the assets available for all creditors proving in the bankrupt estate of that party, including the Commissioner. The application under the Family Law Act was therefore a proceeding “in respect of” the Commissioner’s debt for the purposes of s.58(3)(b) of the Bankruptcy Act. Reference may also be made to the decision of Hill J in Re McMaster; Ex parte McMaster (1991) 33 FCR 70 which is to similar effect. The same analysis holds good here in relation to the Conveyancing Act provision.

19 Because of the intervention of the first defendant’s bankruptcy, the present proceedings in which the plaintiff seeks to see property disposed of by the first defendant restored to her pursuant to s.37A are therefore proceedings in which the plaintiff may not take any fresh step unless granted leave to proceed under s.58(3)(b) of the Bankruptcy Act.

Jurisdiction

20 It is then necessary to consider the third question, namely, whether this Court has jurisdiction to grant such leave. The relevant jurisdiction is, by s.58(3)(b) of the Bankruptcy Act, conferred on “the Court”. By s.5, “the Court” is defined as “a Court having jurisdiction in bankruptcy under this Act”. This leads to s.27(1):

“The Federal Court and the Federal Magistrates Court have concurrent jurisdiction in bankruptcy, and that jurisdiction is exclusive of the jurisdiction of all courts other than the jurisdiction of the High Court under section 75 of the Constitution.”

21 The meaning of “jurisdiction in bankruptcy” is to be determined with the assistance of the s.5 definition of “bankruptcy”:

“ ‘bankruptcy’, in relation to jurisdiction or proceedings, means any jurisdiction or proceedings under or by virtue of this Act.”

22 I was taken by counsel to several cases in which the scope of s.27(1) has been considered. These include, most relevantly, Sutherland v Brien (1999) 149 FLR 321 and Scott v Bagshaw (2000) 99 FCR 573. In the former case, Austin J decided that s.27(1) did not vest in the courts to which it refers exclusive jurisdiction in respect of every question turning upon the interpretation and application of the Bankruptcy Act. That must be so. When persons become bankrupt, it is necessary for courts to determine all kinds of questions about the consequences. Many of those questions will depend for their answers on the provisions of the Bankruptcy Act. One class of such questions relates to the nature of the rights of persons to property. Austin J held that nothing in the Bankruptcy Act precludes the exercise in such cases of the well established jurisdiction of courts other than those mentioned in s.27(1) “to determine and declare rights to property and make orders as to its destination”. But that undoubted general jurisdiction will yield to any aspect of the jurisdiction for determination and declaration of such rights which the Bankruptcy Act itself places in the hands of s27(1) courts. In Scott v Bagshaw (above), the Full Federal Court noted that among the matters so placed in the hands of those courts is “applications to declare for or against the title of the trustee to any property”. Because this is one of the matters s.31(1) of the Act requires “the Court” to hear in open court, it is identified as a matter within the definition of “bankruptcy” and thereby seen to be within s.27(1). That aspect of the general jurisdiction “to determine and declare rights of property and to make orders as to its destination” which entails “applications to declare for or against the title of the trustee to any property” is accordingly reposed in s.27(1) courts alone.

23 The present application for leave to proceed does not involve the inherent jurisdiction of this Court. The jurisdiction is wholly statutory. It is created by the Bankruptcy Act. Nothing could more clearly involve “jurisdiction or proceedings under or by virtue of this Act” as referred to in the s.5 definition of “bankruptcy”. The relevant jurisdiction is therefore “jurisdiction in bankruptcy” for the purposes of s.27(1), with the result that, subject to one possibility about to be mentioned, it is confined by that section to the Federal Court, the Federal Magistrates Court and, having regard to s.75 of the Constitution, the High Court. This conclusion is consistent with the decision of Kirby J in Mechtler v P & E Phontas Pty Ltd [1998] NSWSC 513.

24 The only possible basis on which this Court might exercise the s.58(3)(b) jurisdiction in the face of these clear specifications in the Bankruptcy Act is that some other Commonwealth law nevertheless operates to confer that jurisdiction. Such a possibility was briefly mentioned in Official Trustee as trustee of Miller v Edwards (unreported, NSWSC, Simos J, 5 December 1997) and Geia v Palm Island Aboriginal Council [2001] 1 Qd R 245. It was canvassed in greater detail in Re Killington; Ex parte Chisholm [1998] FCA 1474 where Mansfield J, dealing with the question of the jurisdiction of the Supreme Court of South Australia to grant leave to proceed under s.58(3)(b) of the Bankruptcy Act, concluded:

“It would seem, therefore, that the Supreme Court may have jurisdiction to entertain the questions which arise in this proceeding in the circumstances, as jurisdiction has already been granted to it under s.39(2) of the Judiciary Act . It is unnecessary to do other than to note the point, as it may arise in subsequent proceedings.”

25 Section 39(2) of the Judiciary Act 1903 (Cth) is as follows:

“The several Courts of the States shall within the limits of their several jurisdictions, whether such limits are as to locality, subject-matter or otherwise, be invested with federal jurisdiction in all matters in which the High Court has original jurisdiction or in which original jurisdiction can be conferred upon it, except as provided in section 38, and subject to the following conditions and restrictions … .”

The conditions and restrictions following are irrelevant for present purposes. Nor does s.38, declaring certain matters to be within the exclusive jurisdiction of the High Court, have any application to the present case.

26 “Federal jurisdiction”, in its simplest form, was said by Isaacs J in Baxter v Commissioners of Taxation (NSW) (1907) 4 CLR 1087 to be “the authority to adjudicate derived from the Commonwealth Constitution and laws”, a description which “gives no indication of the complexity it has assumed since then”: Austral Pacific Group Ltd v Airservices Australia (2000) 74 ALJR 1184. Authority thus derived from the general provisions of s.39(2) of the Judiciary Act must be viewed in the light of the totality of Commonwealth law to see whether it has been made subject to modification or displacement by specific provisions of that law. Recent recognition of this is found in the decision of the Queensland Court of Appeal in Brackenridge v New Zealand [2000] 1 Qd R 1.

27 In Adams v Cleve (1935) 53 CLR 185, Rich, Dixon and Evatt JJ said:

“Section 39 is expressed in terms of perfectly general application, and such an application accords with the principles upon which the enactment proceeds. To exclude its operation upon any part of Federal jurisdiction, more is required than a special provision conferring part of the jurisdiction, either original or appellate, which s.39 also confers. If the special provision conferred a different authority, or imposed conditions or restrictions or otherwise disclosed an intention at variance with the full operation of s.39, an intention to exclude it might be inferred.”

28 This passage was explained by the High Court (Gibbs ACJ, Stephen, Mason, Jacobs and Aickin JJ) in R v Ward (1978) 140 CLR 584 as follows:

“We do not think that by the last sentence their Honours were saying that whenever the ‘special provision’ confers a jurisdiction different from that conferred by s.39 of the Judiciary Act s.39 is thereby totally excluded. No doubt their Honours had in contemplation a contradictory or inconsistent authority from which it might be deduced that the Parliament was displacing pro tanto the grant of jurisdiction contained in s.39. As Gibbs J said in R v Bull (1974) 131 CLR 293, at p 257, ‘s.39(2) invests the several courts of the states with federal jurisdiction in any matter arising under any commonwealth law’. In our opinion, this grant of jurisdiction will only be displaced in whole or in part by another statute when that statute evinces an intention to exclude or otherwise limit the jurisdiction conferred by s.39.”

29 Read in the light of this, s.39(2) of the Judiciary Act does not enable this Court to hear and determine matters within the jurisdiction referred to in s.27(1) of the Bankruptcy Act. When s.27(1) says that the jurisdiction it confers “is exclusive of the jurisdiction of all courts other than the jurisdiction of the High Court under section 75 of the Constitution”, it plainly evinces a specific intention to exclude the jurisdiction conferred on State courts by the general prescription in s.39(2). Words more apt to lead to that result could not be imagined.

30 I therefore conclude that s. 38(2) of the Judiciary Act is not effective to confer on this Court jurisdiction to grant leave to proceed under s.58(3)(b) of the Bankruptcy Act.

31 It was said by Mansfield J in Re Killington; Ex parte Chisholm (above) that an application for such leave is, by virtue of s.39B(1A)(c) of the Judiciary Act, a “special federal matter” as defined by s.3 of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth), with the result that jurisdiction for this Court to deal with it might arise under that Act if the stringent conditions imposed by it s.6 were satisfied. As there is no suggestion that the conditions have been satisfied here, that avenue need not be further explored – although it is likely that the plain excluding words of s.27(1) would again prevail.

Conclusion

32 It is not open to this Court to grant the leave to proceed under s.58(3)(b) sought by the plaintiff in his notice of motion. That notice of motion must be dismissed.

33 Nor, however, is it appropriate at this stage to grant a permanent stay or to dismiss the proceedings as the second defendant requests. It may be that a court having jurisdiction under s.27(1) of the Bankruptcy Act will see fit to grant leave under s.58(3)(b) upon application made to it by the plaintiff. The second defendant’s notice of motion should therefore be stood over to allow the plaintiff an opportunity to make such an application to an appropriate court. I shall hear counsel as to the date to which the second defendant’s notice of motion should be adjourned and on the question of costs.

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Last Modified: 10/22/2001